Investor participation in marketplace lending securitizations, especially consumer loan offerings, have seen more than 100 investors pile into deals priced over the last 18 months, up from 26 unique investors in 2015, the panelists said. Deal volume saw a 73% year-over-year growth, with SoFi leading the pack with 12 transactions across student loan refinancing and consumer loan ABS.
“Frankly that’s more participation than what we’ve seen for the student loan and some of the credit card issuers. Even in timeshares we only see about 40 to 45 investors in that space each year,” said Randal Johnson, a director at Deutsche Bank, who added that the influx of larger institutional buyers has led to a “huge amount” of spread compression on deals priced in 2017.
The increase in buyer participation can be attributed to rating agencies becoming more comfortable with the collateral, in addition to the accumulation of data to prove the robustness of some issuers, said Rosemary Kelley, co-head of ABS at Kroll, a bond rating agency. Kroll assigned Marlette Funding and SoFi double-A ratings on their recent consumer loan offerings – the highest rating given to an online lender by a rating agency.
The panelists also singled out Marlette’s 2017-3 deal for achieving the “tightest ever” pricing on the class ‘A’ notes, which was priced at 75bp over Eurodollar spot forwards. According to data from PeerIQ, this is the narrowest among all MPL ABS backed by consumer loans.
“This is really incredible in terms of where the market has been before,” said Ram Ahluwalia, CEO of PeerIQ. The ‘A’ notes on Marlette’s debut deal in July 2016, for example, were priced at 225bp over EDSF.
Ahluwalia noted that the trend of spread tightening will also carry into 2018, with the possibility of new issuers accessing securitization for funding.
“We’re definitely long in the space, and going into 2018 we expect more issuance. A number of new issuers will be tapping the ABS market [and] spreads will see more tightening, partly driven by regulatory clarity and rating agency acceptance,” he said, referring to the recent confirmation of key regulators like the Office of the Comptroller of the Currency's (OCC) Joseph Otting, who could give the green light to a pending special purpose charter for fintech companies.
Changing deal structures
Ashish Jain, senior vice-president of capital markets at SoFi, indicated that the sector has the advantage of being short duration in nature and paying down fast, which makes it attractive for investors to demand either deeper capital stacks or re-slicing of tranches.
“We like to think we’re forward-thinking on structuring. What we’ve tried to do is give little tweaks to our structures that investors find acceptable,” Jain said. SoFi recently time-tranched its two year ‘A’ notes into a one year 'A-1' tranche and a three year 'A-2' tranche, allowing money market investors who previously could not participate to buy the one year bonds.
“The other tranche offers investors relative value versus other issuers or where interest rates are,” he added.
Some concerns remain
“We’ve been very blessed by the low rate environment. Our lending is short [dated], so our exposure is primarily in the two to three year space. But if you’re not thinking of interest rate management as an issuer, that’s irresponsible risk management. We’ll be hyper-focused on that next year,” Jain said.
Patricia Evans, vice president at Wilmington Trust, noted that the market had recovered quickly after last year's Lending Club shakeout, but questioned if marketplace lending could successfully weather a credit cycle.
“The market was able to correct itself fairly quickly after the Lending Club incident last year,” said Evans, referring to the exit of former Lending Club CEO Renaud Laplanche, which created some market disruption in the wake of his departure.
“But I do worry about credit quality and the overall credit cycle. We are experiencing economic and credit challenges in the unsecured consumer loan space – how is this going to play out,” she asked?