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Kroll: Upstart's focus on more extended-term loans adds ABS risk

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Nearly 85% of the unsecured consumer loans in marketplace lender Upstart’s next securitization have five-year or seven-year terms attached.

That is an unprecedented concentration of extended-term loans for Upstart, compared to the collateral in the firm's other asset-backed deals dating back to 2017.

The tilt toward longer term loans for its fifth prime/near-prime securitization is nearly a full departure from Upstart's original focus on originating and securitizing only three-year loan products in 2014. That heavier-than-usual mix of 60- and 84-month term loans also presents elevated risk beyond that of the collateral of Upstart's previous ABS issue, according to Kroll Bond Rating Agency.

Consequently, senior note credit enhancement levels and loss expectations have increased for the $231.9 million Upstart Securitization Trust (UPST) 2019-1 issuance over that of the prior Upstart asset-backed offering last August,

According to a Kroll presale report published Thursday, the ratings agency’s base case loss range is 20.1%-22.1% for the UPST 2019-1 transaction, up from 18.3%-20.3% in UPST 2018-2.

Kroll's cumulative net loss expectation for the deal "has increased from the prior deal due the higher con-centration of 60 month loans,” the report stated, “as well as the inclusion of 84 month loans both of which have higher loss expectations compared to 36 month loans.”

UPST 2019-1 is the first of Upstart’s securitizations to pool seven-year loans that it began originating in February 2018. Those loans only account for 1.09% of the pool, but the 83.81% exposure to five-year loans (which were first issued in 2015) surpasses the previous four deals, including the 70.74% level in last November’s transaction. It more than doubles the 39.91% share of five-year loans in Upstart’s debut securitization in June 2017.

Upstart 2019-1 will issue four classes of notes secured by 21,892 loans with a total balance of $257.68 million, its largest collateral pool to date. The average loan balance is $11,770 with a weighted average coupon of 17.42%. The WA FICO is 687, with average original terms of 57 months; the pool of loans was seasoned five months.

The note balance includes an $86.83 million Class A note tranche with a preliminary A- rating from Kroll, which is on par with the senior-note ratings Kroll has assigned to Upstart’s previous deals. DBRS also issued a provisional single-A rating for the tranche.

The Class A notes have 66.8% credit enhancement, an increase from 61.2% in its prior deal.

The Class B notes totaling $64.4 million are rated BBB- by Kroll and BBB by DBRS; the Class C notes sized at $45 million are BB- by Kroll; and the $35.5 million Class D notes at B-, also Kroll. DBRS is not rating the Class C and D notes.

Upstart’s loans are underwritten through its partner bank, the New Jersey-chartered Cross River Bank, but the loans are funded through a trio of sources that also retain a share of the loans that are issued: Upstart, Cross River and external investors including Goldman Sachs and Jefferies LLC affiliates.

The hybrid model of funding and sharing skin in the game creates an alignment of interest among stakeholders, Kroll stated in its report.

For the UPST 2019-1 transaction, the loans obtained for the pool are randomly selected and purchased by an Upstart-affiliated depositor; more than 87% of the loans in the loan are being acquired from Goldman and Jefferies, according to Kroll.

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