Analysis News

Present and future of marketplace lending securitization

Online marketplace lending has originated more than $43 billion in loans. Though it is a small number in the consumer finance universe, the number is predicted to reach $490 billion by 2020. Growth of securitization will decide at what speed is institutionalization going to occur in marketplace lending.
Securitization is the process of pooling together individual illiquid debt and selling their cash flows to investors by transforming them into a uniform security.
Securitization could be a boon for the p2p lending market as it would force the originators to streamline the security structure to meet institutional demand and can generate a separate revenue stream and source of liquidity for all parties involved.

Securitization

Asset managers are able to bet on consumer finance in a more nuanced manner and are able to earn higher yields as compared to a similar rated security. The securitization trend is turning into a snowball with more than $8.7 billion dollars of loan confirmed to be securitized by PeerIQ and Credit Suisse. That represents a healthy 20% of the market. Citigroup, Blackrock, Victory Park, KKR and Blue Elephant are some of the major players in the securitization market.

One of the most famous deals was the CHAI securities by Citigroup. The average size of these securities was  $400 million dollars. Even Blue Elephant, a small New York based p2p lending focused asset manager did a $71 million dollar securitization deal. The question is who is going to aggregate for ethe 1-10 million dollar space.

Securitization examples:

Name Issuer / Originator Date Size Senior A Mezz B Sub C
CCOLT BlackRock / Prosper 2/9/2015 $363m 77.5% 12.5% 5.21%
Moody’s BAA3 BA3
CHAI PM1 Citi / Prosper 8/5/2015 $421m 52% @1.85% 20.5% @2.93% 15% @5.01%
Moody’s A3 BAA3 BA3
CHAI PM2 Citi / Prosper 10/23/2015 $420m 55% @2.35% 20.5% @4% 14% @5.96
Moody’s A3 BAA3 BA3
CHAI PM3 Citi / Prosper 12/18/2015 $299m 54% @ 2.56% 20% @4.31% 14.5% @6.99%
Moody’s A3 BAA3 BA3
BLT 2015-1 Citi / Blue Elephant 3/17/2015 $71m 77.5% 12.39% 5%
unrated unrated unrated

 

Ldger

The market gap for small scale securitization has been identified by Ldger (http://www.ldger.com/) . Ldger is a New York based start-up looking to create a common securitization platform for the marketplace lending industry. The start-up was founded by Miles Cowan, Hyung Kim, Zachary Smith and Ossip Kaeh. Miles was a M&A lawyer at Dentons, Hyung was an interest rate options trader at Credit Suisse and Barclays, Zachary is the tech side entrepreneur and Ossip is the tech genius who was the chief architect of Click and Buy(a global payment platform).

According to Hyung Kim “Ldger’s platform allows current holders of marketplace originated debt to upload their loans, structure those loans in a securitization, run cashflow scenarios, and lastly offer out that securitization for sale. The offer can be standalone or they can elect to submit that securitization for other debt holders on our platform to participate as a group — crowd securitization.” They have also started integrating with the available api’s from several originators and are educating and adding new originators.

The current process versus new paradigm being created by Ldger:

Current System Ldger Platform
Purchasers have no visibility at loan level Full transparency every month at loan level
High costs of securitization prospectus Upload on Ldger Platform
Underwriting and warehousing process Automatic on platform
Assigning to SPV Same
Conversion of the pool into divisible securities Same
Sale to Investors Purchasers can request securitization creation seeking particular type
Servicing by originators Same
The process is archaic and inflexible. Process can take up to 2 months Process can be completed much faster.
Min $50-100m Min $5-10m

 

The current system of securitization is a 2 month tedious process of underwriters executing the deal. The resulting costs forces deals to be in the $100 mil plus range and makes deals in the 1-20 million range prohibitively expensive.

Fee structure

The cost of a typical ABS runs in the 2-3% range per deal, amounting to 3-5 million dollars at the minimum. It is usually composed of counsel fees. While some of the cost is incurred upfront the majority is paid on an ongoing basis over the maturity of the security. The typical payment priority is fees 1st, then interest on A tranche, then B tranche, then C tranche and then principal on A until A is paid in full. Only after principal is paid in full for A will principal for B start getting paid. The existing stated maturity on the securitization is 72 months to allow for collections time on the non-performing loans. However the weighted average on tranche A on existing deals is expected to be just under 1 year due to the pay mechanism explained above.

These fees will be exorbitant in absolute terms for small aggregations. Ldger with its platform technology is looking to democratize the process of securitization, while bringing in much needed transparency in the process.

Transparency

Its integration with origination platforms allows the originators to market their loans more effectively. Lenders on these platforms can also leverage the platform to securitize their loan portfolio and investors can also push for creation of securities according to their interest. In effect, Ldger is bringing the opportunity to invest in and securitize small denominations of loans. They are targeting family offices and foreign yield hungry investors, to partake in the p2p bonanza. On the other side, non institution capital lending on p2p platforms would get the opportunity to play with their loans and create a liquidity option for their holdings.

The company’s aim is to grow a secondary market for p2p credit.  They are going to achieve it by creating a 1-20 million dollar template for securitization. Inventory holders would be able to structure their own securitization on the basis of the template and investors would be able to trade p2p loans on a wholesale basis.

Challenges

The company is limited by the fact that initial securitizations won’t be rated by agencies. But as the process gets institutionalized, it would be able to get rating agencies involved thus expanding the universe of investors manifold. The company initially plans to group the securities on the basis of the platform. This makes the process easier, as the lender would have a similar set of lending terms across its loans.

An issue would be getting different holders of the same category of inventory to agree on the market value of their investments. Another innovative feature is that securitization can be initiated by an “expression of interest” from the buyer of securities. Ldger will distribute that expression across its community to facilitate the transaction. Ldger is trying to hack the underwriting process by creating a transparent securitization platform for p2p loans.

The company is also providing additional tools to the investor by supporting portfolio analytics, modelling and waterfall creation. The Federal Housing Finance Administration’s (the “FHFA”) ongoing development work on the Common Securitization Platform (the “CSP”), a proposed shared securitization infrastructure for Fannie Mae and Freddie Mac for residential mortgage loans, lends further credos to the need for a common platform for all types of securitization. Ldger seems to have the first movers’ advantage, but it might be necessary for them to partner with a bank to lend credibility to their platform.

 

 

 

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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