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Weekly Industry Update: July 24, 2016

By Vy Phan

July 25, 2016

Last week saw a substantial uptick in issuance news in MPL ABS securitization space. Four deals, totaling more than $1 billion of bonds, were either priced or announced last week. SoFi and Marlette priced a student and consumer loan deal respectively. Both deals executed at meaningfully tighter levels. SoFi SoFi strengthens its lead as the largest MPL ABS issuer by volume and is enjoying a virtuous cycle of lower funding costs, improved liquidity, and expansion of the ABS base. At the current pace, PeerIQ predicts SoFi may issue 8 to 10 deals this year and is on pace to be one of the largest issuers globally in certain markets. SoFi issued its first student loan deal (SoFi 2016-C) early this quarter. Early issuance this quarter signals a strong securitization pipeline and we could see additional securitizations before the quarter end. SoFi 2016-C was priced ~10 bps tighter for A1 tranche and ~25 bps tighter for the B tranche (Chart 1). The collateral and structure of SoFi 2016-C is very similar to their last deal in May 2016 (Table 1) which we analyzed in a prior newsletter. Chart 1: SoFi 2016-C Term Structure Screen Shot 2016-07-24 at 6.38.46 PM Source: PeerIQ, Bloomberg Table 1: SoFi 2016-C Deal Comparison Picture1 Source: PeerIQ, Moody’s, Kroll Marlette Marlette is a balance sheet lender that originates unsecured consumer loans via the Marlette BestEgg Platform. Loans issued through the Marlette platform are originated by Cross River Bank (CRB). CRB and Marlette retain a share of loans issued through their online platform addressing potential “skin in the game” and true lender concerns. MFT 2016-1 is the second deal from Marlette this year and is backed by a $205 million loan pool. The pricing of MFT 2016-1 is about 200 basis points tighter across capital structure as compared to CHAI 2016-MF1 (Chart 2). The consequence of better execution on IRR for equity tranche holders is significant. We find that the excess spread on MFT 2016-1 increases IRR by a whopping ~20% as compared to CHAI 2016-MF1. While the other loan characteristics of the MFT 2016-1 deal are similar to CHAI 2016-MF1, the loans in MFT 2016-1 have seasoned for eleven months as compared to four months in CHAI 2016-MF1 before they are included in securitization deal (Table 2). Seasoning is an important consideration for investors. The average conditional default rates (CDRs) are lower in the first twelve months of consumer loan pool than CDRs in the pool seasoned beyond twelve months. Therefore, seasoned unsecured consumer loans pool tend to have higher cumulative net losses as a percentage of deal balance. As the loans season, the conditional prepayment rates (CPR) tend to be elevated as well. Indeed, loan seasoning is an important factor for our loan-level valuation and waterfall analysis. Chart 2: MFT 2016-1 Term Structure Screen Shot 2016-07-24 at 6.39.47 PM Source: PeerIQ, Bloomberg Table 2: MFT 2016-1 Deal Comparison Table 1 MFT Source: PeerIQ, Kroll Market Outlook In our view, ABS issuance growth trends remain robust this quarter. We predict Q3 will lead to record issuance exceeding historical quarterly deal volumes including prior quarter ($1.7 billion), and last year’s quarter Q3 ($1.1 billion). Dynamics remain favorable–a global low yield environment, the short duration of MPL ABS assets, and improved IRRs for junior tranche holders–will lead to growth in MPL ABS securitization as we have suggested in our 2Q 2016 Securitization Tracker. Platforms that generate strong credit performance, build investor trust, and can improve the distribution of their products (via ABS or otherwise) are well positioned to grow. Industry Update: PeerIQ Mentions: Lighter Fare: