Upgrade takes aim to reduce 'marginal' credit exposure in next ABS

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Online consumer lender Upgrade Inc. is including more higher-credit tier borrowers in its next securitization, reflecting the company’s focus this year on reducing loan volume in “marginal” credit segments.

According to a presale report from Kroll Bond Rating Agency, the collateral pool of 17,007 loans in the $162.26 million Upgrade Receivables Trust 2019-2 includes a 5.76% increase in the share of borrowers with FICO scores 720 or higher compared to the marketplace lender's previous asset-backed pool that closed in February.

The pivot toward more “prime plus” borrowers in its transaction is reflected in improved loss expectations compared to its prior deals backed by static pools of unsecured marketplace loans, according to a presale report from Kroll Bond Rating Agency.

Kroll has net loss expectations of 11.6%-13.6%, reduced from the range of 12.15%-14.15% in the earlier 2019 issuance from Upgrade’s static-pool shelf. (The company this year has also launched a master-trust, pass-through certificates platform intended to widen the diversity of investors into revolving pools of its loan originations through partner WebBank, based in Utah).

The pool does have a larger share of borrowers with FICOs under 659 compared to Upgrade 2019-1, but Kroll said the overall credit quality of the pool still reflects improvements in the origination efforts to curtail lending to lower-credit tier borrowers (such as a lower weighted average APR in the deal).

The tightened underwriting means Upgrade has had a drastic 37% decline in year-over-year loan volume, issuing only $374 million in loans through the first half of 201, compared to $598 million through the first half of 2018, according to Kroll..

The new transaction will include four classes of notes: a $103.8 million Class A tranche with a preliminary single-A rating from Kroll; a $17.6 million Class B offering with a BBB rating; $23 million in BB-rated Class C notes, and a $17.7 million Class D tranche with a B- rating.

The ratings are similar to those assigned Upgrade’s prior deal.

The Upgrade 2019-2 collateral loans have an average balance of $10,525, and have an average three months of seasoning on original terms of 43 months.

The private company does not issue public financial statements, but Kroll reports Upgrade “continues to incur operating losses” due to the early stages of its business life cycle that includes investments in facilities, infrastructure and personnel. Upgrade earns most of its revenue from transaction fees rather than interest income based on 1% to 6% marketing fees on each origination.

Upgrade has originated loans since April 2017, issuing more than $2 billion to 200,000 borrowers under co-founder Renaud Laplanche, former chief executive of pioneering MPL LendingClub. The loan products are fixed-rate loans with balances between $1,000 and $50,000, with original terms of three or five years.

To date, Upgrade has categorized its loan products into three credit grades: prime plus, prime and near prime. The prime plus loans feature borrowers with weighted average FICOs of 760, with average interest rates of 8.9%; the Prime borrowers have FICOs averaging 692 with interest rates on loans of 16.15%; the near-prime cohort (FICO average of 637) are charged the steepest rates averaging 25.36%.

Most of the loans are offloaded to investors through whole-loan investments and securitization, but Upgrade maintains an economic interest ranging from 5-15% of the $336 million of loans consolidated on its balance sheet.

The company as $110 million in warehouse facilities, but is still “mostly reliant” on whole loan investors providing the funding for loans originated by WebBank through the platform.

The company has raised $150 million in total equity by investors including CreditEase, VY Capital, Union Square Ventures and Sands Capital. Private stockholder equity as of March 31 was $50 million, Kroll reported.

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