Much industry buzz centered on Moody’s notice of a potential downgrade on certain of Citi’s CHAI bonds, while upgrading the senior bonds on Blackrock’s CCOLT securitization.
The top-level question we are fielding is how do the CCOLT and CHAI deals compare? We have to break that down to related sub-questions:
- Are the CCOLT and CHAI collateral pools similar?
- How do delinquency rates compare across vintages?
- How do the waterfalls compare?
Are the CCOLT and CHAI collateral pools similar?
Yes, both pools consist of Prosper loans. The credit quality, composition, and geographic distribution is quite similar. CCOLT has a higher proportion of 3Y loans (which have lower CDR rates) and marginally higher FICO although these tilts are relatively minor. Here are the collateral statistics on both pools at deal origination:
How do delinquency rates compare across vintages?
We find that, for most cohorts, delinquencies have increased mildly in 2H 2015 as compared to the same period one year ago. [Specific numbers available to PeerIQ analytics subscribers.]
The rise in delinquency is uneven across grades. In particular, lower-FICO loans are experiencing a 2x or 3x higher sensitivity as compared to a smaller uptick in the super-prime cohort.
The increase in delinquencies is true of other US consumer platforms, although the effects are uneven across originators. The increase in delinquencies survives controlling for FICO, Grade, and Geo. This suggests vintage effects rather than underwriting standards are the primary explanatory variables.
How do the deals compare?
Below we show the capital structure and initial ratings on both deals:
Figure 2 Source: PeerIQ Research
We note there are other differences in the deal – roles and responsibilities, covenants, and so forth that are outside the scope of our newsletter analysis and included in prior PeerIQ research.
So why the different ratings treatment?
Moody’s notes ‘a faster build-up of delinquencies and charge-offs than expected’ and has accordingly increased their cumulative loss expectation from 8% to 12% for CHAI.
We note that CCOLT is a Feb 2015 deal, whereas CHAI shelf spans 2H 2015 – we believe this explains the increased delinquencies for CHAI and the associated ratings action. This is consistent with our observation of increased delinquencies in the 2H 2015 vintage (after controlling for loan and borrower attributes). CCOLT was a better vintage.
And finally, what does this mean for bondholders and the markets?
Naturally, the Class C tranche is the most vulnerable from increased losses. That said, we observe the deal has substantial credit enhancement in the form of overcollateralization (13 to 16%), excess spread (9 to 10%), and reserves (50 bps).
Brian Weinstein, Portfolio Manager at Blue Elephant, interprets the data as indicative of a turn in the credit cycle and has encouraged platforms to raise rates. Others disagree. Prosper and other platforms have raised rates in anticipation of a possible slowdown.
Managing credit risk is a bit like driving with your rear-view mirror – platforms can price rates today but can only monitor performance after loans have seasoned some 6 to 18 months later. Nevertheless, the relatively swift action we see in platforms re-pricing underscores a responsive data-driven approach that seeks to deliver consistent risk-adjusted returns through the cycle.
In the ABS market, we observe and expect to see increased trading as potential ratings actions lead to some re-pricing. We also observe re-tranching of certain deals with a tendency for increased credit enhancement. We continue to see a broadening in the base of ABS investors, although the pace of deal activity is slower.
Taking a step back, we note that the level of delinquencies we observe is still at multi-decade lows according to Fed data. Combined with the short duration of the collateral, tranche thickness, low correlation, and wide spreads – the asset class will continue to find a welcome home on the asset allocation mix of ABS investors.
- Ram will be at the NY Hedge Fund Roundtable on Monday February 22nd, moderating the panel: “P2P Lending: How Large Investors Can Access the Asset Class.”Panelists include Moore Capital (Erik Siegel), Victory Park Capital (Gordon Watson), and Citi (Tim Madigan). Email firstname.lastname@example.org if you would like a pass to this no-media closed-door session.
- PeerIQ will be speaking on the ‘Development of Securitization in Marketplace Lending’ panel at ABS Vegas on February 29th
- PeerIQ will be speaking at LendIt on April 11th in San Francisco
- China’s web finance craze sows confusion and risk (Reuters, 2/19/16) Platforms continue to grow dramatically but sector remains a ‘black box’ for investors
- P2P sheds ‘alternative’ label and moves into mainstream (FT, 2/18/16) Zopa and other UK platforms are increasingly harnessing institutional funds to fund their marketplace lending sector
- Bob Doll – A Recession Remains Unlikely Despite Market Turmoil (2/16/16) There may be more volatility and damage ahead, but a bottom seems in sight
- Fed’s Neel Kashkari: Break up the Big Banks (WSJ, 2/16/16) Former politician and banker Kashkari believes Dodd-Frank did not go far enough and suggests risk-weighted asset requirements of 25% – 3x as strict as current rule
- Prosper-Linked Bonds Sold Last Year Face Moody’s Cut (Bloomberg, 2/12/16) Higher than expected rates of charge offs on Prosper originated consumer loans may cause downgrade of 3 bonds issued by Citigroup Inc.
- Loan Valuations Draw Scrutiny (WSJ, 2/11/16) Finance firms under scrutiny for lack of independent valuation of illiquid assets – very relevant for P2P loan and ABS valuation
- Sidley’s Jinfei Zhang publishes ‘The Law of Securitization in China’ (Sidley Austin, Feburary 2016) Very topical given the dramatic growth in China’s ABS market