Major ratings agencies weigh in on marketplace lending as an asset class, point to concerns over track record and alignment.
The present turmoil within the marketplace lending sector may arguably be traced back to Moody’s Investors Service’s decision to mull downgrading three Prosper loans-backed bonds, news broken by Bloomberg in February. A lot has happened since; some of it related, some unrelated. Citi stopped securitising Prosper loans two months later, again according to Bloomberg, after a bond offering backed by the platform’s loans received a “chilly” reception from investors in March.
The marketplace lending industry has been the subject of much discussion over the past week at the Global ABS 2016 conference in Barcelona – perhaps the world’s largest gathering of ABS issuers and investors. The event’s many panel discussions left audience members in no doubt as to the importance of the major ratings agencies in shaping investor perceptions of what remains a nascent asset class. In relation to Funding Circle’s inaugural securitisation, Simon Wooltorton of Deloitte said: “It’s not helpful that the rating agencies themselves can’t agree on how to rate that transaction”. Robert Liao of Citi said that Moody’s decision to put the Prosper bonds on review in February was “not helpful”, but said that the company was entitled to its point of view. Sachin Patel, Global Co-Head of Capital Markets at Funding Circle, said that the perception was that the move from Moody’s revolved around concerns over the Prosper platform and its processes, rather than around the performance of the underlying loans within the bond – a potentially damaging miscomprehension for the industry.
I had the chance to catch up with Anthony Parry, SVP at Moody’s Investors Service, and Matthias Neugebauer, MD at Fitch Ratings, at Global ABS. Both were measured in their views on the emergent marketplace lending sector.
Parry said that the simplicity of the marketplace lending model is a big lure for investors. The fact that most major platforms focus solely on a particular niche – such as consumer loans – helps to standardise loan data and portfolio monitoring processes. A European securitisation of consumer loans certainly seems to be coming, and Moody’s has already fielded a fair few queries from interested parties. Parry spoke about securitisation as a “natural” funding source for marketplace lenders, which was a common refrain at the event in general.
On the subject of alignment, Parry said that reputational risk for marketplace lenders – as relative newcomers to ABS markets – is an important factor. Transparency at the loan book level is useful, but perhaps less so for new issuers than a broader culture of transparency.
Neugebauer’s perspective was a little different. Fitch did not rate Funding Circle’s SBOLT 2016-1 offering, citing various uncertainties over the model. Matthias explained that the offering didn’t look like a classic high-street bank SME portfolio. Rather he called the underlying assets “micro SME loans", which are for the most part unsecured. He said that if the banks were to write these kinds of loans, they’d typically look to take a charge on the business owner’s property, rather than a personal guarantee. Neugebauer said that Fitch could rate marketplace loan backed bonds, but that the issuers would have to live with a fairly tepid rating. The super senior tranche of the Funding Circle securitisation was assigned a provisional rating of Aa3 by Moody's in April – the fourth highest rating that Moody’s gives.
Neugebauer isn’t sold on the scalability of the marketplace lending model. He sees potential in the more niche plays, and mentioned Prodigy Finance, an MBA student funding platform, but is less bullish on the prospects of the more mainstream lending platforms. For SME lenders, Neugebauer pointed to the necessarily human-intensive underwriting process as a key limiter to growth. And while he concedes that it’s easier to automate credit processes in consumer finance, he believes that platforms in the consumer space will struggle while outfits like Sainsbury’s Bank are offering generally cheaper loans online.
While the major ratings agencies are certainly taking an interest in marketplace lending, it’s also clear that there’s a fair amount of uncertainty around the asset class at present. The lack of an established track record for the vast majority of platforms was an often talked about point at Global ABS, as was the fact that the platforms are for the most part yet to weather a downturn in the economy. Moody’s in fact published an update on marketplace lending in March, summarising its key concerns around the industry, which included the threat of cyber-attack and regulatory risk. Fitch posted a video summarising Neugebauer’s thoughts on marketplace lending this week, which may be viewed below.