The Prosper marketplace is changing shape, aptly reflecting the increasingly institutional flavour of the US online lending space. On the one hand, we have another strongly rated securitization. On the other, the reigniting of distressed debt sales within the sector.
Bloomberg broke the news on Wednesday that Citigroup Inc. is flogging $377m of bonds backed by Prosper loans. The highest-rated slice of the securitization was given a provisional grade of A3 by Moody’s, which is reportedly the best credit grade to have been conferred upon a bundle of marketplace lending-sourced consumer loans to date. The A3 rated portion represents 54% of the total package. Prosper’s last securitization – a $327m chunk – won a Baa3 grade from Moody’s, three levels below the Citigroup deal. Citi has exhibited quite the appetite for marketplace lending exposure of late, having also tied up with Lending Club in April.
The mammoth deal branches away from existing models of marketplace lending securitization. A Citigroup subsidiary acquired the Prosper loans in order to package them up into bonds. Increased amounts of securitization and the proliferation of listed fund structures will open up the marketplace lending industry to pension funds and insurers – which cannot, by law, invest directly in the debt originated by a platform.
The loans themselves are reportedly two months old, on average, and pay an average interest rate of 13.2%. Moody’s expects the loans to post cumulative losses of 8%.
Elsewhere, within the platform’s inner workings, a new medium of investment is beginning to take shape. Prosper has now introduced a debt sale program, thus fundamentally changing the way that it deals with “charged-off” loans. Previously, Prosper placed distressed loans with a third-party collections agency, which then sought to recover the money on behalf of the platform. This is a time-consuming process, and one which comes with no guarantee of success.
The debt sale strategy has been pitched by Prosper as a more efficient method of servicing investors in the instance of default. Each month, non-performing loans will be grouped together and sold off to a single buyer. For Prosper’s mixture of private and institutional investors, this means a swifter resolution to loan defaults, and the return of at least some principal, in a timely fashion.
Eric Thaller, Head of Lender Services at Prosper, penned a blog post on the subject, suggesting that the current market for debt sales is highly favourable, and that Prosper’s investors stand to reap the rewards. He writes:
“We have negotiated a debt sale rate that will deliver a meaningfully higher net recovery amount than is currently being realized by the collections agency.”
Prosper investors will be notified if any of the loans to which they have exposure are sold off, and will be able to track the proceeds of a debt sale on their monthly statement, and in the “account transactions” section online.
This isn’t the first time that Prosper has adopted a debt sale strategy. A Prosper blog post from late 2007 reveals that debt sales were employed during the platform’s infancy. The update in question provides details of the sale of 701 consumer loans, which were priced between 2.8% and 14.5% (percentages of the principal outstanding). The practice of charged-off loan sales was dropped, amidst buyer and pricing difficulties. So why now is it making a return? We suspect it’s a combination of factors: the aforementioned favourable market and the massively increased size and sophistication of the platform. The latter point means that each sale will be much larger, and thus more relevant to specialist buyers.
Perhaps the major risk of reigniting the program will be reputational. Each month the platform will hand over the control of a collection of dysfunctional loans to a buyer that will in turn attempt to eek enough money out of the debt to earn a decent return. How aggressive will these buyers be in chasing repayment? Only time will tell.
The debt sale program represents another medium through which yield-hungry, risk-disposed institutions may gain access to the Prosper platform. And the program kicked off just days before the announcement of the $377m securitization, which appears to be attracting interest from more risk-averse pension funds and insurance firms. Prosper is, in short, accommodating an ever broader range of institutional partners, encapsulating the character of the marketplace lending industry in the US.
24 March 2023
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