Blue Elephant Securitizes Prosper Marketplace Loans

At $60.8 million, it may be the most expensive BLT in the world—and that's not a bacon-lettuce-and-tomato sandwich.

Blue Elephant Capital Management privately sold on Tuesday $60.8 million of securities backed by unsecured consumer loans sourced from Prosper Marketplace, according to deal documents for Blue Elephant Loan Trust (BLT). The files were prepared by the underwriter, Citigroup, which in February helped transact a similar deal for BlackRock.

A Blue Elephant official confirmed document contents when reached by email.  A Citigroup spokesman declined to comment.

The Irving, N.Y.-based investment firm will use proceeds to reduce its reliance on a credit line.

The transaction will help pave the way for Blue Elephant’s next big play, on loans from marketplace platforms that haven't attracted the same kind of public attention as firms like Prosper. It’s preparing to launch an unlevered absolute return fund, its fifth fund, which will invest in both consumer and non-consumer marketplace loans, American Banker previously reported. As of December, it had commitments for at least $20 million. The launch, which was first intended for earlier this year, may take place after May 1, managing partner Brian Weinstein said in a phone interview.

The shift in focus comes as fast-growing demand for exposure in marketplace consumer debt is expected to diminish the yields that the biggest risk-taking firms first sought, officials at Blue Elephant have said. They are looking to move into more illiquid and niche segments of the market for opportunity.

"There is an amazing opportunity to build a diverse book of loans across geographies and lending types, so long as we can attract interested capital," Weinstein wrote in a blog post on the firm's website this month.

Securitization plays an important role in sustaining growth for platforms like Lending Club and Prosper. Both platforms operate on an originate-to-distribute model, meaning their growth depends on investors' willingness to buy exposure to their loans in various formats, including securities backed by the loans. Other platforms, such as small business lender OnDeck, retain their loans on balance sheet or have a hybrid model where they only sell a portion of what they help originate. 

In addition to Blue Elephant, other firms including Garrison Investment Group and Eaglewood Capital Management have also sold privately sold securities backed by marketplace loans.

This week's deal includes loans that Blue Elephant acquired via its first marketplace loan fund, which the firm levered up from an initial $20 million to $60 million, over the past two years. The riskiest slice of bonds yielded 5.364%.

Collateral includes 3,175 loans with three-year maturities, and 1,689 loans with five-year maturities. Borrower credit strength is mostly high, with weighted average FICO scores of 715 and 717 for each respective loan type, which are spread out across two tranches, dated 0.96-year and 2.56-years. Some 12% of loans the pool have FICOs ranging from 660-679. Blue Elephant is retaining a $3.5 million Class C tranche.