Prosper forgoes prefunding period in next consumer loan ABS
Prosper Marketplace’s next consumer loan securitization does not have a prefunding period, and this led Kroll Bond Rating Agency to lower its expectations for cumulative net losses.
Unlike Prosper’s previous transaction, in which only 85% of the collateral was identified pre-closing, and 15% were set aside to acquire collateral over the following two months, 100% of the collateral for the latest deal has been identified.
Partly for this reason, Kroll expects losses on the transaction, PMIT 2018-2, to reach just 12.4% over the life of the deal, down from 13.4% for the previous transaction. Kroll viewed the prefunding feature of the previous deal as “credit negative.” It assumed that the loans to be acquired after closing would result in a “worst-case mix” of collateral, according to the presale report.
PMIT 2089-2 is also the first transaction on the current platform to be rated by Moody's Investors Service, which published a presale report early Friday. Moody's expectations for losses are slightly higher than Kroll's, at 13%.
The lack of a prefunding period isn’t the only reason Kroll lowered its loss expectations, however. The concentration of loans in what Prosper identifies as higher-quality credit tiers has slightly increased; credit tiers AA, A and B make up 58% of the collateral, up from 54% of the prior deal. The lower-quality credit tiers C, D, E and HR make up 42%, down from 46%.
The higher credit quality is less obvious when using more traditional metrics, however. Loans in the latest deal have a higher weighted average loan interest rate (14.61% vs 14.29%); they also have a lower weighted average FICO score (713 vs 717).
The weighted average original term is one month shorter, at 43 months, and the weighted average seasoning is two months less, at one month.
Although Prosper originated all of the loans via an arrangement with Web Bank, it is not contributing them to the securitization trust. Instead, all of the loans to be used as collateral were first purchased by a consortium of institutional investors that have committed to purchase a total of $5 billion of loans from Prosper over a two-year period. This consortium includes affiliates of New Residential Investment Corp., Jefferies Group, Third Point, and an entity advised by Soros Fund Management.
The lower loss expectations allowed Prosper to obtain the same credit ratings (on the two senior tranches of notes) despite offering less credit enhancement. Kroll expects to assign an A+ to the senior tranche of notes, which benefit from 39.5% credit support, down 5.6 percentage points from the comparable tranche of the prior deal. Credit enhancement for the Class B notes, which will be rated BBB, is 28.60%, which is 0.5% less than the comparable tranche of the previous deal. Credit enhancement the Class C Notes is 9.5%, which is 8.25 percentage points less than the Class C notes of the prior deal; however this tranche is only rated B+, down from BBB for the prior deal.
Moody's was not so generous, however. It is rating the senior tranche A3, which is the equivalent of two notches lower.
Excess spread is similar to the previous transaction, as both collateral interest rates and note coupons increased to a comparable degree.
PMIT 2018-2 also has a lower target overcollateralization of 9%, down from 13.25% for PMIT 2018-1.