Marketplace Lending Securitization Tracker Q2 2017 This quarter saw nine marketplace lending securitizations with quarterly issuance of $3.0 Bn, representing 76% growth over 2Q2016. To date, cumulative issuance equals $21.9 Bn across 92 deals. Multi-seller club deals and self-sponsored deals have emerged at several leading platforms. All deals were rated in this quarter, including record-sized consumer deals from SoFi, large multi-seller deals from Marlette and Prosper, and the first self-sponsored, near- prime deals from Lending Club and Upstart. Dealer and rating agency participation continues to intensify. Fitch rated its first Consumer MPL ever, Prosper’s PMIT 2017-1, indicating broadening acceptance across ratings agencies. Goldman Sachs, Morgan Stanley, and Deutsche Bank lead over 47% of MPL ABS transaction volume. Noteworthy is the rising presence of BNP Paribas, which co-managed CLUB 2017-NP1. DBRS leads the rating agency league table, and Kroll dominates the unsecured consumer sub-segment. New issuance spreads continued to tighten and flatten—a credit friendly environment for securitization. In 2Q2017, we saw spreads tighten in riskier tranches of consumer ABS, indicating strong investor appetite for MPL ABS paper in the market. Delinquency rates have continued to increase across in several verticals—such as subprime auto, student, and personal loans—due to exposure to riskier borrowers, a re-leveraging of consumer balance sheets, “loan stacking,” and shifting payment priority trends. Initial pricing is near record tight levels. Lending Club’s inaugural deal priced at Libor + 110, second only to Marlette’s MFT 2017-1 (L+100) in execution on the Class A bond. Overall, spreads have tightened with greater investor acceptance in an overall “risk on” environment. Yishu Song [email protected]Jianguo Xiao [email protected]Investors should consider PeerIQ as only a single factor in making their investment decision. Please refer to the Disclosure Section, located at the end of this report, for information on disclaimers and disclosures.
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Marketplace Lending Securitization Tracker
Q2 2017
This quarter saw nine marketplace lending securitizations with quarterly issuance of $3.0 Bn, representing 76% growth over 2Q2016. To date, cumulative issuance equals $21.9 Bn across 92 deals. Multi-seller club deals and self-sponsored deals have emerged at several leading platforms. All deals were rated in this quarter, including record-sized consumer deals from SoFi, large multi-seller deals from Marlette and Prosper, and the first self-sponsored, near-prime deals from Lending Club and Upstart.
Dealer and rating agency participation continues to intensify. Fitch rated its first Consumer MPL ever, Prosper’s PMIT 2017-1, indicating broadening acceptance across ratings agencies. Goldman Sachs, Morgan Stanley, and Deutsche Bank lead over 47% of MPL ABS transaction volume. Noteworthy is the rising presence of BNP Paribas, which co-managed CLUB 2017-NP1. DBRS leads the rating agency league table, and Kroll dominates the unsecured consumer sub-segment.
New issuance spreads continued to tighten and flatten—a credit friendly environment for securitization. In 2Q2017, we saw spreads tighten in riskier tranches of consumer ABS, indicating strong investor appetite for MPL ABS paper in the market.
Delinquency rates have continued to increase across in several verticals—such as subprime auto, student, and personal loans—due to exposure to riskier borrowers, a re-leveraging of consumer balance sheets, “loan stacking,” and shifting payment priority trends.
Initial pricing is near record tight levels. Lending Club’s inaugural deal priced at Libor + 110, second only to Marlette’s MFT 2017-1 (L+100) in execution on the Class A bond. Overall, spreads have tightened with greater investor acceptance in an overall “risk on” environment.
Investors should consider PeerIQ as only a single factor in making their investment decision. Please refer to the Disclosure Section, located at the end of this report, for information on disclaimers and disclosures.
On June 29, the Federal Reserve announced an increase in the Fed Funds rate with a new target of between 100 and 125 basis points. The decision comes at a ten-year low unemployment rate at 4.5%, 1.2% GDP growth in 1Q2017, and year-over-year wage growth of 2.6%. Fed futures forecast two more rate hikes before end of year.
The “risk-on” environment has continued in the first quarter of 2017 as the global reach for yield intensifies. 10-year bond yields remain at 2.2%, while the equity markets have continued to rally with the S&P 500 up 9.0% YTD and other equity indices near record highs.
For 2Q2017, overall credit markets have exhibited low volatility and credit conditions remain favorable. The MPL ABS market has benefitted from a strong “risk on” environment that has buoyed credit markets. Implied volatility from CDX.HY options remains low. In the CLO category, the market beat expectations with issuance this year of $49.0 Bn, a 90% YoY increase. The top-rated slice of CLOs are now priced at 110 bps over Libor, the tightest since 2008 financial crisis.
Record Deal Size and Execution Driven By Multi-Seller Deals
The encouraging macro conditions continued to support the growth of the MPL ABS market. The first quarter of 2017 witnessed several record-sized MPL securitizations driven by self-sponsored multi-seller deals. Nine deals priced, totaling $3.0 Bn, comprised of consumer and student collateralized deals. Cumulative issuance since the inception of the MPL ABS market in 2013 now stands at $21.9 Bn.
SCLP 2017-1 is not only SoFi’s largest deal, but is also the largest unsecured consumer ABS ever, with a collateral pool of $650 Mn. Marlette Funding Trust 2017-2 is the largest deal to date for the MFT shelf, with a size of $370 Mn, pricing tighter than MFT 2017-1 across all tranches with a flattened credit curve (100, 165, 300). In another milestone, Lending Club’s CLUB 2017-NP1 deal printed with pricing on the Class A bond at L+110 and shortest WAL, at 0.42, 1.18, 1.91 respectively. The strong pricing is driven by participation of Lending Club as the sponsor, greater alignment of interests, the short duration of the bonds, and structural protection for investors.
Additionally, Lending Club and Upstart introduced their inaugural self-sponsored deals. This continues Lending Club’s presence in the securitization market after last quarter’s initial deal from the LCIT Lending Club shelf.
Credit Facility Deal Flow
Turning to credit facility activity, OnDeck continued it’s restructuring activities, amending its asset-backed revolving credit facility with Suntrust Bank by extending the maturity date to November 2018 and decreasing funding cost by 50 basis points. Deutsche Bank upsized its revolving credit facility with OnDeck to $214 Mn.
Arhaus, LLC, a home furnishings retailer, recently obtained a $30 Mn asset-based facility from Monroe Capital for corporate purposes and working capital.
Increased Focus on Data Integrity & Verification
Data integrity continues to be on the mind of all participants in the marketplace lending ecosystem. Credit score at origination is increasingly a new variable that ABS investors and regulators are requesting during the securitization process. In CLUB 2017-NP1, Lending Club, for the first time, included credit score at origination for the verification process, as a response to increased demands from regulators and investors. (See PeerIQ newsletter for more analysis.)
Additionally, we observed continued concerns on limited data verification in the auto loan sector (for example, Santander Consumer USA) and related challenges in the MPL sector.
Definitions and Inclusion Rules
Our Tracker includes all issuances connected to assets originated by marketplace lending platforms, which we define as including both:
(i) Online and other novel technologies to increase operational efficiency, risk accuracy, and borrower experience, and
(ii) Non-deposit funding for lending capital.
We recognize there is rapid innovation in lending channels and welcome all comments and consideration on inclusion rules.
I. Quarterly Round-up
The second quarter of 2017 brought 9 securitization deals totaling $3.0 Bn in new issuance, the second highest quarterly issuance in history of MPL, just shy of volumes from
first quarter of 2017. The volume represents a 76% year-over-year increase over 2Q2016.
Total securitization issuance to date now stands at $21.9 Bn, with 94 deals issued to date (57 Consumer, 25 Student, 1 Mortgage and 9 SME) since September 2013 (Exhibit 1).
Exhibit 1
Cumulative Marketplace Securitizations
Source: Bloomberg, PeerIQ
Examining issuance by underlying verticals, we see significant increases in consumer relative to the first quarter of 2017, up 28%. Student MPL issuance was almost $1 Bn, down 5% from last quarter and up 28% YoY. (Exhibit 2).
