[Editor’s note: This is a guest post by David Johnson. David is the Chief Executive Officer at First Associates, the fastest growing loan servicer in the country with a $7 billion dollar portfolio under management for various asset classes including P2P and P2B loans. As CEO, Johnson increased revenues at First Associates by 20x in just three years.]
Marketplace lending reliance on non-deposit funds for lending capital is driving increasing securitization volume. Marketplace lenders aiming to rise to the top of the pack would be well-advised to start planning for securitization now, if they haven’t already.
For those both contemplating and completing securitization, PeerIQ Research has initiated a series of reports called the Marketplace Lending Securitization Tracker, starting with third quarter 2015. The reports track various elements of securitized marketplace lending progress and performance.
According to the inaugural report, “As the sector continues to scale—with a projected $50B in total US originations by end of 2015—origination platforms, loan purchasers, and other market participants are increasingly looking to the [Asset-Backed Securities] ABS markets to meet their funding needs…Securitization is an essential link in the funding chain connecting originators to institutional investors in the capital markets. A transparent, simple, high-quality securitization market with active repeat issuance will connect marketplace lenders to long-term, low-cost, and diverse capital base, thereby reducing the funding risk through all credit environments.”
The fourth quarter report documents continuing rapid growth with “a total of 9 deals issued for a total Par Amount of $2.7bn…this figure represented over 30% of cumulative issuance to date, and an over 5x increase in issuance from the corresponding quarter in 2014 ($0.5bn). Total securitizations to date now stand at $8.4 bn, with 41 deals issued to date.”
Before starting the process, however, marketplace lenders must be adequately prepared to securitize successfully. Otherwise, aspirants will find themselves constantly running into obstacles that will impede progress, lengthen the timeframe, increase costs and perhaps lead to failure.
Companies must offer a sustainable business model, demonstrate solid and compliant servicing that results in low delinquencies and high customer satisfaction, and work with trusted advisors whose reputation and expertise can help negotiate the complicated process.
Before starting: 6 qualifications separate winners and losers
Following are key qualifications (explained in more detail in a First Associates whitepaper entitled, “Guide to Marketplace Lending Securitization Success)” that will help marketplace lenders heighten credibility with those responsible for moving the securitization process along, and streamline steps along the way:
1. Develop a business model that’s unique (or at least innovative); and prove sustainability. A dynamic management team, cutting-edge technology, adequate equity capital and superior credit decision-making protocols must be in place.
2. Prove the ability to get and keep customers through a customer acquisition program driving healthy loan volume growth with first-time and repeat customers.
3. Engage the services of a skilled, industrial-strength servicer that provides comprehensive back office support, applicable asset class experience and state-of-the-art technology to optimize onboarding, payment processing, delinquency management and reporting.
4. Make sure that top-notch backup servicing is in place. With a respected, established loan servicing company, this may not be necessary. For self-servicing or those using a lesser-known servicer, the lender must prove ability to safeguard investors and take over loans efficiently and rapidly if problems occur.
5. Hire a seasoned, trusted advisor(s) who knows the territory. This advisor/team has high credibility with such key industry players as money center banks, investment banks, sponsors, trustees, rating agencies and other financial market participants. Extensive networks and solid relationships are key to success.
6. Address compliance every step. Compliance impacts all areas of marketplace lending, and non-compliance—even if unwitting—can undo a securitization very quickly. In contrast, documenting full compliance improves confidence and spurs momentum.
Going forward: Plan on at least 16 weeks from start to securitization
Marketplace lenders gearing up to go through the securitization process will see success more reliably and rapidly by cooperating, showing patience, and proving all claims.
Everyone from investors and investor banks to rating agencies (if pursuing a rated securitization) will check out the operation thoroughly, ask many questions, and expect candid and complete answers. If requested information isn’t provided in a timely manner, the timeline will get longer while the chance of ultimate success gets shorter.
For those that already have gone through the process, PeerIQ’s inaugural report looked at several issues, including credit quality and securitization class ratings. The results show a mixed bag.
In credit quality, the report notes, “Overall marketplace lending securitization asset credit quality is at the higher end of the FICO range for traditional consumer credit securitizations. For CCOLT and CHAI, the weighted average FICO was 706 and 703 at issuance. In comparison, the weighted average FICO ranges for credit cards is 679 to 710, auto-prime loans is 687 to 732, and auto-subprime loans is 650 to 678. In these cases, recent marketplace loan securitizations are near the upper endpoint or above the range entirely.”
Marketplace consumer loan securitization class ratings haven’t fared as well to date. PeerIQ reports ratings “are marginally lower than their contemporaries. Our sample shows that recent consumer and student loan marketplace securitizations are rated in the Moody’s Aa to Baa and Baa to Ba ranges for note classes A and B. And while these ratings are still strong, marketplace loan securitizations lack the high percentage of classes in the Aaa (for Class A notes) and above A-grade(for Class B notes) categories for traditional consumer credit deals.”
The report adds, “Going forward, marketplace lending securitization ratings may potentially migrate upwards. As the industry matures and volume increases, sponsors may insist on more insulated note classes to achieve higher ratings. For example, the recent CHAI deal’s Class A notes had a Moody’s A rating, which was up from CCOLT’s Baa rating for Class A notes.”
PeerIQ concludes that, while many investors may see it differently, marketplace lending securitizations are similar to other consumer credit classes when looking at structure and collateral pools. This may be contributing to higher coupons and lower ratings received. Notes the report, “…the perception gap may not be warranted…the asset class has not undergone a full credit cycle…does not emphasize traditional credit risk measures (like FICO scores)…and is…unsecured.”
Although non-rated securitizations can theoretically be done in 16 weeks, rated securitizations will take longer. And, marketplace lenders need to expect the cost to surpass initial estimates, especially when a rated securitization is involved.
To see the 16-week initial arrangements, development, and due diligence timeline starting with engaging a placement/structuring agent and law firm and winding up with finalizing legal documentation/closing, download the whitepaper authored by First Associates CEO David Johnson.
Founded in 1986, San Diego-based First Associates Loan Servicing, LLC is the fastest growing and largest third-party consumer loan/lease and backup servicer in the United States. First Associates Loan Servicing leads the marketplace lending industry in providing customized technology and customer service solutions, and is an active advisor in helping marketplace lending companies pursue securitization.