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Weekly Industry Update: October 2, 2016

By Vy Phan

October 2, 2016

Several marketplace lending ABS deals are coming to market amidst favorable market conditions and impending risk retention rules.

P2P Global Investments, a UK UCIT investing in marketplace lending loans, sold £114 M ($167.36 MM) of rated notes backed by Zopa loans. The senior bond of the deal—Marketplace Originated Consumer Assets (MOCA 2016-1)—was rated Aa3/AA by Moody’s and Fitch respectively.  

Noteworthy is that the deal's senior note has the highest rating afforded to any marketplace lending transaction from Fitch. Moody’s assigned a cumulative loss estimate of 7% and expected recoveries of 5%. We show deal structure and pricing below: 


The MOCA 2016-1 senior bond priced 75 bps better than April SBOLT 2016-1 deal consisting of Funding Circle loans. Investors noted the quality of the data as a factor explaining the price difference as well as market conditions. PeerIQ also notes the substantial variation in agency provided cumulative loss and recovery estimates on SBOLT 2016-1 in our prior newsletter underscoring the need for specialized capabilities to evaluate this unique asset class.

 It was also reported that Prospect Capital, a NYC-based Business Development company, is working with Morgan Stanley to bring a $150 MM unrated offering consisting of seasoned Lending Club loans to market under the Murray Hill Marketplace Trust 2016-LC1 shelf.

Valuation of Seasoned Loans

Seasoning is an important consideration for investors and an increasing theme in recent ABS transactions and secondary pool sales. PeerIQ expects this trend to grow particularly as originators incentivize contributed collateral "club deals" to achieve standardization while also providing a quarterly path to liquidity for whole loan investors.

 Sophisticated loan-level analytics are required to accurately value seasoned loans contributed to the collateral pool. Aged portfolios offer greater clarity to loan performance. However, there are other analytical considerations. 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.  

The price of a seasoned loan is the present value of projected loss-adjusted cashflow for the remaining balance of the loan, discounted at an appropriate rate. We show below the price behavior of a typical 60-month loan over its life while holding the discount factor constant:


 As losses ramp up, the loan price drops; and then price exceeds par as risky loans approach maturity. This behavior results from positive survival bias of a loan given its remaining principal balance.

 Specifically, in the early life of a loan, the credit loss projection ramps up and dominates the loan coupon—the loan price drops below par. As the loan seasons and survives over time, the credit risk on the remaining principal balance decreases. This survival bias of the credit risk profile leads to certain high credit risk loans valued above par. 

 For a higher coupon loan, the interest return or carry of the loan dominates loan pricing—the loan price exceeds par. At maturity, if the loan has not experienced any credit impairment, the price of the loan will be par; this leads to a “pull-to-par” profile.

Securitization Tracker Update

We look forward to releasing the Q3 securitization tracker this week. As origination volumes have slowed in certain areas, and as ABS markets started with a slow Q1, readers are asking what is the state of the ABS market? You may be surprised.

 Stay tuned as we share volumes, pricings, and our outlook this week.

 Thank you for your readership and support.


PeerIQ Mentions:

Industry Update:

Lighter Fare: