Citigroup is paying up for a single-A rating on its latest securitization of marketplace loans.
The $376.7 million Citi Held for Asset Issuance 2015-PM1 (CHAI 2015-PM1) is backed by unsecured consumer installment loans originated and serviced through Prosper Funding’s online platform. CIGPF I Corp., a unit of Citigroup, has a flow purchase agreement with Prosper allowing it to acquire a nearly pro-rata portion of all loans originated on the platform.
Marketplace lending has some unique risks, such as the limited performance history of these platforms and the potential for increased regulatory scrutiny. As a result Moody’s expects that cumulative losses on the loans in the pool could be 8%, which is significantly higher than the cumulative losses is typically expects for other consumer assets with borrowers of similar credit profiles,” the presale report states.
Nevertheless, Moody’s assigned an A3’ rating to $227.28 million senior tranche of class A notes, a Baa3’ rating to $86.29 million of class B notes and a Ba3’ rating to $63.13 million of class C notes.
All of the notes have a legal final maturity of December 2021.
By comparison, the only previous securitization of Prosper loans to be rated by Moody’s, Consumer Credit Origination Loan Trust 2015-1, completed by BlackRock in February, was rated three notches lower, at Baa3.’
How did Citi get a higher rating?
The class A notes benefit from a whopping 54% of credit enhancement; the class B notes from 20.5% credit enhancement; and the class C notes from with 15% credit enhancement.
In its presale report, Moody’s notes that all of the class of CHAI 2015-1 have higher credit enhancement than corresponding classes of CCOLT 2015-1. In fact, the Class C notes of CHAI 2015-PM1 have the same amount of credit enhancement as the Class B notes of CCOLT 2015-1.
Citi’s deal has something else going for it: the class A notes have a much shorter life, just 0.71 years, than those of CCOLT 2015-1, owing to their smaller size (just 0.54% of the pool), thus reducing their exposure to tail ended losses. (The weighted average life of the class B notes is 2.08 years and the class C notes 3.25 years.)
By comparison, the senior notes of BlackRock’s deal had a weighted average life of 1.07 years.
The loans backing CHAI 2015-PM1 are also relatively short term, which helps offset other risks compared with more typical consumer loans. As of the cutoff date of the deal, the pool was made up of fully amortizing installment loans with initial repayment terms of three or five years, and had a weighted-average remaining term of 43 months, resulting in an approximate weighted average life of 1.46 years.
This short weighted average life limits the transaction's exposure to the risks of negative macroeconomic credit events and adverse regulatory and operational developments.