ABS East kicks off this Sunday in Miami. Stop our booth to be entered for an Oculus Rift giveaway and be sure to catch the panel with Ram this Monday at 2:50 PM for Trends in Online Consumer Lending: Less Tech, More Fin?
This week, Equifax continues to be at the top of everyone’s mind following the hack that may have compromised the names, Social Security numbers, birth dates, addresses, and driver’s license numbers of up to 143 million people. In the fallout of the Equifax breach, the leading credit bureaus are dealing with an overwhelming volume of credit freeze requests from consumers. While it is still too early to tell, it seems that the genie is out of the bottle. The breach is sparking additional focus on FinTech innovation to protect consumers (e.g., digital identity verification, disposable card numbers, etc.).
This Friday, Mike Cagney resigned as CEO of SoFi and the company became the latest Silicon Valley high-flier embroiled in controversy. This all happened very quickly. On Sunday, September 10th, the WSJ published an article alleging inappropriate behavior was commonplace at SoFi. The next day, Mike Cagney announced his plans to resign by year end. However, only days after his announcement, amidst a flood of media coverage, Cagney resigned as CEO and stepped down from the board.
Beyond the headlines, SoFi’s growth engine continues. In Q2 2017 alone, SoFi funded $3.1 Bn in loans with $134 Mn in revenue and $61.6 Mn in adjusted EBITDA. Revenue and adjusted EBITDA were up 67% and 60% year over year respectively. The news of Cagney’s resignation coincided with SoFi marketing its latest personal loan deal which priced this Friday. Interest in SCLP 2017-5 was initially strong, however the bond priced somewhat wider than guidance. We analyze this further below.
On a more positive note, Goldman Sachs believes lending will be the biggest driver of net revenue growth in years to come. We are not surprised – last year, we made the business case that banks can boost ROE by originating or buying loans from non-banks. Harvey Schwartz of Goldman Sachs described lending as a $2 Bn annual revenue opportunity. Across Goldman’s three lending conduits, Marcus is expected to add $1 Bn in incremental revenue, while private wealth (GS Select) and corporate lending are expected to contribute $500 Mn each.
Consistent with their confidence in the lending business, Goldman Sachs agreed to buy $300 Mn of loans from Mosaic and snapped up employees from failed small business lender Bond Street. Mosaic, which makes loans to homeowners for solar energy systems, is the dominant solar FinTech firm and raised $220 Mn for Warburg Pincus last summer. This news is a major win for Mosaic. The GS deal will help other investors get comfortable with the asset class. The deal also improves Mosaic’s funding profile and more than doubles the volume of Mosaic’s forward flow agreements.
In other securitization news, LendingClub priced its first prime CLUB deal this week. We compare this bond to LendingClub’s prior securitizations below.
SoFi’s Latest Consumer Lending Deal: SCLP 2017-5
After Mike Cagney’s resignation on Friday, the lead underwriter re-launched SCLP 2017-5. Since guidance was released before the critical NY Times article on Tuesday, we have a close (but imperfect) control to study the consequences of management upheaval on deal execution.
ABS investors reacted negatively to the news; the bonds priced 10 to 15 bps wider than guidance on Monday. Also, although the deal was initially upsized due to strong interest, the deal was downsized back to original size in the relaunch. Nevertheless, SoFi has benefitted from continued spread tightening and the recent execution is a substantial improvement versus prior deals on the same shelf.
As you can see in the table below, on the one hand, SoFi continues to be one of the most consistent issuers with regards to consistency of collateral. On the other hand, the structures have been changing slightly, each of the last three securitizations has less over-collateralization than the prior. Additionally, SCLP 2017-5 broke the A class into A-1 and A-2. Both classes are senior and have the same amount of initial CE. Since A-1 and A-2 are sequential classes, the A-2 has a longer WAL, is riskier and priced wider.
SCLP 2017-5 has gone through a re-launch, with deal size back to $527.12 Mn from $615 Mn compared to Bloomberg pricing guidance 2 days ago.
- Spreads for tranches A-1, A-2 and B increased from 55, 95 and 170, respectively, to 65, 105 and 185.
- Credit quality continues to improve – a difficult feat given SoFi’s growth – KBRA’s loss range has come in lower.
- Structurally, SCLP 2017-5 is the first SoFi consumer deal which breaks senior tranche into A-1 and A-2. (Default rates typically increase with time and this contributes to why the A-2 is riskier than A-1).
