News Comments Today’s main news: Smava raises $34m; Lenddo partners with FICO in India. Today’s main analysis : PeerIQ’s analysis of securitization and pricing. Today’s thought-provoking articles: Blackston’s “now is the most difficult period ever“. Lendup has 29% of non-performing-loans. United States Amazing info and data from PeerIQ on the securitization market and loan pricing. […]
Weekly Industry update from PeerIQ, (PeerIQ email), Rated: A
Several marketplace lending ABS deals are coming to market amidst favorable market conditions and impeding risk retention rules.
P2P Global Investments, a UK UCIT investing in marketplace lending loans, sold £114 M ($167.36 MM) of rated notes backed by Zopa loans. The senior bond of the deal—Marketplace Originated Consumer Assets (MOCA 2016-1)—was rated Aa3/AA by Moody’s and Fitch respectively.
Noteworthy is that the deal is the highest rating afforded to any marketplace lending transaction from Fitch. Moody’s assigned a cumulative loss estimate of 7% and expected recoveries of 5%. We show deal structure and pricing below:
Sophisticated loan-level analytics are required to accurately value seasoned loans contributed to the collateral pool. Aged portfolios offer greater clarity to loan performance. However, there are other analytical considerations. The average conditional default rates (CDRs) are lower in the first twelve months of consumer loan pool than CDRs in the pool seasoned beyond twelve months. Therefore, seasoned unsecured consumer loans pool tend to have higher cumulative net losses as a percentage of deal balance. As the loans season, the conditional prepayment rates (CPR) tend to be elevated as well.
The price of a seasoned loan is the present value of projected loss-adjusted cashflow for the remaining balance of the loan, discounted at an appropriate rate. We show below the price behavior of a typical 60-month loan over its life while holding the discount factor constant:
As losses ramp up, the loan price drops; and then price exceeds par as risky loans approach maturity. This behavior results from positive survival bias of a loan given its remaining principal balance.
Specifically, in the early life of a loan, the credit loss projection ramps up and dominates the loan coupon—the loan price drops below par. As the loan seasons and survives over time, the credit risk on the remaining principal balance decreases. This survival bias of the credit risk profile leads to certain high credit risk loans valued above par.
For a higher coupon loan, the interest return or carry of the loan dominates loan pricing—the loan price exceeds par. At maturity, if the loan has not experienced any credit impairment, the price of the loan will be par; this leads to a “pull-to-par” profile.
Securitization Tracker Update
We look forward to releasing the Q3 securitization tracker this week. As origination volumes have slowed in certain areas, and as ABS markets started with a slow Q1, readers are asking what is the state of the ABS market? You may be surprised.
Stay tuned as we share volumes, pricings, and our outlook this week.
The CEO of marketplace lender Funding Circle says the industry is going through a “golden age” despite troubles for platforms like Lending Club this year.
Funding Circle is the UK’s biggest marketplace lender, worth over $1 billion.
Funding Circle CEO Samir Desai told Business Insider: “It was certainly a tough first half of the year with various things going on with Lending Club, which caused investors to take another look, and then the stuff with Brexit. But actually, what I’ve always said is I think we’re in this golden age for our industry.”
So why does Desai think we’re in a golden age? “If you look at the net returns that have been generated by marketplace lending platforms, they have been the highest of any asset class over the last 5 years with the lowest levels of volatility. If you look on the borrower side, borrowers flock in their droves to this kind of customer experience.
“For any professional investor, this is the most difficult period we’ve ever experienced,” Baratta, Blackstone’s global head of private equity, said Tuesday, speaking at the WSJ Pro Private Equity Analyst Conference in New York. “You have historically high multiples of cash flows, low yields. I’ve never seen it in my career. It’s the most treacherous moment.”
The firm is still selling more assets than it’s buying, according to President Tony James.
Blackstone finished gathering $18 billion for its latest private equity fund last year. The firm also has an energy private equity vehicle, which finished raising $4.5 billion last year.
Blackstone, founded by Schwarzman and Peter G. Peterson in 1985, managed $356 billion in private equity holdings, real estate, credit assets and hedge funds as of June 30.
LendUp extended nearly 75,200 installment loans in California last year, up about 110% from a year prior, according to the California DBO. The amount lent out on these loans last year surpassed $22 million, up 225%.
Missed payments are also high. Some 29%, or 5,921, of the unsecured installment loans outstanding at the end of last year were 30 or more days past due, according to a report from the California DBO.
