SCI's Marketplace Lending Securitisation Seminar provides an in-depth examination of the burgeoning marketplace lending securitisation landscape. Together with overviews of transaction structuring/credit considerations and the biggest platforms involved, panel discussions will focus on opportunities and challenges from the perspective of both aggregators/sponsors and investors. A sector outlook will also gauge prospects for growth and demand, as the asset class continues to evolve.
Recent sample coverage of the sector in SCI is presented under the agenda.
KINDLY HOSTED BY
250 West 55 Street, New York, NY
12:40 KEYNOTE SPEECH, FOLLOWED BY Q&A
Albert Periu, Head of Capital Markets, Funding Circle
1:10 THE SPONSOR PERSPECTIVE
This panel will examine the opportunity offered by marketplace lending ABS for aggregators/sponsors, such as low cost of funding.
What motivates marketplace lending securitization sponsors?
What are their key requirements?
An overview of the biggest platforms and how they differentiate themselves (Lending Club, Prosper and others).
How do new funds (aggregators) get started? How do they select a platform?
How are banks becoming more involved in this space?
Lawton Camp, Kaye Scholer
Mike Joplin, Servatus
David Klein, CommonBond
Michael Lamont, Seer Capital
Albert Periu, Funding Circle
2:00 NETWORKING BREAK
2:15 STRUCTURING & CREDIT CONSIDERATIONS
A look at the constituent parts of a marketplace lending securitization structure. This panel will provide an overview of credit enhancement/subordination, underwriting/origination, servicing and compliance requirements.
Discussions will cover:
Warehouse funding structures and underwriting/origination considerations.
Key securitization features and considerations.
How the rating agencies review transaction structures.
Regulatory issues and the impact on structuring.
Henry Morriello, Kaye Scholer
Angela Ceresnie, Orchard
Larry Chiavaro, First Associates
Christopher Johnson, Prospect Street
Peter Morreale, Goldman Sachs
Eric Rapp, DBRS
Stephanie Yeh, Credit Suisse
3:10 NETWORKING BREAK
3:40 INVESTOR PERSPECTIVE
This panel will examine the opportunity offered by marketplace lending ABS for investors, such as assets with varying credit quality and attractive yields, and how they get comfortable with the asset class.
What motivates marketplace lending investors and what are their key requirements?
How does the limited performance history of the asset class impact investor decisions?
How do investors evaluate risk associated with: platform/technology; borrowers; regulations and other variables?
Where do investors see relative value in the asset class?
Tim Madigan, Citi
Ram Ahluwalia, Peer IQ
Paul Mangione, Apollo
John Di Paolo, Prudential
Sonal Patel, BNY Mellon
4:30 SECTOR OUTLOOK
Marketplace lending has moved into areas such as commercial mortgages, residential mortgages and student loans. How is the marketplace lending securitization asset class likely to evolve going forward? This panel will discuss how challenges such as asset aggregation and supply can be overcome. It will also gauge prospects for growth and demand.
What are originators and aggregators looking for, but have not yet received from securitization?
What role does technology play in the asset class and how is it expected to evolve?
Discuss potential new structures.
William Black, Moody's
Rohit Arora, Biz2Credit
Nikki Baldonieri, QuietStream
Rob Levy, Avant
Steve Moffitt, Goldman Sachs
Jeffrey Rogers, LiftForward
Mitch Wasterlain, CAPFUNDR
5:20 DRINKS & NETWORKING IN OUTDOOR RECEPTION AREA
CLICK HERE TO REGISTER
A sample of delegates registered:
||Banca IMI Securities Corp.|
||MUFG Union Bank, N.A.|
||Atalaya Capital Management|
||1/0 Capital LLC|
||Kaye Scholer/Goldman Sachs|
||Amherst Advisory & Management|
||Rinato Financial, LLC|
||Clifford Chance US LLP|
||20 Gates Management|
||Amherst Advisory & Management|
||Deloitte & Touche, LLP|
||Standard & Poor's|
||Credit Suisse Asset Management|
||MUFG Union Bank, N.A.|
||Two Sigma Investments|
||Market Genomics LLC|
||Societe Generale Americas|
||Clayton Holdings LLC|
||Lloyds Bank plc|
||Winston & Strawn LLP|
||HSBC Securities (USA) Inc.|
||NYL Investors LLC|
||NYL Investors LLC|
||Duff & Phelps, LLC|
||Moore Capital Management|
||Brooklyn Park Asset Management LLC|
||Winston & Strawn LLP|
||Garrison Investment Group|
||Perkins Coie LLP|
||Clifford Chance US LLP|
||Natixis Securities Americas|
||EAA Portfolio Advisers|
||Millennium Trust Company|
| RECENT COVERAGE OF THE MARKETPLACE LENDING SECTOR IN SCI|
SCI, 10 June 2015
Institutional investors boost marketplace lending securitisation
The marketplace lending securitisation sector appears set for take-off, fuelled by the proliferation of online lending platforms and an influx of institutional investor capital. However, increased visibility around credit criteria and better representations and warranties are necessary for the asset class to become mainstream.
An estimated 100 platforms are already active in the marketplace lending space, including the biggest brands LendingClub, OneMain Financial and Prosper Funding. US$5.5bn of marketplace loans were issued in 2014, but PricewaterhouseCoopers projects that annual volumes could rise to US$150bn or more within a decade.
Indeed, a recent survey undertaken by Richards Kibbe & Orbe and Wharton FinTech indicates that the marketplace lending industry could soon see a transformative influx of capital from institutional investors. Of the over 300 institutional investors polled in the survey, 85% expressed interest in entering the sector in some way, although only 29% have allocated capital to the space so far (see box for more).
"Technology start-ups are bringing incredible energy to the credit market. Marketplace lending platforms are highly motivated and will continue to grow in size as consumers recognise their utility," says Lawton Camp, partner at Kaye Scholer.
Henry Morriello, chair of the finance practice at Kaye Scholer, adds: "The concept of using technology to bypass traditional methods to originate loans is attractive and there is a great need for this from under-served borrowers. The marketplace lending industry is only two or three years old, but it is growing at a rapid rate."
The driver of growth from a consumer perspective is that marketplace loans provide incremental access to credit over credit cards, at a more cost-effective rate. Indeed, many marketplace loans are being used to consolidate existing credit card debt, but lenders are also diversifying into student loans and home equity loans (albeit residential loans are more complicated to originate online).
From an investor perspective, marketplace lending securitisations have a more appealing structure than, for example, credit card ABS. Transactions typically have an amortising balance and are backed by loans with three- to five-year terms.
However, Camp notes that asset performance remains a significant unknown. "Most of the platforms have yet to be tested during a significant downturn in the credit cycle. One of the first questions asked by potential investors in these platforms is how each platform approaches the servicing of distressed and defaulted loans."
Another area in need of clarity is the different origination methodologies across platforms: one group's approach is based on algorithms, while another's is based on analysing historical data. "There is a certain opacity to origination and credit quality in the marketplace lending industry," explains Morriello. "Lenders tend to provide details on the general underwriting criteria considered, but not on the precise process of their credit decisions. Investors are, therefore, seeking increased visibility on credit criteria and more representations and warranties with respect to the underlying loans."
The US SEC's Rule 15Ga-2 - which requires issuers and underwriters to disclose third-party due diligence services employed in connection with the issuance of rated ABS - goes live on 15 June (SCI 1 June). It is hoped that the rule will, at least, help reveal how due diligence is used to diligence marketplace loans that become subject to rated ABS transactions.
Nevertheless, Camp suggests that institutional investors can differentiate between platforms based on their attractiveness from a securitisation standpoint and their ease of use. "The question is whether to partner with an established platform and be one of many associated with it or go to a new platform and potentially get a better deal?"