Source: PeerIQ, Company Filings, S&P, Kroll Bond Rating Agency
LendingClub’s Self-Sponsored Prime Consumer Deal: CLUB 2017-P1
LendingClub priced CLUB 2017-P1 this week, a three class deal with $363 Mn of prime loans outstanding. This is the second self-sponsored deal from LendingClub, and it follows the success of CLUB 2017-NP1. LendingClub expects to alternate between prime and near-prime securitizations at least once a year going forward. Of the $363 Mn outstanding, approximately $100 Mn came from LendingClub’s balance sheet (a shift from prior management’s business practice); the remaining loans were contributed from investors.
These two securitizations mark a historical deviation from LendingClub’s marketplace lending strategy and shows how lucrative securitization has become for non-bank lenders. The repeat issuance strategy also enables LendingClub to offer an efficient path for whole loan investors to seek liquidity and permanent financing.
The CLUB 2017-NP1 and CLUB 2017-P1 deals total to approximately $628 Mn in loans, yet LendingClub has facilitated almost $29 Bn in loans on its platform as of Q2 2017 making it a small part of LendingClub by dollars loaned but a meaningful portion of EBITDA. As we discussed in a prior newsletter, their first securitization (CLUB 2017-NP1) netted the company $3.7 Mn and put them in the black for the quarter.
CLUB 2017-P1 deal priced in a similar range to the first CLUB 2017-NP1 by trading off high credit quality with lower credit enhancement. The senior classes on both deals were rated A- by KBRA. CLUB 2017-P1 A has 39% initial credit enhancement and CLUB 2017-NP1 A had 52% initial credit enhancement. Even though the collateral supporting both deals have very different characteristics, it appears that Lending Club (working with Citi as lead structurer and JP Morgan as joint lead) may have structured the deal such that pricing and ratings are similar, most likely targeting the same investors.
Source: PeerIQ, Company Filings, Kroll Bond Ratings Agency
- Ram will speak on the “Trends in Online Consumer Lending: Less Tech, More Fin?” panel on Monday, September 18 at ABS East in Miami, FL.
- Ram will speak on a panel at the Online Lending Policy Summit on September 25th in Washington, DC.
- Ram will speak at the 1010Data Discovery Summit on October 5 in New York, discussing PeerIQ’s data partnership with 1010Data at 11:15-11:55AM.
- PeerIQ Teams Up With TransUnion (AB Alert, 9/15/17)
- Monday September 11 2017, Daily News Digest (Lending Times, 9/11/17)
- PeerIQ Teams Up With TransUnion (AB Alert, 9/15/17) Consumer-credit analytics shop PeerIQ is beefing up its flagship product with data from credit tracker TransUnion.
- SoFi Chief Executive Mike Cagney to Leave Firm Immediately (WSJ, 9/15/17) Cagney was to stay until permanent replacement was found; SoFi Chairman Hutton to be interim CEO.
- Mosaic Will Sell $300 Million Worth of Solar Loans to Goldman Sachs(GreenTechMedia, 9/13/17) Solar loan provider Mosaic reached an agreement with Goldman Sachs in which the bank will buy $300 Mn in loans over time.
- Goldman Sachs to take on UK retail banks (FT, 9/10/17) Goldman Sachs plans consumer loan and savings push as it widens search for deposits.
- Goldman Banks on Lending to Grow (WSJ, 9/12/17) Goldman Sachs expects lending to account for nearly half of $5 billion in revenue growth by 2020.
- Goldman Nabs Fintech Group in Push to Boost Online Lending (WSJ, 9/13/17) The firm is hiring employees from small-business lender Bond Street; a mix of Bond Street Marketplace engineers, product developers, risk and marketing specialists will join firm’s consumer bank.
- U.S. banking regulator not ready for fintech charter applications (Reuters, 9/13/17) Keith Noreika, acting Comptroller of the Currency, said that he is not ready to accept applications from financial technology companies seeking a special purpose federal charter.
- College Avenue Sets Annual Pace (AB Alert, 9/15/17) Marketplace education lender College Avenue sees itself sponsoring an asset-backed bond deal each year.
- As Amazon Pushes Forward With Robots, Workers Find New Roles (NYT, 9/10/17) Amazon’s robots are increasing productivity for workers – and creating new higher-value added jobs in the process.