On March 2, Pagaya Investments – an A.I.-driven, alternative asset manager of consumer loans – priced its first 2021 asset-backed pool of unsecured marketplace loans acquired from leading lenders in the space.
The upsized, $810 million deal represented one of the largest transactions to date in the short history of the esoteric ABS asset class.
The pricing of Pagaya AI Debt Selection Trust 2021-1 helped push year-to-date deal issuance volume to $2.85 billion. The transaction also bolstered a recent projection by Kroll Bond Rating Agency that unsecured consumer-loan pools – after a pandemic-driven retreat in 2020 securitizations – could return to record 2019 issuance levels.
“We anticipate investor demand to remain strong and for historically low yields to attract issuers to tap the ABS market for funding,” Kroll stated in a Feb. 26 consumer marketplace lending (MPL) analysis.
Eric Neglia, senior managing director at Kroll, attributed MPL issuers’ strong performance – in the face of the asset class’ first true period of market adversity – in part to loan underwriting aided in some cases by deeper analytical tools and machine-learning technology. He also credited firms with strong servicing outreach.
“MPL platforms have used similar loss mitigation techniques as other traditional consumer lenders by offering financial assistance in terms of payment deferments and term extensions,” Neglia said.
Pagaya’s deal was among nine that have priced so far this year, the most recent of which was a $375 million offering
Overcoming adversity
Kroll notes the general concern for consumer-loan ABS at the start of the pandemic – in particular online MPL, which only dates back to 2013 with publicly issued securitizations – was that the sector had yet to weather a significant crisis.
The segment has since displayed resiliency, Kroll says, and while the rating agency placed many ratings in the sector on watch for possible downgrade last spring, it subsequently affirmed all the ratings.
“All KBRA-rated notes in the sector have continued to receive timely interest payments, and many ratings were upgraded due to increased credit enhancement as a result of transaction deleveraging,” the ratings agency stated in the report, adding that deleveraging resulted from lenders’ tighter underwriting and so reduced originations.
In an indication of the stable 2021 outlook for the MPL market, Pagaya Investments’ newly priced ABS deal that had first approached the market at $720 million—its largest yet—before upsizing.
The deal was split into a $639 million portion rated A-minus, a $99 million piece rated BBB-, and a $72 million tranche rated BB+, pricing respectively for spreads of 100 bps, 180 bps and 375bps—at the tight end of price talk—for coupons of 118%, 2.13% and 4.09%.
Kroll’s Feb. 26 presale report cites credit enhancement on those tranches of 29.50%, 18.50% and 10.50%, respectively.
The new deal compares to similarly rated tranches of Pagaya’s third 2020 ABS deal. Including private placements, Pagaya has completed 11 securitizations since 2018 totaling $2.5 billion comprising unsecured consumer loans, according to Kroll. Pagaya AI Debt Selection Trust 2021-1 is its second publicly rated ABS offering
Kroll notes that Pagaya slashed new consumer-loans purchases by more than 50% in 2Q 2020 as it tightened underwriting standards, increased pricing and limited or stopped purchasing loans to borrowers in pandemic-affected industries. Given the lack of meaningful credit deterioration recently, Kroll said, it has begun to unwind those measures, adding that loans subject to a modification, deferment or forbearance are not included in the current securitization.
Pagaya’s credit model takes an “agnostic and holistic”
Pagaya recently announced expanding into auto loans and is developing underwriting models for other consumer credit, including point-of-sale loans, credit cards and single-family rentals.
Blatt said the model gave the firm sufficient confidence to continue partnering with lenders through March and April.
“We had conviction behind the analysis done from a macro standpoint, so we were active throughout the summer,” Blatt said.
Blat declined to comment about the firm’s current ABS deal.
Pagaya reported positive net income in 2020 after incurring losses in the previous two years. Kroll attributes that partly to higher risk-adjusted returns stemming from strong credit performance bolstered by enhanced unemployment benefits and stimulus checks sent to consumers during the pandemic.
“Pagaya’s positive net income is also a result of favorable credit trends as consumers benefited from federal stimulus but also cut back discretionary spending,” Neglia said.
He added that the federal government now under Democratic leadership cuts both ways, since additional stimulus will likely help near term credit performance, but regulators may adopt consumer protection policies that could impact some consumer lending.