• SoFi: SCLP 2017-3, SOFI 2017-C (SCLP 2017-4 issued on 7/5 and will be included in Q3)
• Prosper: PMIT 2017-1
• Lending Club: CLUB 2017-NP1
• Avant: AVNT 2017-A
• CommonBond: CBSLT 2017-A-GS
• Upstart: UPST 2017-1
• Earnest: EARN 2017-A
• Marlette: MFT 2017-2
Rating agencies continued to serve a key role in strong deal execution. Like last quarter, every deal was rated by at least one rating agency (Exhibit 3 & 4). Fitch Ratings increased their activity in the category in rating Prosper’s PMIT 2017-1. Broader ratings agency participation indicates greater acceptance and mainstreaming of the MPL ABS asset class as originator business models mature and data standards improve.
Exhibit 3
2Q2017 Rated Issuances
Source: Bloomberg, PeerIQ
Exhibit 4
Issuance Ratings
Source: Bloomberg, PeerIQ
Exhibit 5
Average Deal Size over Time
Source: Bloomberg, PeerIQ
Deal sizes remain large this quarter. The average deal now stands at $358 Mn for 2017 (Exhibit 5). The growth in deal size is driven by multi-seller deals and various risk retention solutions such as Manager Owned Affiliates which we summarize here.
II. MPL Securitization League Tables
Dealers remained active in the space, with strong participation from Goldman Sachs, Deutsche Bank and Citigroup. Maintaining top ranks in the league table, Goldman Sachs led $769 Mn in total new issuance, a 19% growth from 1Q2017 (Exhibit 6). It executed deals with SoFi and Marlette to maintain its 21% market share in MPL ABS. Further, Bank of America Merrill Lynch showed 54% growth through their continuous managing of SoFi student deals.
The top three dealers, Goldman Sachs, Morgan Stanley, and Deutsche Bank have contributed to over 47% of the total market share in the MPL space.
Exhibit 6
Lead-Manager League Table Excl. Self-led (All Issuance to Date)
Source: Bloomberg, PeerIQ
Seal interest and involvement remains high, with nine of the top ten lead managers increasing their MPL issuance activity. In addition, the industry saw a new participant, BAML, which led two SoFi student deals this quarter.
Turning to the co-manager league table, SoFi remains the clear leader in the co-manager league, increasing their participation value to over $3.7 Bn through their co-manager position on their respective student and consumer deals (Exhibit 7).
Exhibit 7
Co-Manager League Table Excl. Self-led (All Issuance to Date)
Source: Bloomberg, PeerIQ
SoFi remains the clear leader on the Originator table, with 49% market share (Exhibit 8). Further, SoFi has a much larger sandbox, including student refi, unsecured consumer and mortgage loans, whereas other originators focus on a single vertical. Second place, Prosper, has 11%, but jumped quickly to number two on the league table in terms of quarterly issuance due to the size of the PMIT transaction. The short average age of the loans in the PMIT deal and a robust capital markets team suggest we should expect repeat issuance.
Exhibit 8
Originator League Table (All Issuance to Date)
Source: Bloomberg, PeerIQ
We currently observe 153 rated MPL ABS bonds in the market. As of 2Q2017, DBRS leads Moody’s, Kroll, S&P, and Fitch in the amount of rated bonds (Exhibit 9). DBRS rated $7.9 Bn Student MPL ABS, or approximately 45% of the sub-segment, competing primarily against Moody’s within the student sector. Kroll dominates the Consumer MPL ABS category with 53% market share. The mortgage sub-segment currently has an even split amongst DBRS, Fitch, and Kroll.
Exhibit 8
Rating Agency League Table (All Issuance to Date)
Source: Bloomberg, PeerIQ
2Q2017 also saw an increase in ratings actions. For deals issued prior to 2017, there were several ratings updates. Deals from Avant (AVNT 2016-B by Kroll), Common Bond (CBSLT 2015-A by DBRS), Earnest (EARN 2016-B by Kroll), SoFi (SCLP 2016-1 by DBRS/KBRA) shelves received ratings upgrades, serving as another positive sign from the agencies.
SoFi’s new $530 Mn consumer loan securitization, its third of the year, is the first to earn a double-A, from both Kroll Bond Rating Agency and S&P Global Ratings. Both credit rating agencies assigned a preliminary double-A to $470 Mn in Class A notes, a notch higher than the single-A for the comparable tranches of two prior 2017 securitizations of personal loans to its prime consumer borrower base.
