The securitisation industry’s best-known gathering of issuers and investors has been bitten by the marketplace lending bug. Despite there having been just one securitisation within the UK and European marketplace lending sectors to date, a number marketplace lending platforms have made the trip to Barcelona for Global ABS 2016. There’s a clear interest in the asset class among investors, as reflected by the six or seven sessions that touch on or revolve around opportunities within the marketplace lending space. But these sessions have also thrown up a number of concerns. These are my takes from a hectic first few days at Global ABS.
The conference organisers (IMN) have placed a heavy emphasis on the need to educate both investors and issuers about marketplace loans and how these interact with securitisations markets. Day 1 at the event featured an “Alternative Finance 101” session. Rupert Taylor from AltFi Data provided an overview of the risk/reward proposition on offer and characteristics of the asset class. Nick Parkhouse of EY explained that alternative lenders mostly play in niches that the banks have retreated from, and that it’s too early to tell whether technology is a fundamentally better means of pricing risk. This point relates to track record, and that’s been another important focus throughout the course of the event.
A number of questions and potential problems stand between marketplace lenders and the securitisation markets. Parkhouse spoke with a number of investors who elected not to buy into Funding Circle’s debut securitisation. The deal’s split rating stood out as a key concern, with investors worrying that ratings agencies are yet to come up with an established methodology for dealing with marketplace loans. Simon Wooltorton of Deloitte said: “It’s not helpful that the rating agencies themselves can’t agree on how to rate that transaction”. Risk retention was another talking point. Funding Circle’s fairly limited track record was also cited, as was the fact that there was one very large buyer in the senior note, meaning limited liquidity.
The European Investment Fund’s involvement in the SBOLT deal was the subject of some discussion. Paolo Gabriele of Finanziaria Internazionale – an investor in the deal – believes that it would have completed with or without the EIF’s involvement. He also believes that the majority of large investors would probably like to see marketplace lending platforms investing their own capital when they come to securitise their loans. It was noted several times that the support of governmental and supra-national entities like the EIF could be the key to launching marketplace lending into the mainstream of institutional investment.
Lack of liquidity was raised as a concern in a number of panels. Daan Potjer of Dynamic Credit said: “There is not yet a secondary market in loan portfolios that is suitable for professional investors”. Dynamic Credit is setting about solving that problem. However, one panellist pointed out that many ABS investments are by their nature hold-to-maturity assets, and as such a lack of liquidity may not have an adverse impact on investor appetite for marketplace lending securitisations.
Marketplace lending platforms are famously transparent at the loan book level, but is this kind of disclosure useful in structuring securitisations? Speaker sentiment on this issue was somewhat split. One speaker said: “Transparency is always good, but who is it aimed at? Does your average Joe Public really understand how to analyse a cohort? The key questions are who is it aimed at and is it detailed enough?” Another speaker, from a major ratings agency, argued that transparency – not just in terms of loan book disclosure but also at the corporate level – is an important part of building trust in the capital markets.
The surmounting of STS regulations may be tricky for marketplace lenders. Technical expertise and risk retention requirements were pointed to by a number of speakers as a potential stumbling block for new issuers. However, Annabel Schaafsma of Moody’s Investors Service said that she hasn’t seen anything which explicitly excludes new lenders. The challenge lies in getting both investors and regulators comfortable with technology-based, intermediary models.
There have been a large number of polls at the event, upon which the audience has been voting during panel sessions. Here are a few of the headline findings on alternative finance:
Marketplace-funded mortgage loans have been something of a hotspot at the event. Both LendInvest and Landbay have been featured in speaking roles. It’s clear that RMBS investors are now awakening to the possibilities in marketplace lending. The scale isn’t quite there yet, but Landbay boss John Goodall confessed that he expects to securitise loans in the future, calling securitisations a “more efficient” medium of investment for large institutions. “To have diversified funding is key as an originator,” said Goodall. “Markets are fickle.”
RMBS transactions will likely be crucial in bringing larger investors to the table. As one Goldman Sachs speaker noted, insurance funds are well suited to funding long term assets like mortgages, and RMBS is the most suitable investment channel for these sorts of companies. Hardly surprising, then, that the marketplace lending platforms are circling.
Here are the key findings from the mortgage-focused polls:
A natural extension?
An often talked about theme at the event has been the idea that the marketplace lending model is naturally suited to securitisation. The thinking here is that a marketplace lending platform that offers a pooled investment product, backed by a large number of loans, is not dissimilar in structure to a securitisation. Some P2P platforms have provision funds, which look a bit like first loss protection mechanisms within securitisations. Alistair Jeffery of Bluestone Group (a mortgage and auto lender) compared the existence of differing investment products within P2P platforms to the various tranches of securitisations, even if the former are less sophisticated. Such comparisons may be seen as facetious, but they serve to highlight the fact that securitisation is a natural funding mechanism for marketplace lenders, and that increased ABS activity within the European marketplace lending sector seems inevitable.
Look out for our continuing coverage of Global ABS 2016.