The introduction of tighter underwriting criteria continues to pay off for the online consumer lender Avant.
The company, which was founded in 2012 and is based in Chicago, was able to lower the credit enhancement, again, on its latest securitization, the $221.9 million Avant Loans Funding Trust 2018-A.
Kroll Bond Rating Agency assigned an A- to the $149 million senior tranche of notes to be issued, which benefit from 38.42% credit enhancement. That’s down from 41.8% on the comparable tranche of its prior transaction, completed last year.
The BBB- rated Class B notes benefit from 18.65% credit enhancement, down from 21.26% for the comparable tranche of the previous deal. However, credit enhancement for the BB- rated Class C notes is unchanged at 8.06%.
Despite the lower credit enhancement, loss coverage multiples are similar on the senior tranches of both deals, due to Kroll’s lower expectations for cumulative net losses, in its base-case scenario, of 15.5% to 17.5%. By comparison, Kroll's base-case loss projection for the 2017-8 transaction, completed in November, was in the range of 16.7% to 18.7%.
Kroll cited the improved performance of Avant’s portfolio since it tightened its underwriting criteria beginning in 2Q16, by reducing loan tenor, amount financed, and payment to income ratios for loans.
Lower credit enhancement isn’t the only way that tighter underwriting can lower funding costs. It can also avoid diverting excess cash flow from the deal that would otherwise to Avant, as holder of the most subordinate securities issued in the deal. Two deals that Avant completed in 2016 breached a cumulative net default ratio trigger (the first deal in April 2016 and the second deal in May 2017). As a result, funds left over after paying interest and principal on three rated tranches of the deals were not been released to the company; instead, they were used to pay down additional principal of the more senior noteholders.
That’s no small thing, since Avant, which is privately held, has incurred operating losses since its inception.
Avant relies on a combination of unrestricted cash on its balance sheet, committed warehouse capacity and relationships with institutional investors to fund purchases of its loans, which are originated by WebBank. As of May 9, the company had approximately $796 million in committed multiyear warehouse lines, from three different providers, with $440 million in current borrowing capacity.
The collateral for the new transaction is similar to that of the November transaction, which, according to Kroll, is beginning to experience improved performance (compared with the 2016 deals) as a result of underwriting changes.
One change is the inclusion of a small portion of a new loan product, called New Framework Permitted loans, which have slightly shorter weighted average remaining term (32 months vs. 34 months), lower weighted average FICO score (642 vs. 646), larger weighted average loan amount ($6,525 vs. $5,530) and higher weighted average APR (31.42% vs. 30.10%) than other loans in the transaction. These new loans account for 4.65% of the collateral.