Rank Bookrunner/Lead Dealer
Deal Value ($Mn)
Quarterly Change % Top 10
1 Goldman Sachs 4,736 19% 21%2 Morgan Stanley 2,892 2% 13%3 Deutsche Bank 2,865 22% 13%4 Citigroup 2,347 16% 10%5 Credit Suisse 2,340 15% 10%6 Jefferies 1,825 15% 8%7 JP Morgan 1,657 30% 7%8 Barclays Capital 1,077 14% 4%9 Guggenheim Securities 899 0% 4%
10 BAML 527 54% 2%
Rank Co-Manager Value ($Mn)Quarterly
Change% Top 10
1 SoFi 3,770 13% 42%2 Deutsche Bank 1,015 0% 11%3 Morgan Stanley 885 46% 10%4 BAML 684 0% 8%5 Credit Suisse 487 56% 5%6 Goldman Sachs 444 0% 5%7 JP Morgan 350 0% 4%8 Jefferies 290 92% 3%9 GreensLedge 276 0% 3%
10 Barclays Capital 256 0% 3%
Rating Agency
Consumer Mortgage SME Student Total Consumer Mortgage SME Student Total
New issuance spreads in 2Q2017 continued to tighten, reflecting a healthy risk appetite in the capital markets. We saw a continued preference for senior tranches over riskier subordinated bonds (Exhibit 10). Yet, term structures flattened from the previous quarter, reflecting stronger investor appetite for riskier tranches.
No SME deals were issued from OnDeck or Kabbage this quarter.
Exhibit 10
New Issuance Spread Across Segments
Source: PeerIQ
Exhibit 10 shows that the average initial pricing of consumer credit deals achieved record tight levels. Student loan spreads in 2Q are somewhat wider than the prior quarter reflecting increased compensation for interest rate risk.
IV. Deal Credit Support Profile
Deteriorating collateral performance contributed to trigger breaches in ten active MPL ABS deals, eight unsecured consumer and one SME deal, representing $1.5 Bn deal issuance.
Despite weakening in credit performance, we have not seen a meaningful uptick in initial credit support for unsecured consumer loan MPL ABS, reflecting growing comfort in the current conservative rating approach by the agencies. The senior and mezzanine tranche initial credit support has been stable for SoFi, LCIT, and other shelves (Exhibit 11).
Exhibit 11
Original Credit Support Trend
Source: PeerIQ
Due to the amortizing nature of the collateral pool, MPL ABS bonds typically exhibit shorter weighted-average life (WAL) and a faster deleveraging profile than other structured products, such as MBS bonds backed by 30-year mortgage collaterals. As deals season and perform as initially expected, the credit support increases. We quantify the amount of deleveraging by measuring the differences in current and original credit support for the same bond. Exhibit 12 shows that the senior part of capital structure begins to deleverage first then mezzanine tranches (solid lines are regression lines). For instance, Prosper senior bondholders will enjoy a 40% improvement in credit support as the bond seasons.
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Original Credit Support Profile for Consumer Deals
Exhibit 12 shows that investors in most consumer deals, particularly the Avant shelf, benefit from increased credit support as the deal seasons.
V. Credit Performance Trends
Consumer credit delinquencies and charge-offs continued to increase during the second quarter across consumer credit verticals including personal, student, and auto loans. Prime bank credit card portfolios continue to exhibit multi-decade low delinquency rates but have started to revert to historical levels.
The PeerIQ MPL Loan Performance Monitor tracks the health of marketplace lending loans using bellwether public programs from Lending Club and Prosper. Charge-off rates for both originators continue to be elevated for loans in 2016 vintages. The increase in charge off rates agree with delinquent loan pipelines as loans transition from delinquency to charge-off status. Originators have taken actions, including tightening underwriting criteria and raising rates.
The primary drivers of increased losses for non-bank lenders include “loan stacking”, a mix-shift to riskier borrowers as measured by credit score, re-leveraging of the consumer balance sheet due to greater availability of credit, and, a re-normalization of credit performance, as described in our 4Q2016 tracker.