Other points to take into consideration are whether a platform is willing to work with sponsors, underwriters and rating agencies to provide the necessary due diligence and disclosure required to securitise a pool of loans and whether the rating agencies have reviewed the platform's origination process and servicing arrangements. "Consistency and transparency are important for securitisation: the more transparent a platform's origination and servicing, the easier it will be for sponsors to securitise their loans," Camp observes.
LendingClub, OneMain and Prosper are widely regarded as having well-developed platforms in the US. Morriello agrees that their systems are advanced and suggests that any new entrant to the sector will have to reach a similar level to compete at the same plateau.
"The barrier to entry is perceived to be low, but in reality it is significant," he observes. "The process of origination and servicing is subject to significant Federal and state regulation, so it's important that new programmes have the same attention to detail as the incumbents. So far, institutional investors appear to be aligning with the better-known platforms."
Examples include Varadero Capital partnering with LendingClub and Apollo-affiliate MidCap Financial partnering with LendKey. BlackRock and Prosper teamed up to bring Consumer Credit Origination Loan Trust 2015-1, the sole rated marketplace transaction to date (SCI 30 January).
Rated by Moody's, the US$345m deal was oversubscribed. The US$281.32m triple-B rated class A notes priced at EDSF plus 240bp (with initial credit enhancement of 23.5%) and the US$45.38m double-B class Bs at swaps plus 425bp (11%). An unrated US$18.15m class C tranche and a residual certificate were retained.
Moody's projects 8% cumulative net losses for the CCOLT 2015-1 transaction, based on the collateral and historical trends.
The majority of marketplace lending securitisations have so far been unrated private placements, however. To move the asset class to a rated environment, rating agencies need to be additionally comfortable with the ongoing loan servicing and the verifiability of underlying data, according to Morriello.
He concludes: "I suspect that it won't be too long before we see platforms doing their own deals. There is plenty of opportunity for different parties to pursue different strategies. But the more the sector moves towards the traditional securitisation approach and the more transparency there is around loans, platforms and aggregators, the better."
Secondary market eyed
When asked about which types of investments in marketplace lending they are most interested in pursuing, respondents to a recent Richards Kibbe & Orbe/Wharton FinTech survey most frequently cited the purchase of whole loans (27%) and direct investment in a lending platform (23%). Only 8% cited securitisations, although nearly a third of respondents (31%) expressed interest in pursuing multiple strategies.
Respondents were most interested in investing in loans to small businesses (31%), followed by consumer (28%), real estate (24%) and student (24%) loans.
Presented with a number of risk factors associated with marketplace lending, respondents expressed greatest concern over adverse selection resulting in declining borrower quality over time. They identified the possibility of a market-wide credit event as the risk factor of next-greatest concern, followed by liquidity risk/lack of a secondary market.
When asked which developments would lessen their concerns about investing in the marketplace lending sector, respondents indicated that the presence of a mature secondary trading market - whether for the loans themselves or via a mature securitisation market - would have the greatest impact. This was followed by platforms including provision funds for bad debts and taking steps to improve recoveries from defaulting borrowers.
SCI, 6 May 2015
Marketplace lending risks surveyed
Investors in the nascent marketplace lending sector are exposed to certain increased risks than if they were investing in securitisations from traditional lenders, says Moody's. However, mitigating these risks is the large amount of data that marketplace lenders provide to investors, which differentiates them from their traditional counterparts.
The risks particular to marketplace lending ABS include the securitisations' limited performance history, as most marketplace lenders have only operated for a couple of years. Although some companies back-test their business models in comparison with other consumer ABS sectors, there are limits to comparing different asset classes in past economic scenarios to determine future performance.
