Home-improvement loans issued through point-of-sale financing specialist GreenSky came to the asset-backed market in a first-time $261.8 million securitization.
According to market data, sponsor Waterfall Asset Management marketed bonds across three tranches, which were backed by the participation interests in a pool of unsecured prime consumer loans that are mostly used to finance major door/window and HVAC system upgrades.
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While GreenSky (Nasdaq: GSKY) services loans on its platform, it was not involved in structuring the Cascade Funding Mortgage Trust 2021-GRN1 deal nor in the sale of the notes, according to a report from Kroll Bond Rating Agency.
“The quality of the receivables, performance data dating back to 2014, deal structure and operating history of the company warranted the double-A minus rating despite GreenSky’s first time accessing the ABS market,” said Kroll managing director Eric Neglia, pointing out that the deal is also adequately collateralized and benefits from excess spread as well as a reserve fund.
While not a green-bond deal, there is a climate angle that may be attractive to ESG-inclined fixed income investors: about 62% of loans in the trust are earmarked for window/door or HVAC replacement. Attesting to their climate importance, these energy saving-type home improvement outlays are a major part of green energy plans in many states.
The loan pool consists of 27,607 loans for home-improvement products and services, with an average balance of $10,341 and a weighted-average coupon of 7.97%. The loans, with average original terms of 113 months, are seasoned an average of 15 months, according to Kroll. The average borrower FICO is 749.
The $226.5 million Class A tranche, which priced at a coupon of 1.1%, benefits from 21.1% credit enhancement that consists of overcollateralization, Class B and C subordination, a 0.5% reserve fund and excess spread.
Atlanta-based GreenSky, which raised nearly $1 billion in a 2018 IPO, is a tiny player in the massive consumer lending market and employs a third-party bank partner funding model. Georgia-based Synovus, which funded more than 75% of loans in the trust, is by far GreenSky’s biggest bank partner. But GreenSky does have arrangements with other banks to ensure depth of funding capacity, with current total commitments of $8.1 billion.
In addition to its bank partners, the company has a $555 million asset-backed revolving credit facility, administrated by JPMorgan, to finance the purchases of participation interests in loans originated through the GreenSky’s platform. (GreenSky sells the interests directly to WaterFall, according to Kroll)
Most of GreenSky’s revenue is derived from upfront transaction fees that are charged to merchants. Additionally, GreenSky earns a servicing fee on the loan portfolios they service.
While the new ABS deal consists of home improvement loans exclusively, the company recently announced it will begin working with healthcare providers to help patients finance their medical expenses. Late last year, GreenSky unveiled a 3-year, $1.8 billion commitment - up to $600 million per year – from a new bank partner to support the healthcare-lending business.
A tiny 0.26% of the trust’s loans are currently 30-59 days delinquent, but GreenSky has amended its lending agreements to allow forbearance amid COVID economic strains.
GreenSky offers reduced rate, deferred interest rate and zero interest loans on its platform. A majority of the reduced rate loans have a “purchase window,” a time period in which the borrower may draw down loan funds. These loans typically begin in an interest-only period for five or six months and then become a simple interest loan. The reduced rate loans generally have interest rates ranging between 2.99% and 11.99% for the life of the loan.
Kroll’s examination of GreenSky’s historical loan loss for its reduced rate loans goes back to 2014. Not surprisingly, loss experience is tied closely to FICO scores. As of December, about 1.4% of the pool’s current principal balance had at some point been previously delinquent. About 0.26% of the pool is currently in a delinquency stage, with an equal percentage of loans enrolled in a hardship program.
Kroll’s base-case loss range expectations are 6.8%-8.8%.
Kroll noted that GreenSky has been informed that the Consumer Financial Protection Bureau intends to bring an enforcement action against the lender for its policies, procedures and processes, unless a settlement is reached beforehand.