Peer-to-peer (P2P) lending platform Landbay has launched a new comparison tool that will help tenants and landlords to compare their rents against the prevailing market rate as rental values continue to spiral.
The ‘Rent Check’ facility, which has launched today (Monday), utilises data from the P2P lender’s monthly rental index and allows users to compare rental movements for specific property types to check that rents are tracking the wider market.
“Together, Landbay’s Rental Index and the Rent Check tool will give both tenants and landlords a simple way of accessing data from across the UK, not only providing an in depth view of the market, but helping inform their next move.”
Zoopla invested £500k in the startup earlier in the year which guaranteed it exclusivity for new Landbay products that will be rolled out across its network of property websites Zoopla and PrimeLocation.com.
Smava, a leading marketplace lender in Germany, has clinched $34m in a round led by Runa Capital, with additional participation from Verdane Capital, mojo.capital and a gaggle of existing investors. Runa is an active investor in the alternative finance sector, having already invested in consumer lender Zopa and gateway platforms Lending Robot and Lendio. Verdane is a Scandinavian private equity firm with a track record of investing across the consumer internet space.
Alexander Artopé, CEO and co-founder of smava, said that the $34m will allow the company to expand its customer base, hire additional talent and to enhance its credit scoring technology.
Investors including Cerved Credit Management SpA and a venture between KKR & Co. and Varde Partners LP submitted non-binding offers on Friday for Banca Monte dei Paschi di Siena SpA’s non-performing loans platform, according to people with knowledge of the matter.
As part of the deal, the lender will also transfer management of an 8.6-billion euro ($9.6 billion) loan portfolio to the platform’s buyer, along with the exclusive management of a portion of Monte Paschi’s future bad loans, the people said, asking not to be identified because the process is private. Monte Paschi, which is being advised by Mediobanca SpA, plans to complete the sale by the end of the year, the people said.
China’s banking regulator has indicated that the government would not bail out failed firms in the shadow banking sector despite a string of recent collapses which have triggered protests across the country from disgruntled investors.
Wang Shengbang, a senior official at the China Banking Regulatory Commission, said investors putting their savings into high-yield debt products should be aware of the risks.
Among the most troubled have been peer-to-peer (P2P) online lending platforms. The collapsed Ezubao, which raised more than 74 billion yuan ($A14.5 billion) from nearly a million investors across the country, is being investigated over claims it ran a Ponzi scheme. Some 21 people from the P2P firm were arrested earlier this year.
He said only around 17 per cent of shadow banking products, or around 3.2 trillion yuan ($A640 billion) were held in riskier high-yield products, which is around 1.5 per cent of China’s overall banking assets.
In a recent report, Moody’s said P2P lending did “not pose systemic risks given its small size” at about 1 per cent of total shadow banking assets.
Liu Li-Gang, chief China economist at Citi, said while (NPLs) were higher than official figures indicate, the level was still manageable.
FICO, the world leader in credit scoring, has today announced a new partnership with Lenddo, a specialist in credit and verification technologies. Together, the companies plan to develop a credit risk score for consumers in India who have a limited or no formal credit history.
Lenddo was founded in 2011 to improve financial inclusion for 1 billion people around the world, enabling financial service providers to access and serve new and underserved markets using its disruptive technology and leveraging new sources of digital data, such as mobile-social digital footprints.
News Comments Main news: Jefferies-Loan Depot securitization breaks trigger; Lending Club’s fund 1st down-month; Funding Circle’s results; GLI’s results; Lufax signs banks for IPO. Main analysis: PeerIQ’s summary of last 9 months. Main thought provoking: The causes and effects of low rates, a must read Economist article; China’s number of p2p lenders will keep growing […]
Klarna onboards SAP’s product in 3 months. Interesting for 2 reasons: 2 large companies doing an accounting migration in 3 months is extremely impressive. And second, SAP now has an accounting solution for fintechs.
Comment: I am not an expert in securitization, nor in investment banking. But it looks to me that Jefferies’ made securitization have by far the highest probability ofbreaking triggers. This is very strange. See Circle Back and OnDeck’s. And now LoanDepot’s.
Online consumer loans made by LoanDepot Inc. are going bad faster than underwriters expected, threatening payments to investors who bought bonds backed by those debts less than a year ago.