VI. Commentary
For this Tracker’s commentary, we look at changes we are seeing in both trigger breaches and consumer payment priority and highlight the multi-seller securitization trends, as exhibited by the recent Marlette transaction.
Changing Consumer Behaviors and Payment Priority
In a 2012 Payment Priority study, TransUnion found that the payment hierarchy placed auto loans above credit cards and the mortgage hierarchy. That behavior has changed. In a new study, released in May 2017, TransUnion finds, remarkably, that consumers holding multiple credit products are prioritizing the unsecured personal loan over auto, mortgage, and credit card.
Exhibit 13
Delinquency Rates for Consumers Possessing Auto Loans, Credit Cards, Mortgage Loans and Unsecured Personal Loans
Source: TransUnion, TransUnion Payment Hierarchy Study (May 2017)
The finding is novel and contradicts intuition. TransUnion conjectures that consumers may have a “light at the end of the tunnel effect,” with consumers experiencing a psychological reward for successfully paying down a short duration credit product.
The latest data suggests that consumers will prioritize personal loans, auto loans, mortgages, and credit cards in that order. The more general takeaway is that consumer behaviors have and will likely continue to shift, with financial institutions competing for the borrower relationships, increased ride-sharing providing substitute access to auto, and the ubiquity of smartphones and mobile internet access. Shifting consumer behaviors underscore the need for vigilant monitoring of credit performance trends, payment priority, and benchmarking.
Trigger Breach Events Stabilize
In 2Q2017, there were three new trigger breaches, all Avant consumer deals: MPLT 2015-AV2, AVNT 2016-B, and AVNT 2016-A.
Exhibit 14 summarizes the 14 active deals that had breached triggers in the MPL ABS sector (11 unsecured consumer and
3 SME) with $2.4 Bn of total issuance volume. Since the inception of the MPL ABS market, we have observed 10% of deals breaching triggers historically.
Exhibit 14
MPL ABS Deal Trigger Breaches
Source: Bloomberg, PeerIQ, Ratings Agencies
Trigger breaching events do not necessarily imply credit deterioration of the collateral pool. The art of trigger setting is a core structuring competency for an issuer, warehouse lender, or securitization deal team. A strong analytics toolset offered by firms like PeerIQ will help issuers and investors alike guard against trigger breach scenarios.
Multi-Seller Trend continues
Issuers continue to offer whole loan investors the opportunity to de-risk through securitization programs. This also helps to drive standardization, spread deal costs, and reduce execution risk. In the most recent Marlette deal (MFT 2017-2), a record nine whole loan sellers vended collateral pools into the deal. The Lending Club deal (CLUB 2017-NP1) and Prosper deal (PMIT 2017-1) featured seven and two unaffiliated sellers, respectively. This approach for loan pool aggregation benefits both loan aggregators and originators—and we expect it continue.
Developments in response to regulatory uncertainty
Platforms are taking steps to structure ABS transactions to protect investors from “true lender” risk. Several states enforce usury laws that might render MPL loans with high interest rates unenforceable in their state. In an effort to mitigate the potential risk of breaching state usury laws, Lending Club excluded any borrowers in Colorado from its CLUB 2017-NP1 pool and simultaneously pledged to buy back any loans vulnerable to state usury laws.
Banks have also started to push back against certain court rulings regarding local usury laws. Two state-chartered banks, WebBank and Cross River Bank, with support from 7 other trading groups including the American Bankers Associated, recently filed complaints for declaratory judgment and injunctive relief against the Administrator of the Uniform Consumer Credit Code for the state of Colorado. The partner funding banks argue that federal law
pre-empts the regulator’s enforcement actions against partners.
M&A prospects and consolidation activity increased this quarter. Consumer platform Pave and small business lending platform BizFi are winding down. Asset managers EJF and Marathon have built sizeable positions in small business lender ONDK. Kabbage is reportedly raising capital to fund M&A as well. Platforms that have successfully weathered capital access and data integrity issues over the past year are expected to take share, grow their footprint with new products and services, and deepen their relationship with borrowers.
