Kroll notes mixed year-over-year performance in fintech ABS
Kroll Bond Rating Agency has tracked a rising level of year-over-year losses in certain marketplace-loan securitizations – but does not believe it indicates a broader trend of brewing troubles in the space, according to the agency.
Kroll found rising losses across two of the three tiers of MPLs it tracks in monthly index reports surveying ABS performance. The weaker performance was recorded in the September indices (which culled data from servicer reports) of both the prime-lending tier (Marlette Funding and Social Finance) as well as the near-prime/lower-prime pools of lenders Prosper, LendingClub, Upgrade and Upstart.
A third subprime tier of loans (which tracks the securitization performance of Avant and LendingClub’s NearPrime ABS platform) was the only grouping in which net losses fell significantly year-over-year by 325 basis points to 18.18% – a result attributed to Avant’s underwriting standards that have tightened over the last two years, according to Kroll.
The Tier 1 annualized net losses climbed 76 basis points year-over-year to 5.73%, rising alongside increasing - but still low - levels of delinquencies for the Marlette and SoFi deals (up 30 basis points to 1.49% from the September 2018 time frame).
But the deepest weakening was in Kroll’s Tier 2 index, which had annualized net losses climbing to 13.36%, an increase of 209 basis points month over month, and 229 basis points year over year.
The report stated the weaker Tier 2 index performance was primarily driven by the inclusion this year of the securitized pools of fintech startup, Upgrade Inc. According to Kroll, the firm’s UPGR 2018-1 and UPGR 2019-1 deals have exhibited loss rates that are 50%-100% higher than similar deals within the index.
Brian Ford, a Kroll analyst, said that Upgrade accounted for 50 basis points of the Tier 2 index’s month-over-month loss, but its two deals account for nearly all of the year-over-year losses.
“This time last year, those two deals were not in the index, and today they account for about 12% of it,” Ford said, adding, “The annualized losses for the two Upgrade deals in September were 18.5% and 16.3%, compared to most other deals that had losses between 11% and 13%.”
Ford said given that Upgrade’s securitizations contained loans with similar borrower metrics to transactions from other issuers, its losses were somewhat higher than Kroll anticipated. He added that Upgrade’s deals were outliers and, “I wouldn’t make assumptions about loan performance weakening across the board based on this index.”
Ford noted that the relatively new marketplace asset class has reached a “critical mass where one deal doesn’t completely dominate the index and drive performance—there’s decent diversification at the point.”
The Kroll report noted that Tier 2 delinquencies of 60 days or more increased 17 basis points compared to the previous month and 38 basis points year over year.
The delinquencies for Avant and LendingClub's Near-Prime platforms decreased 27 basis points month-over-month and 24 basis points year-over-year.
But delinquencies have increased across all consumer loans, despite the strong economy and tight labor markets, Ford said, adding that likely speaks to a “slight” loosening of credit by most consumer lenders.
Lenders such as SoFi initiated marketplace securitizations when they offered to consolidate federal student loans for credit-worthy borrowers, such as recent graduates from medical or law schools. After 2012, they started securitizing unsecured loan products, such as credit cards with high annual percentage rates.
“Since this is an untested asset class through a credit cycle, the question is: are these the loans people will default on first?” Ford said, adding that as a result Kroll and other rating agencies have demanded significant overcollateralization in securitized deals to support the investment-grade ratings of the pools.