In addition, marketplace lenders' operational frameworks for collections, loan servicing, customer service and cash management are less developed than those of traditional lenders. "The operational framework is the backbone of securitisation because its goal is to provide for uninterrupted cashflow payment to investors, even if the originator fails," says William Black, a Moody's md and team leader of the agency's ABS group. "If these lenders do not develop their operational structure at the same rate as their rapid growth, there is increased risk that the securitisation would not survive an originator failure."
Thus far, marketplace lenders have not sponsored their own securitisations and, as such, have not retained a direct economic interest in the securitisation's performance. Moody's believes this lack of skin in the game poses increased performance risk for investors.
Further, because marketplace lenders are small and the sector relatively new, they have not received the same regulatory scrutiny as larger, more traditional lenders. However, this could change as the lenders and the sector grow in size. One risk is that the current use of third-party banks to originate loans could come under scrutiny, which could call into question whether the bank is the true lender and, in the worst case, render the loan unenforceable.
On the other hand, Moody's notes that marketplace lenders have superior data transparency compared with traditional lenders. "They amass, organise and share this data with retail and institutional investors alike, whereas traditional lenders are typically more guarded with their data," adds Black.
SCI, 30 January
Marketplace lending deal debuts
The inaugural rated securitisation of consumer instalment loans originated on the Prosper Funding P2P platform has hit the market. The US$345.85m Consumer Credit Origination Loan Trust 2015-1 (CCOLT 2015-1) is an SPE created by BlackRock Financial Management on behalf of funds and accounts under management.
Prosper Funding has partnered with WebBank, a Utah state-chartered industrial bank, to originate consumer instalment loans. BlackRock SPEs have, in turn, been purchasing a nearly pro-rata portion of the loans originated via the Prosper platform since November 2013 and will continue purchasing them on an ongoing basis.
A US$50m pre-funding account will be used in the first two months after closing to purchase additional Prosper loans to be added to the pool. BlackRock independently evaluates the credit quality of loans on the platform and has no ongoing obligation to purchase the loans.
Provisionally rated by Moody's, the transaction comprises three tranches: US$281.32m of Baa3 rated class A notes, US$45.38m of Ba3 class Bs and US$18.15m of unrated class Cs. The CCOLT 2015-1 SPE will retain the class C notes and the residual certificate at closing.
Overcollateralisation will be 5% at the time of closing and increase to a target of 15% of the outstanding pool balance, subject to a floor of 2% of initial pool balance. A non-declining reserve fund is sized at 1% of the initial pool balance. In addition, a cumulative default trigger will be tested on a monthly basis.
The weighted average FICO of the CCOLT 2015-1 eligible loans as of the 31 December statistical cut-off date is 706. The underlying borrowers in the pool have a weighted-average annual income of approximately US$90,000 and a weighted average debt-to-income ratio of approximately 26%. The loans are fully amortising, with initial repayment terms of three or five years, and the pool has a weighted-average remaining term of 42 months.
Moody's cumulative net loss expectation for the CCOLT 2015-1 pool is 8%, which is considerably higher than the net losses typically expected for pools of other consumer assets with similar credit characteristics.
SCI, 5 Dec 2014
KLS boosts P2P platform
A fund managed by New York-based KLS Diversified Asset Management is set to invest STG132m in loans to UK small businesses through the Funding Circle UK marketplace. The fund will invest in whole peer-to-peer loans across all risk bands in order to avoid competing with any individual investors lending on partial loans.
Funding Circle says that due to the interest it has received from institutional investors, it introduced whole loans in April this year to enable these types of larger investors to lend to small businesses. "As we continue to grow, we will manage the allocation between partial and whole loans, so that there is consistently enough lending opportunities for all investors. A more and varied range of investors means we increase the amount of lending opportunities for everyone."
Over 36,000 individuals, the government-backed British Business Bank, 10 local councils, the University of Huddersfield and other institutions are helping businesses access finance via the Funding Circle platform. In November alone, investors lent a record STG35m to small businesses across the UK.