Cumulative losses rose to 4.97 percent in September, breaching the 4.9 percent “trigger” in the $140 million securitization that Jefferies Group assembled last November and sold to investors that now include the Catholic Order of Foresters, according to data compiled by Bloomberg. Bondholders in the riskiest portion of the deal who may see funds diverted couldn’t be identified because the offering is private.
LoanDepot, which for years has specialized in traditional mortgage banking, began making small consumer loans over the internet last year.
Jefferies has been a lead underwriter of other securitizations backed by loans made by online startups, and at least two of its deals, for CircleBack Lending Inc. and OnDeck Capital Inc., have also breached their triggers. Those include Marketplace Loan Trust 2015-CircleBack 1 and Marketplace Loan Trust 2015-OnDeck 3.
CircleBack Lending hired Jefferies to explore a sale, people familiar said in June, as funding for online-finance companies tightened amid concern about loan performance.
LoanDepot aborted a planned initial public offering last November and turned to other sources of funds, including a $150 million term debt financing completed in August. The company says it recorded 80 percent year-over-year average annual growth from its founding in 2010 to 2015, funding more than $70 billion of loans. Second-quarter fundings reached almost $10 billion in home, personal and home equity loans, the company said.
“Mark-to-market” from Q1’s ABS West to Q3 ABS East, (Peer IQ email), Rated: AAA
This past February, at ABS West, conversations centered on deteriorating collateral performance and liquidity concerns. A steady flow of negative headlines–Madden-Midland, negative ratings actions, San Bernadino, platform layoffs, and global slowdown concerns–weighed heavily on investor sentiment.
Two events marked the peak of investor apprehension:
In the bond market, the pricing of CHAI 2016-PM1 (PeerIQ analysis here) where Mezzanine bonds delivered greater returns than the whole loans themselves.
In the equity market, investor capitulation after the Lending Club May 9th disclosures.
Turning of the Tide
Global credit markets began to firm in April. Lending Club tightened DTI criteria, elevated the role of the capital markets function, and strengthened leadership on the board and executive team.
In May, the US Treasury report published “Opportunities and Challenges in Marketplace Lending”–a constructive regulatory development. Treasury acknowledged the role of securitization in funding growth, and consistent with the PeerIQ RFI, recommended the need for standardized reps & warranties, consistent reporting standards for loan origination data, loan securitization transparency, and consistent market-driven valuation standards.
SoFi achieved a AAA rating for an MPL bond and cracked open the MPL ABS investor market to global investors via its hands-on marketing approach.
PeerIQ observed that secondary ABS spreads continued to tighten despite volatility in the equity markets. PeerIQ also observed in the Q2 tracker that the combination of stricter underwriting, higher coupons, and tighter secondary ABS spreads meant the conditions for securitization were strong.
A LendingClub Corp. investment fund that’s struggled with withdrawals this year posted a negative return for August, the first decline in its five-year history, after overhauling how it values holdings and incurring losses on riskier debts.
The fund, overseeing about $700 million at the start of the month, had disclosed plans earlier in the summer to overhaul how it tracks assets. It enlisted outside valuation firm Duff & Phelps Corp. and shifted methodology to forecast how debts will perform individually, rather than in groups. August marked the first month under the new system, resulting in a one-time 0.95 percent reduction to returns, Sanborn wrote.
The LC Advisors Broad-Based Consumer Credit Fund ended the month down 0.49 percent, cutting this year’s net return to 1.24 percent, LendingClub Chief Executive Officer Scott Sanborn told stakeholders in a letter and report Friday.
In June, the investment vehicle was forced to limit redemptions after stakeholders asked to pull out $442 million, or 58 percent of assets under management.
But in the case of the August slump, key developments had already been signaled, with the largest hit coming from a one-time adjustment as the firm improved how it values holdings, Sanborn wrote in the letter.
In the future, “investors should expect more movement in fund returns month-over-month because the new methodology is more responsive to changes in each individual loan’s delinquency status,” he said.
The analysts forecast the global P2P lending market to grow at a CAGR of 53.06% during the period 2016-2020. To calculate the market size, Technavio considers the lending amount through P2P platforms in the Americas, Asia Pacific (APAC), and Europe, the Middle East, and Africa (EMEA).
Interest rates are persistently low. First we ask who or what is to blame. Then we look at one outcome: a looming pensions crisis.
On September 21st the Federal Reserve kept its target for overnight interest rates at 0.25-0.5% but indicated that, after raising the target for the first time in a decade last year, it hoped to raise it for a second time soon—possibly in December, after America’s presidential elections.