Emerging Bank Competition in Super Prime Segment
Several banks have announced plans to offer installment loans to the sector including Goldman Sachs, American Express (relationship customers only), Sun Trust, and PNC Financial. The GS Marcus product recently announced $1 Bn in origination—the fastest origination growth of any lender PeerIQ tracks—and is on pace for $2 Bn in origination by year-end.
Banks are focused on high-quality credits and relationship customers so they pose the most competitive challenges for marketplace lenders. Interestingly, SoFi has responded by filing for an ILC bank charter. The application requests a license to accept deposits and offer credit cards. We expect SoFi and other non-bank lenders to compete on service, rather than rate, and by deepening their customer relationships through a diverse product mix (e.g., insurance, wealth management, deposits, etc.), community, and brand building.
In the wake of emerging bank competition, non-banks are responding by applying one of the following strategies:
• Focus on underserved credit segments where traditional banks outside of a few specialists will not compete (e.g., Fair Square Financial, Loan Depot, various non-QM lenders)
• Compete on brand and service, rather than rate, by offering a better customer experience and integrated product mix to a targeted customer segment. (e.g., SoFi)
• Lending-as-a-Service models that enable banks and credit unions to compete with licensed technology (e.g., Upstart, Avant, LendKey)
We also note that by and large many banks are choosing to partner, either buying loans from non-banks, partnering on
Deal Name Issuer OriginatorColl
Size ($Mn)Sub-
SegementIssuance
DateEvent Type
1st Trigger Breach
Trigger Test
MPLT 2015-AV2 Avant Avant 111 Consumer 10/16/15 Amortization Jun-17 Cumulative DefaultAVNT 2016-B Avant Avant 345 Consumer 4/28/16 Amortization May-17 Cumulative DefaultAVNT 2016-A Avant Avant 345 Consumer 2/26/16 Amortization Apr-17 Cumulative DefaultSCLP 2015-1 SoFi SoFi 252 Consumer 8/21/15 Amortization Mar-17 Cumulative Default
MPLT 2016-LD1 Jefferies LoanDepot 100 Consumer 2/19/16 Amortization Dec-16 Cumulative DefaultMPLT 2015-CB2 Jefferies CircleBack 151 Consumer 12/15/15 OC Trigger Nov-16 OC TargetCANF 2014-1A CAN Capital CAN Capital 200 SME 10/17/14 Amortization Nov-16 Minimum Excess Spread
MPLT 2015-AV1 Jefferies Avant 127 Consumer 9/24/15 Amortization Nov-16 Cumulative DefaultAVNT 2015-A Avant Avant 140 Consumer 8/12/15 Amortization Nov-16 Cumulative Default
lead gen, financing whole loan pools, or renting technology from non-bank technology companies.
Focus on Risk Management
It’s been over a year since the May 9th Lending Club events. Since then, we have seen a heightened emphasis on controls, risk management, and the role of the capital markets function across the industry. The seizing up of whole loan buyers and liquidity resembles, to some observers, a dress rehearsal for what might occur in a mild recession.
As platforms resume their focus on growth and enjoy relatively calm macro conditions, we see platforms and asset managers investing in risk management to prepare for the next downturn: primary and backup servicing, data & analytics, fraud prevention tools, verification and validation tools, and building alternative funding channels to weather disruption to capital markets. Additionally, in the wake of shifting consumer payment priorities, we expect lenders and investors to vigilantly monitor and improve responsiveness to changes in their priority within the consumer payment hierarchy.
Overall, we expect securitization volumes to continue to grow. The economic opportunity for whole loan buyers to fund via the term ABS markets is stronger than ever. Non-bank lenders have a growing addressable market and larger asset classes to tap into such as auto and mortgage. Investor and ratings agency participation continues to grow as performance history seasons. Every major federal regulator has now acknowledged the role of FinTech in creating transparency and promoting financial inclusion. There are now multiple paths to reducing regulatory uncertainty. We continue to expect the asset class to continue to mainstream into the portfolios of institutional investors that seek yield in a low-rate return environment.
Appendix: Marketplace Lending Securitizations to Date (Cont’d):
AVNT 2016-A C Consumer Avant AVNT Avant 26-Feb-2016 344.9 14% 55.2 2.66 Fixed 9.79 na BB RatedTicker Type Originator Shelf Issuer Issue Date Collat Amt
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