Pagaya plans first publicly rated securitization of marketplace loans

Pagaya Investments, an analytics-driven asset manager of unsecured consumer loans culled from major marketplace lending platforms, is sponsoring its first publicly rated securitization in a $423.94 million transaction.

Pagaya AI Debt Selection Trust (PAID) 2020-3 will include three classes of notes, including a $282,220 Class A tranche with a preliminary A- rating from Kroll Bond Rating Agency.

The senior notes benefit from 42.25% credit enhancement.

The deal is a fully prefunded deal, meaning none of the collateral assets have yet been obtained. The company, jointly headquartered in New York and Israel, will use note-sale proceeds to acquire marketplace loans over a 150-day period after closing via a prefunding account.

The loans will be chosen from the online platforms of Avant, LendingClub, Marlette Funding, Prosper Funding and Upgrade.

Instead of gathering loans through preselected portfolios of collateral compiled by lenders, Pagaya uses its own artificial-intelligence platform to select individual loans from the managed portfolios of those marketplace lenders. The lenders may also underwrite custom loans originated specially for Pagaya’s platform, which may not meet all the lender’s traditional underwriting criteria such as minimum FICO and debt-to-income ratios.

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The Pagaya platform automatically compiles prices and purchases the loans under its own criteria that re-underwrites each loan for quality, returns and probability of default. The loans intended for PAID 2020-3 will still have to meet eligibility criteria and satisfy concentration limits, including Pagaya’s own loan grades, loan terms and loan coupons.

Pagaya, now with $2.1 billion in assets under management, closed its first $100 million securitization in early 2019. That deal was privately placed, as were eight subsequent deals totaling more than $1 billion. According to Kroll, the “transactions have performed well and have not breached any transaction triggers.”

Kroll’s net loss expectation for the new deal include a base-case loss range of 15.5%-17.5%, factoring in the potential for economic uncertainty of the pandemic.

The company has sponsored three deals this year totaling $550 million, and would stand as the second-largest issuer bonds backed by unsecured consumer loans for 2020 following the closing of PAID 2020-3.

The company, founded in 2016, has also expanded its AI platform to purchase subprime auto loans, which are not part of the planned collateral acquisitions for the new deal.

Pagaya slowed its loan acquisition activity by more than 50% during the second quarter, as the company tightened underwriting criteria to mitigate exposure to loans from borrowers in certain industries impacted by the economic impact of the COVID-19 outbreak. For PAID 2020-3, Pagaya will not be including any loans that are subject to modification, deferment or forbearance under lenders’ coronavirus relief programs.