The securitization of small business loans originated by online lenders — an asset class that made its appearance last April — will keep growing, according to participants at the ABS East conference hosted by Information Management Network.

“There are at least three transactions in the works,” said Ronald Borod, counsel for DLA Piper, adding that players in this space are quickly accumulating portfolios.

In early April, the online lender Kabbage said it had closed a $270-million securitization, touting the Guggenheim Securities-led transaction as the first of its kind.

And later in April, OnDeck Capital priced a $175-million deal backed by small business loans. DBRs gave a ‘BBB’ rating to the senior notes, which priced at a spread of 250 basis points over the interpolated swap curve, according to a source.

Among the challenges facing those looking to assess or buy these transactions is the fact that sponsors tend to be rated below investment grade while the obligors are unrated. And the youth of the sector translates into another crucial risk factor: a limited track record.

In its presale of the OnDeck deal, DBRS said that the target customer for the sponsor included small business customers who may have had difficulties securing timely or affordable financing.

For the lenders, the incentives to securitize are typical for new securitizers: a diversification of funding sources and potentially lower rates than those available elsewhere.

In addition to OnDeck and Kabbage, online providers of small business loans include Swift Capital, CAN Capital, Fundera and Funding Circle.

Fred Wan, a portfolio manager at Hudson Cover Capital Management, said he expected to see more securitizations of commercial loans by online lenders. But hadded that, as with similar deals on the consumer side such as those issued by P2P lenders, the question for those interested in these transactions will be whether the sponsors are doing a good job “controlling credit.”

In general, he expects to more non-banks to move into the consumer asset-backed space, while banks retrench.

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