Upgrade has some skin in its 2nd consumer loan securitization

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Upgrade Inc., the online lender founded by Renaud Laplanche, contributed the bulk of the collateral for its second consumer loan securitization, and Kroll Bond Rating Agency feels this creates a better alignment of the company's interests with those of investors in the $226.9 million deal.

Upgrade's first securitization, competed in October, was backed entirely by loans it had sold to investors in bulk.

At the time, it only had a $10 million line of credit and was forced to rely entirely on whole loan sales to fund origination. The success of that deal allowed the company to obtain an additional $100 million revolving line of credit in November, reducing its reliance on uncommitted funding.

As a result, the lender was able to contribute more than half of the $242.3 million in loans supporting Upgrade Receivables Trust (UPGR) 2019-1, according to Kroll. The remainder was contributed by via Jefferies Group, according to Kroll.

The new deal also benefits from improvements in Upgrade's underwriting. There are more “Prime Plus” loans to borrowers with a weighted average FICO of 760, which account for 17.1% of the collateral for UPGR 2019-1 pool vs. 11.12% for UPGR 2018-1. Exposure to “Near Prime” consumers with weighted average FICO of 637 fell to 15.97% from 17.05%.

One of the ways that Upgrade was able to boost exposure to stronger borrowers was to reject consumer applications for very large loans. Previously, the San Francisco-based lender had countered with a smaller loan offer, but it found many of these customers would make up the difference by getting additional loans from other lenders – and subsequently default.

“Upgrade’s principal take-away from 2018 performance was borrower behavior,” Kroll noted in its presale report. “There were borrowers who were making irrational choices regarding their finances.”

As a result of the improved underwriting, Kroll expects losses over the life of the deal to be in the range of 12.15%-14.15%, slightly below the 12.25%-14.25 range for UPGR 2018-1.

Nevertheless, credit enhancement on the most senior tranches of notes to be offered in the new deal are slightly higher than those of the previous deal. The $140.5 million Class A notes tranche carries the same single-A rating as the senior tranche of the prior deal, but has credit enhancement of 42.5%, compared with 39.25%.
Upgrade’s first asset-backed deal in 2018 priced at par, with a coupon of 3.76% on the Class A notes.

Upgrade will be the risk retention holder in the transaction and retain 5% of the principal balance of each class of notes and 5% of the notional amount of the certificates.

In total, Upgrade has originated $1.4 billion in loans through its partner bank firm, WebBank. The company occasionally retains an economic interest in the loans it originates through the platform on its balance sheet by participating in financing structures. As of December 2018, it had an economic interest in 5%-15% of the $225 million in originations on its books, according to Kroll.

The company has raised a total of $145 million in equity from a team of private equity, venture capital and bank investors, including CreditEase, VY Capital, Union Square Ventures, Ribbit Capital, Silicon Valley Bank and Sands Castle.

Upgrade's first deal came to market less than a month after Laplanche reached a settlement with the Securities and Exchange Commission barring him from working in the securities and investment management industry – a settlement in which LaPlanche neither admitted nor denied allegations he improperly used investor money to benefit LendingClub.

LendingClub’s board had removed Laplanche in 2016 on allegations the company had falsified loan data under his watch (prompting a shareholder lawsuit), and had also failed to disclose a conflict of interest over his personal stakes in an investment firm he had advised the board invest in.

In its presale report for the new deal, Kroll stated it was confident that Upgrade has “effectively implemented a culture of compliance” that will prevent similar problems within Upgrade, chiefly through the appointment of former U.S. Treasury and Office of Thrift Supervision regulator Thomas Curran as chief compliance officer.

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