Online lender Avant is returning to the securitization market for the first time since shedding staff and shelving expansion plans in the spring.
The latest deal, dubbed Avant Loans Funding Trust (AVNT) 2016-C, is a $200 million notes issuance backed by loans that, while unsecured, are of higher credit quality than those backing its previous securitization, completed in April. The deal also features additional investor protections.
This could help the transaction pass muster with investors, who may have grown wary of the company’s business model and are concerned about regulatory scrutiny of the broader marketplace lending industry. In the second quarter, Avant tightened its underwriting criteria by reducing loan lengths, lowering finance levels and shaving payment-to-income (PTI) allowances.
Avant traditionally has lent to borrowers with average annual incomes of $61,000 and FICO scores that range widely from 580 (in subprime territory) to 720 (prime quality). The loans ranged in size from $1,000 and $35,000 and annual interest rates range from 9.95% to 36%.
Over half the 36,459 loans totaling $244.8 million backing AVNT 2016-C were originated under the new guidelines. As a result, the borrower PTI ratio for the latest deal has improved, to 11.7% from 8.8% for the April deal. The loans backing this deal also have a shorter weighted average life.
Loans with terms of originated at under three years now comprising 45.63% of the pool. Only 11.91% of loans are between 49 and 60 months, compared with 21.03% in the April deal and 23.84% in a February deal.
Avant is also eliminating delinquent loans for the 2016-C pool, unlike the pool of collateral for each of Avant’s deals this year that had up to 1.5% of loans as much as 59 days late.
Avant is also boosting credit enhancement for the latest deal, partly by increasing the excess spread, or the difference between the interest rate on notes issued by the trust and loans used as collateral. The senior, class A notes benefit from total credit enhancement of 56.85%, up from 49.95% for the senior notes of the April deal.
This additional enhancement did not earn Avant a higher credit rating however. Kroll Bond Rating Agency expects to assign the same ‘A-’ to the senior tranche of the latest deal – $108 million in Class A notes – that it did to the comparable tranches of Avant’s two previous deals. KBRA assigned a ‘BBB-’ on the $62 million Class B tranche and ‘BB’ on the $29.9 million in Class C notes.
Despite the improved underwriting, KBRA expects cumulative net losses on the loans used as collateral to range from 20.2% and 22.2%, its base case scenario.
By comparison, the rating agency’s had a base case range for cumulative net losses of 18.75%-20.75% for the April transaction.
Avant isn’t the first marketplace lender to brave the securitization market since a series of events, including rising delinquencies, layoffs at several lenders and a management shakeup at Lending Club, rattled investor confidence in the spring.
Social Finance and CommonBond have both issued bonds backed by refinance student loans. SoFi has also issued bonds backed by unsecured consumer loans. But both lenders target borrowers considered to be better risks than does Avant.
Avant operates through a strategic underwriting partnership with Utah-chartered WebBank. All of its loans are originated through WebBank, even though the company has its own lending and service/collection licenses in 30 states that are currently not used.
Although WebBank is a partner to fellow online lenders such as Prosper and Lending Club that retain no loans, Avant has a “hybrid” approach to originations that sells off only 45% of its loans to institutional investors. The company has retained about $1.6 billion of its issued loans to date, and all of the loans in the 2016-C pool are owned and serviced by Avant.
Another positive in Kroll’s eyes is the fact that Avant holds formal loan-purchase relationships with institutional investors – rather than the uncommitted auction format of peer-to-peer lenders. Avant also maintains multi-year warehouse lines totaling $900 million from five different providers (with $457 million available as of May 31).
But like much of the marketplace industry, Avant it is having trouble finding eligible borrowers. Loan originations fell to $971 million in the first half of 2016, down from $1.2 billion in the same period of 2015. This prompted the company to trim its workforce by 30% through voluntary severance and layoffs. Layoffs have been restricted to positions dedicated to the business expansion plans, according to KBRA, and did not involve compliance, servicing or collections staff.
Avant has also canceled plans to expand into auto loans, credit cards and point-of-sale business lines.
Avant is among 14 marketplace lenders that are the subject of a California state-level inquiry into how their business models and online platforms conform to the state’s licensing and regulatory structure.
However, KBRA’s presale report credits Avant with having strong, proactive compliance measures. It also points to the addition of former Federal Deposit Insurance Corp. Chair Sheila Bair to the company’s board of directors as a boost to Avant’s profile.