Prosper Marketplace is showing improved credit metrics in its third securitization of unsecured consumer loans this year.
But ratings agencies are still tepid on whether the privately held online lender is sufficiently improved from its troubled underwriting performance of late 2015/early 2016 – or out of the woods from the overall malaise hanging over the marketplace lending (MPL) sector.
Prosper Marketplace Issuance 2017-3 is backed by $501 million of three- and five-year personal loans that were recently originated (one-month average seasoning) through partner WebBank, a Utah-chartered industrial bank.
Compared to Prosper’s last transaction in July, the 2017-3 collateral includes more prime borrowers with 700-plus FICOs and fewer lower-ranking customers, as the company implements a new internal underwriting system. The results and “positive shifts” in originations have reduced expectations for cumulative net losses with the new deal, as forecast by Fitch Ratings and Kroll Bond Rating Agency in new presale reports issued Wednesday.
In addition to the underwriting improvements, Prosper was also buoyed this year by a more stable loan-funding source through $5 billion in commitments from an investor consortium to buy loans over the next two years.
The deal’s capital stack consists of $313.5 million in Class A notes, featuring 43.5% credit enhancement – lower than the 45.4% level from Prosper Marketplace’s 2017-2 issuance. Each agency assigned a preliminary single-A rating to the senior notes, similar to those that assigned to Prosper’s previous securitizations and other fintech lenders including Lending Club, which launched its first self-sponsored asset-backed deal last month of prime consumer loans.
A $77 million Class B tranche in Prosper 2017-3 is rated BBB by KBRA and BBB- by Fitch; only KBRA is rating the $110.6 million in Class C notes (B+).
But according to Fitch, early indications are that new loans may not be performing any better than the problem loans under Prosper’s former management team, which prompted a pullback in originations last year and was followed by a nearly complete overhaul of Prosper management in the past eight months.
“While Prosper and WebBank have implemented underwriting changes to improve performance within internal credit tiers, early delinquency data for the 2017 loans indicates performance in line with weaker historical periods such as 2015 and the first half of 2016,” before originations were curtailed, the presale report states. Fitch has described the 2015/2016 loans as having “significant deterioration” in comparison to 2013 and 2014 originations, the two years after WebBank and Prosper last overhauled the lender’s origination programs.
However, with the shift toward more prime borrowers in the new securitization, the base case cumulative net loss expectations have improved from both agencies from the previous deal. KBRA’s net-loss range on the deal is 14.42% to 16.42%, an improvement from 14.75% to 16.75. The mid-point loss expectation of 15.42% by KBRA is down from 15.75% -- and that already includes a 22 basis-point handicap to the original 15.2% 2017-3 loss expectation due to the collateral pool exposure (10.12%) to loans originated in hurricane-damaged regions of Florida and Texas.
Fitch assigned a base case default assumption of 16.49%; it also estimated a cumulative gross default rate of 14% for the three-year loans and 20.5% to the five-year term loans, down from 14.25% and 21.25% respectively.
The company's latest earnings report in August showed a net loss of $65.4 million for the first six months of 2017, steeper than the $53.1 million loss in the same period in June 2016. But Prosper has increased loan originations this year, which at $775 million through June amounted to an 84% surge year-over-year from the first half of 2016, according to KBRA.
The company has had a near complete turnover in management in the past year as it attempted to correct a late 2015/early 2016 drop in loan performance. President Ron Suber stepped down in July to take on an advisory leadership position; his move culminated an eight-month period in which chief executive Aaron Vermut and four other executives also resigned. Vermut, who in September also gave up his post on PMI’s board of directors.
Prosper is now led by chief executive (and former chief financial officer) David Kimball and CFO Usama Ashraf.