U.K. small-business lender Funding Circle is preparing its second securitization ever.
The GBP 206.6 million deal comes two years after the initial deal closed in 2016.
Funding Circle does not keep any of the loans it originates on balance sheet; all of the loans in this securitization were funded by institutional investors. The transaction allows these institutions to exit their investments by pooling loans into collateral for bonds.
While Funding Circle lends to small businesses in the U.S., the 4,007 loans backing this deal were to 3,928 U.K. borrowers. The average remaining loan balance stands at GBP 51,553, with a weighted average fixed rate of 10.04%, a weighted average remaining term of 44.7 months and a weighted average seasoning of 8.6 months.
Geographically, the pool is concentrated mostly in the South East (24.16%) and London (15.17%). The majority of the loans were taken out by borrowers to fund the expansion or growth of their business and each loan benefits from a personal guarantee from (typically) the owner(s) of the business. At closing, any loan more than 30 days in arrears will be excluded from the final pool.
Six tranches of notes will be issued in the transaction, which is called Small Business Origination Loan Trust 2018-1 DAC. All six have a legal final maturity of December 2026.
Moody’s Investors Service expects to assign an Aa3 to the senior tranche, which benefits from 40.13% credit enhancement, as measured by the rating agency.
Kroll expects to assign an AA to the senior tranche, though it puts the credit enhancement slightly lower, at 39.75%.
Among the strengths of the deal, according to Moody’s, is the fact that the pool of collateral is static, which limits the potential performance volatility resulting from new loans with different characteristics being added to the pool.
A short original maximum maturity of up to 60 months, coupled with average seasoning of around eight months, results in a short portfolio weighted average life of 1.9 years.
Moody’s also takes comfort from the granularity of the portfolio: the largest borrower representing 0.2% of the pool and the 10 largest borrowers representing 1.9% of the pool. The pool is concentrated by industry, however. Borrowers active in the services business and construction and building sectors account for 22% and 17% of the loan portfolio, respectively.
Moody’s does see potential for misalignment of interests, since the servicer and originator of the loans (Funding Circle) is not the risk-retention holder (P2P Global Investments) and the servicing fee on the loans may be lower than origination or recovery fees.
Kroll notes that Funding Circle’s board and executive management team members have diverse backgrounds, including in the fields of investment banking, venture capital investing, consumer lending and financial regulation.
It also notes that Funding Circle has diversified funding sources. It has completed six equity raises totaling approximately $370.5 million, most recently a $100 million raise in January 2017. The firm last year surpassed $5 billion in lending since its 2010 founding.