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Funding Circle launches second U.S. small-biz loan ABS deal

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U.K.-based Funding Circle is marketing its second securitization of U.S. small-business loans, according to ratings agency reports.

The reports stated the lender is sponsoring a $243 million securitization of small-business loans originated online and serviced via its U.S. affiliate, FC Marketplace, d/b/a Funding Circle. The transaction – Small Business Lending Trust 2020-A – is backed by a static pool of 1,930 loans with an outstanding balance of $246.7 million.

According to Moody’s Investors Service and Kroll Bond Rating Agency, the deal has a strong credit structure with a buildup of credit enhancement as the pool amortizes (from 10% to 15% of the performing pool balance), plus a diverse pool in which the top 10 loans make up only 2% of the pool balance.

While the pool carries risks stemming from a potential slowdown in the U.S. economy impacting small businesses, the potential harm is mitigated by the two-year weighted average life of the notes, according to Moody’s.

The pool’s loans have weighted average remaining terms of 47 months, with three months of seasoning.

Funding Circle (part of Funding Circle Holdings PLC) will market $181.58 million Class A notes tranche with a preliminary A3 rating from Moody’s and an A- from Kroll; a $20.92 million Class B tranche (rated Baa3/BBB) and a Class C tranche of $40.5 million in subordinate notes that Kroll rates at BB- (Moody's is not rating the Class C notes).

Each of the tranches has a final maturity of December 2026.

Moody’s estimates a gross default rate of 14.5% for the pool, and an expected net loss rate of 13.8%. Kroll has a base-case cumulative net loss range expectation of 10.95%-12.95%, slightly wider than Kroll's projected loss range in Funding Circle's initial deal last year.

Funding Circle remains a “small, relatively new sponsor” with limited U.S. market experience dating back to 2015, cautioned Moody’s.

“Funding Circle has rapidly increased its origination volumes over the past five years of its operating history. Furthermore, Funding Circle's underwriting model has undergone a number of iterations since the company began originating loans in the U.S., making historical performance comparisons less meaningful,” the report stated.

Funding Circle U.K. has sponsored five deals to date domestically.

Funding Circle was founded in 2010 and originates small/medium-enterprise loans based (on a personal guarantees basis) in the U.K., the U.S., Germany and the Netherlands. The company has originated more than $10.9 billion in loans to 77,000 SMEs.

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