Upgrade, the online lender started by Renaud Laplanche, the founder of LendingClub, is making its first trip to the securitization market.
The $286.4 million deal is an important test for the company, which has raised $142 million of equity over the past two years, but has yet to turn a profit.
Over the past two years, Upgrade has facilitated over $1 billion in personal loans to over 100,000 borrowers. While the company has a small ($10 million) warehouse lending facility, it is mostly reliant on whole-loan investors to fund the loans originated by WebBank through its platform, according to Kroll Bond Rating Agency.
This funding is uncommitted, so if investors cease or significantly decrease their funding of loan purchases, Upgrade’s business and loan volume may be adversely affected. The securitization will demonstrate what kind of appetite there is for bonds backed by Upgrade loans.
Kroll’s presale report does not identify the investors contributing loans used as collateral for Upgrades Receivables Trust 2018-1; it merely states that they were contributed by “unaffiliated transferors.”
The deal could also help Upgrade obtain more bank lines of credit that would allow it to warehouse its own loans to contribute to future securitizations.
It comes to market less than a month after Laplanche reached a settlement with the Securities and Exchange Commission without admitting or denying allegations that he improperly used investor money to benefit LendingClub.
In its presale report, Kroll said that Laplanche’s involvement in the scandal is a “credit negative that carries over to Upgrade” but that it believes management has “effectively implemented a culture of compliance.”
In fact, Kroll assigned a higher credit rating — single A — to the senior notes to be issued in Upgrade’s inaugural deal; by comparison, the senior tranche of notes issued in LendingClub's most recent securitization of prime consumer loans are rated single A minus. However, the senior notes in Upgrade’s deal benefit from additional credit enhancement, 39.25%, compared with just 32.88% for the senior notes in LendingClub’s deal.
And Kroll expects losses over the life of the deal to be in the range of 12.25% to 14.25%, which is only slightly wider than the 12.20% to 14.20% range for Club 2018-P2.
Upgrade offers fixed-rate, fully amortizing unsecured consumer loans with original balances ranging from $1,000-$50,000 and original terms of three years and five years. These loans are categorized as either “prime plus,” “prime” or “near prime.”
Origination fees of 1%-6% are charged to the borrower based on the borrower’s risk profile and loan term. The origination fee is deducted from the borrower’s total loan amount prior to disbursement.
Generally, the primary purpose of the loan is debt consolidation.
In addition to the senior Class A notes, Upgrade Receivables Trust 2018-1 will also issue three subordinate tranches of notes:$32.6 million of Class B notes with 28.6% enhancement are rated BBB; $28.4 million of Class C notes with 19.3% enhancement are rate BB and $38.1 million of Class D noes with 6.85% enhancement are rated B.
The presale report notes that Upgrade’s business model “does not create the same alignment of interests, among the company, the originating bank and institutional loan investors that is present in other marketplace lending transactions in which the platform operator retains a portion of the loans originated on its platform.”
However, Upgrade occasionally retains an economic interest in the loans it originates through the platform on its balance sheet by participating in financing structures. As of August, Upgrade had an economic interest ranging from 5-10% of the $250 million of loans that were consolidated on its balance sheet.
The company will also retain 5% of the notes and certificates in this securitization to comply with risk retention.