Earlier that day, the Bank of Japan (BoJ) said it was staying with its target of raising inflation to 2%. Indeed it went further. The bank said it would continue to buy bonds at a rate of around ¥80 trillion ($800 billion) a year, until inflation gets above 2% and stays there for a while. To help meet this “inflation-overshooting commitment”, the bank said ten-year-bond yields would remain at around zero.
The debt-laden are delighted with the persistence of a low-rate world. It costs much less to service their obligations. But savers are increasingly grumpy. Economists are simply baffled. In the 1980s and 1990s, the high real cost of borrowing (ie, after adjusting for inflation) was the puzzle. Today’s interest-rate mystery is more troubling and there is division over the reasons for it.
One side says it is simply the consequence of the policies pursued by the rich world’s central banks. The Fed, ECB, BoJ and Bank of England have kept overnight interest rates close to zero for much of the past decade. In addition, they have purchased vast quantities of government bonds with the express aim of driving down long-term interest rates.
It is hardly a mystery, on this view: central banks have rigged the money markets.
On the other side of the divide are those who argue that central banks are merely responding to underlying forces. In this view the real interest rate is decided by the balance of supply and demand for the pool of global savings. The fall in interest rates since the 1980s reflects a shift in this balance: the supply of savings has increased as demand for it has crashed.
This ongoing glut in savings is due to two factors in particular. The first is changing demography, mostly in the rich world but also in some emerging markets. Populations are aging. At the same time, the average working life has not changed much. So more money has to be squirreled away to pay for a longer retirement (see article).
A second, related, factor is the integration of China into the world economy. “A billion people with a 40% savings rate; that brings a lot more supply to the table,”
Aging is not the only long-run influence that has tilted the savings-investment scales. By skewing income to the high-saving rich, an increase in income inequality within countries has added to the saving glut. A fall in the relative price of capital goods means fewer savings are needed for a given level of investment. Both trends predate the fall in real interest rates, however, which suggests they did not play as significant a role as demography or China.
A related reason for more saving is fear. The severity of the Great Recession belied the relative economic stability that preceded it.
Consider the business of life-inssurance companies. They pledge to pay a stream of cash to policyholders, often for decades. This promise can be likened to issuing a bond. Insurance firms need to back up these promises. To do so they buy safe assets, such as government bonds.
The trouble is that the maturities on these bonds are shorter than the promises the insurers have made. In the jargon, there is a “duration mismatch”.
When bond yields fall, say because of central-bank purchases, the cost of the promises made by insurance companies goes up. The prices of their assets go up as well, but the liability side of the scales is generally weightier (see chart 4). And it gets heavier as interest rates fall. That creates a perverse effect. As bond prices rise (and yields fall), it increases the thirst for bonds. Low rates beget low rates.
If a growing bulge of middle-aged workers is behind the secular decline in real interest rates, then the downward pressure ought to attenuate as those workers move into retirement. Japan is further along this road than other rich countries. Yet its long-term real interest rates are firmly negative.
A concern is that as more people retire, and save less, there will be fewer buyers for government bonds, of which less than 10% are held outside Japan. Another of the Geneva Report’s authors, Takatoshi Ito of Columbia University, reckons there will be a sharp rise in Japanese bond yields within the next decade. There may be political pressure on the Bank of Japan to keep buying bonds to prevent this.
SAP announced today that Klarna, has become the first customer to go live with smart accounting for financial instruments (smart AFI), a new functionality based on the SAP® Bank Analyzer set of applications, 9.0 release. In just three months SAP implemented the solution including accounting rules configuration, data integration and a full setup of the SAP HANA® database environment, proving that up-leveling market and product growth does not have to be a long and arduous process.
The peer-to-peer lending group is set to post a full-year loss of £36m when it publishes its accounts on Tuesday, after expanding into Europe and the US ate into profits. However, revenues at the firm, which was founded in 2010 and has lent more than £1.5bn to small and mid-sized businesses, rose 140 per cent from £13m to £32m last year.
“We expect our UK business to be profitable in the fourth quarter of 2016 and to generate significant cashflow in 2017 to finance international operations” said chief executive Samir Desai.
In 2015 the company raised $150m (£116m) of new equity for the business and listed the first and only single platform investment trust – the £150m Funding Circle SME Income Fund – on the London Stock Exchange.
