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Prosper contributing collateral to next consumer loan securitization

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For the first time, Prosper is contributing some of the collateral for its next offering of bonds backed by consumer loans made on its lending platform.

The remainder of the collateral for the $171.6 million Prosper Marketplace Issuance Trust 2019-1 was contributed by Goldman Sachs. GS Bank, an affiliate of the co-sponsor, will retain an uncertificated beneficial interest representing the right to receive 5% of all amounts collected on the loans. This will constitute an “eligible vertical interest” under risk retention rules, according to Kroll Bond Rating Agency.

Until recently, Prosper sold all of the loans made on its platform, primarily in bulk to institutional investors. For 2018 as a whole, 91% of originations were funded this way. This funding, which is both concentrated and uncommitted, represented a risk. If these investors cease or significantly decrease their loan purchases, as happened in 2016, Prosper’s business and loan volume could be adversely affected.

In January of last year, however, the company obtained a $100 million warehouse facility that was later upsized to $200 million in June 2018. When a loan is funded through the warehouse line, it is held on the balance sheet as a loan held for sale and the offsetting warehouse liability is also booked. This committed line of credit “provides greater funding stability and increases investor diversity,” Kroll noted in its presale report.

Kroll also believes that the arrangement creates an alignment of interest between the performance of loans originated through the platform and Prosper’s net income, since loans held on balance sheet earn interest which is netted against the warehouse expense.

Aside from the increased diversity of funding sources, investors in Prosper’s latest deal should also take into consideration some changes in the credit characteristics of the collateral.

PMIT 2019-1 has a higher concentration of 60-month loans (40.58% vs. 35.13%) and a higher weighted average loan interest rate (14.88% vs 14.61%).

Compared to the previous transaction, loans in the higher quality credit tiers have decreased as a percentage of the principal balance, while the lower quality credit tiers have increased. The higher quality credit tiers AA, A, and B make up 52.66% of PMIT 2019-1 compared with 57.96% in PMIT 2018-2. The lower quality credit tiers C, D, E and HR make up 47.34% of PMIT 2019-1 compared with 42.04%.

The loans have a similar weighted average original term but a higher weighted average seasoning of nine months, versus one month for Prosper’s prior deal.

The higher seasoning the the principal reason that Kroll has lowered its expectations for cumulative net losses for the latest deal. It’s forecasting a range of 10.60% - 12.60%, which is slightly less than the 11.40% - 13.40% range for the prior deal. “All else being equal, seasoned loans will generally perform better than unseasoned loans because the borrower has demonstrated an ability and willingness to pay,” the presale report states.

Three classes of notes will be issued in the new transaction. The senior tranche of Class A notes are rated A, which is one notch lower than the senior tranche of the previous deal, and benefits from significantly less credit enhancement: 35.97% vs 39.5%. The credit enhancement consists of initial overcollateralization of 13% (remaining at the greater of 13% or 0.75% of the original principal balance), total subordination of 22.47% for Class B and Class C notes, and a cash reserve equal to 0.50% of the initial collateral balance.

However the subordinate Class B and Class C notes benefit from increased credit enhancement of 23.29% and 13.5%, respectively.

Excess spread (the difference between interest earned on the collateral and paid out on the notes) is approximately 9.34%, based on a collateral weighted average interest rate of 14.88% less a 1.10% servicing fees plus other fees, a weighted average life, and weighted average note coupon of 4.44%.

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