Kabbage earns an AA from Kroll on its next small biz loan facility

Online lender Kabbage is returning to the securitization market with $610 million of bonds backed by small business loans and lines of credit. The transaction, Kabbage Asset Securitization 2019-1, refinances a $610 million facility that the lender obtained two years ago. KABB 2017-1 issued $525 million in March 2017, then issued $25 million additional notes in August 2017 and $60 million of additional notes in May 2018.

While KABB 2017-1 does not expire for another year, the new transaction is more highly rated, potentially lowering Kabbage’s funding costs. The $421 million senior tranche of 2019-1 notes to be issued is rated AA by Kroll Bond Rating Agency, one notch higher than the senior tranche of 2017-1 notes. Kabbage had to offer higher credit enhancement of 34.88%, which is more than 4.0 percentage points higher, for the AA.

Yet 2019-1 also includes an A-rated tranche that benefits from just 25.58% credit enhancement, less than the 30.5% on the A-rated tranche of 2017-1. There are three other tranches of 2019-1 notes: the BBB-rated notes have 14.8% CE (versus 15.5% for the comparable tranche of 2017-1); the BB-rated notes have 9.28% CE (10.5%); and the B-rated notes have 5.47% CE (6%).

Notably, the advance rate for the 2019-1 deal is just 65.5%, down from 70% for the 2017-1 transaction, indicating that Kabbage is borrowing less heavily against the collateral.

Guggenheim Securities and Credit Suisse Securities are the initial purchasers.

Kroll did not explicitly state in its presale report why it was comfortable assigning an AA, though it noted that the performance of KABB 2017-1 is in line with the rating agency’s base- case scenario. “Since the transaction closed, all timely interest has been paid to investors,” the report states. “Additionally, no rapid amortization event has occurred.”

Like the 2017-1 transaction, KABB 2019-1 features a 36-month revolving period during which time no payments of principal of the notes will be made unless, though Kabbage has the option to refinance after March 2021. Instead, cash flow from principal collections may be reinvested to purchase additional receivables, based on certain eligibility requirements.

While Kabbage has yet to turn a profit, it has managed to raise additional capital since closing the 2017-1 transaction. In the fourth quarter of 2017, it closed a $250 million equity investment from a subsidiary of SoftBank Group and an asset-backed, revolving credit facility with Credit Suisse for up to $200 million. Then in July 2018, Kabbage closed a secured revolving corporate credit facility for up to $50 million. And in December 2018, as part of its diversification strategy, Kabbage established a program in which it sells participation interests in receivables associated with the loans to various purchasers. These additional funding sources have allowed Kabbage to expand the products and services offered to merchants and to explore other strategic opportunities, according to Kroll.

In addition to loans and lines of credit, Kabbage now provides working capital to merchants by purchasing a specified amount of future receivables known as merchant cash advances, or MCAs. None of the receivables in the current pool consist of MCAs, but the transaction allows up to 10% MCA receivables.