Prosper and Lending Club: Marketplace evolving

Marketplace lenders are successfully reviving the embattled US securitisation industry with the March quarter showing a solid seven deals and a total issuance of US$3 billion.

This brings issuance to date to US$18 billion across 80 deals, according to Ram Ahluwalia, chief executive of PeerIQ, a New York firm that provides institutional credit risk analytics for the US peer-to-peer lending sector.

As demand for marketplace loan asset-backed securities picks up, it is becoming clear that more standardisation is still needed given transactions differ wildly in the way they are designed. 

Ahluwalia said deals are increasingly adding features to reduce risk, which is critical if the fledgling industry plans on morphing into a major player in the credit markets.

“On recent deals, structurally we've seen increased credit enhancement on unsecured personal loan deals from some issuers. Each issuer has its own template and there is a lack of standardisation in documentation, structure and reps and warranties,” he added.

Multi-seller transactions

Platforms are also taking a larger role in the process.

"In terms of trends though, we're seeing issuers taking control over the securitisation process. There's a growing need for greater verification and data; repeat issuance is a trend; and there is a rise in the number of new issuers; as well as the growth of multi-seller transactions."

PeerIQ argued that securitisation will continue to be a favoured funding channel, with total ABS issuance volumes growing 50 per cent in 2017 driven by the need for banks to access large, diverse, funding sources.

His projections are underlined by the recent US$495 million issuance from Prosper Marketplace - the first ABS launched by Prosper via its own branded shelf, although previous deals had been issued by Citi on the CHAI shelf.

Lending Club too has tapped the ABS market and is currently looking to market a major multi-seller consumer loan ABS. 

Ahluwalia said this is a "significant milestone" for the firm and means it is "now able to provide a repeat path to liquidity for whole loan buyers".

Role of rating agencies

There is some evidence that marketplace loan ABS performance has improved over time, with spreads tightening and increases in credit enhancement on certain transactions, which has helped facilitate better engagement across the industry. 

“New issue and secondary spreads have tightened considerably. This is more to do with investor confidence and the increasing role that bulge-bracket banks are playing in the asset class than the deals themselves improving or changing structurally," commented Ahluwalia.

"We are also seeing increased participation across the board, especially from rating agencies, with even Fitch now coming in to rate the recent Prosper deal."

However, the credit risk retention rules that came into effect last December could be a problem.

From where the PeerIQ chief sits, a possible downside is that the ‘skin in the game’ demands may have removed the ability of some issuers - that may have already been holding 5 per cent risk or more - to differentiate themselves when every participant is held to the same standard.

Regardless of risk retention, he added, marketplace loan ABS has become a more established asset class, helped by the growth of new firms entering the market as well as repeat issuers.

"Investors are generally more confident with the asset class in general, not necessarily due to risk retention and this has also been seen in rating agencies with S&P coming into the space. This is quite a change from when rating agencies said they'd never rate the stuff,” he concluded.

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