Online lender Avant is marketing its first rated securitization of loans to consumers with less-than-stellar credit.
Avant, located in Chicago, targets borrowers who can’t qualify for a loan from its better known peers such as Prosper Marketplace or Lending Club. Typical customers have an average annual income of $61,000 and average FICO score of 580 – 720.
The company is growing rapidly – monthly originations were up 196% for the 12 month ending in September 2015 – and it needs to diversify its sources of funding. As of January 2016, over $2.5 billion in loans have been originated through the platform. Avant’s first securitization, for $139 million, was completed in November, was unrated. The company also sells whole loans to institutional investors, a total of $1.0 billion so far, and some of these investors have securitized the loans.
Avant Loans Funding Trust 2016-A will issue three classes of notes totaling $300 million. Kroll Bond Rating Agency has assigned a preliminary A- to $172.4 million class A notes with a final maturity of May 2018 that benefit from 51% credit enhancement; a BBB- to $72.4 million of class B notes maturing in June 2020 with 30% credit enhancement; and a BB to $55.2 million of notes maturing in January 2021 with 14% credit enhancement.
Credit enhancement for the notes consists of overcollateralization, excess spread, a reserve account funded at closing, and, in the case of the class A and class B notes, subordination.
Loans backing the note typically have an original term of between 24 and 60 months, and an original balance of between $1,000 to $35,000 that pay interest of between 9.95% and 36.00%. The borrower’s primary purposes for the loans are for debt consolidation, emergency expense, home improvement, or life events.
Avant, as the primary servicer, is responsible for all collections and payment processing activities until the loan is charged off. Wilmington Trust is the indenture trustee and backup servicer.
Like other marketplace lenders, Avant has a short track record, so rating agencies and investors can’t assess how its loans might perform in different parts of the economic cycle. However, Kroll takes some comfort from the fact that Avant keeps so many loans on its balance sheet and randomly selects the loans to be sold to institutional investors. In its presale report, the rating agency said that this compares favorably with other marketplace lenders that use their platform to generate origination and servicing fees but do not retain a direct economic interest in loans.