The Company losses for the period were GBP6.9m (June 2015 profit of GBP5.3m), impacted by GBP13m write downs in investments in underperforming or liquidated platforms following the strategic review;
Group organized with Three Pillars to improve operational focus and assist reporting our strategy;
Sancus BMS Group on a pro forma* like for like basis, increased consolidated revenues from GBP2.7 million in H1 2015 to GBP4.0 million in H1 2016. The period was notable for the consolidation of the Sancus group and its amalgamation with BMS and Platform Black to establish our specialty lending business.
Valuations in our prioritized platforms, The Credit Junction, LiftForward, Funding Options and Finexkap increased by GBP5.5m in aggregate. Investments in underperforming or liquidated platforms were written down by GBP13m. We have been very prudent in reorganizing this portfolio and we fully expect to see value of this portfolio build materially in future periods;
Amberton Asset Management remains de minimus and we expect to make progress on this pillar in the next 12-18 months;
As a consequence of the considerable restructuring in the period together with writedowns in Pillar Two, the Net Loss for the period on the GLI Measurement Basis** was GBP10.3m (H1 2015: Net Profit of GBP0.2m).
As a consequence of making early write-downs and recognizing losses in underperforming assets, together with raising capital and reorganizing Sancus BMS Group, the Companies’ balance sheet is significantly strengthened. Nonetheless, during the period the Company Net Asset Value “NAV” per share decreased from 42.73p to 37.07p;
Company debt to gross asset ratio is 30% (31 December 2015 33%)
Company Net Assets have increased in the period from GBP98.2m to GBP105.6m and;
The Company’s weighted-average cost of debt decreased from 8.6% (year to 31 December 2015) to 6.8% (period to 30 June 2016).
Post period end
Ordinary share placing raised GBP7.1m from Somerston Group in August 2016;
New wholly owned subsidiary, FinTech Ventures Limited (“FVL”), created to hold, initially, the four Prioritised FinTech platforms thereby enabling independent capital raises to support these investments.
Name change of GLI Alternative Finance Limited Plc to the SME Loan Fund (“SMEF”) on 1 September 2016.
The new channel on the Zoopla website includes a peer-to-peer lending solution, in partnership with Landbay, where anyone can invest from as little as £100 into buy-to-let mortgages, statistically the lowest risk form of peer-to-peer lending.
This addition to Financeit’s management team will help propel the Toronto-based company into its next stage of maturity as it continues to expand its market share in the point-of-sale financing industry.
With 20 years’ experience managing and leading finance teams in Canada and the United Kingdom, Hanning served as Capital One Canada’s Chief Financial Officer for nearly five years. Prior to becoming CFO, Hanning held various senior positions within the bank’s Canadian and United Kingdom operations over the previous 12 years. He started his career at Glenfield Hospital NHS Trust in Leicester, United Kingdom.
Hanning’s entry into Financeit comes on the heels of the company’s $339 million acquisition of TD Bank Group’s indirect home improvement financing assets in partnership with Concentra.
Beyond Bank Australia is continuing its expansion into the fintech sector, forming a significant partnership with the nation’s leader in marketplace lending, SocietyOne.
The agreement sees Beyond Bank tip in $1.5 million for an equity stake in SocietyOne as well as increasing its existing funding commitment in personal loans to $10 million. The arrangement was formalised on Friday, September 23.
SocietyOne now has ten mutual banks and credit unions among its 200 investor funders and is actively engaged with a number of other potential investors as it undergoes further expansion, targeting a 2-3 percent share of the $100 billion consumer finance market by 2021.
The 2016 Blue Book of Internet Finance, published on Friday, found 1,263 of the P2P platforms on the mainland up to the end of 2015 were problematic, which included cases of fraud or firms going out of business.
This total included 896 P2P platforms that got into problems in 2015, with more than half involved in fraudulent tricks that took advantage of loopholes in regulations, the report said.
“China’s slow economic growth has led to plunging business for small and medium-size companies; It increases the risk of loan defaults,” the report said, adding that the risk of financing usually rose after accumulating over a long period.
In one typical case of fraud, highlighted in the report, one P2P platform, Rong Zuan Dai, went online in November 2015 and published 37 financing projects that promised high interest rates to hundreds of investors. But after two weeks the website suddenly closed.
Of the current total, Guangdong province had the largest concentration of P2P platforms, with 18 per cent of the national total, the report said.
It estimates that the number of P2P platforms nationwide will continue to rise at a rate of 90 per cent over both of the next two years as the industry further consolidates, and could eventually reach 10,000.
The number of active users of P2P is also expected to surpass nine million in 2016.