The capital structure consists of multi-class notes rated by DBRS and Moody’s. Although largely similar to its forerunner with its Class A, B, C, D and Z Notes, there are also two new classes of B/B3 rated Class E notes and unrated ‘turbo’ Class X notes. Typically the inclusion of these type of instruments suggests that the seller wishes to seek external capital to participate in the riskier parts of the capital structure – although, as at closing, these notes have been retained by the seller. P2P Global Investments retain their regulatory minimum 5% ‘skin in the game’ through the subordinated loan (which is used to fund the cash and liquidity reserves) and the unrated Class Z notes which account for 1.25% and 5% of the assets respectively.
The Class X Notes are not secured by the principal balance of the underlying receivables but rely on the generation of excess spread (hence the ‘X’) to both pay interest and repay principal during the first months of the transaction – this accounts for their short average life of about 1 year. Although the Class X Notes are unrated, the theory is that, providing sufficient excess spread (defined as surplus margin after senior costs and interest on rated notes) in the transaction is wide enough (Moody’s estimate it at about 4.37%), the transaction would have to go south pretty sharply for the Class X notes not to be repaid in full within the first 12-24 months of the transaction.
Notwithstanding their involvement in the MOCA 2016-1 deal, Fitch did not rate MOCA 2017-1. Given Fitch recently upgraded the notes on MOCA 2016-1 between one and three notches, it’s surprising that Fitch were replaced by DBRS whose credit enhancement requirements were comparable.
Moody’s pre-sale report sizes the Class A notes at 80% of the assets (or £172.8m). They carry a coupon of 1 month LIBOR plus 0.70% p.a. and a par issue price. This compares very favorably with MOCA 2016-1 which had senior note costs of 1.45%. The total credit enhancement for the Class A Notes (not accounting for excess spread) is provisionally set at 21.25%. Disclosed pricing on Class B (1.25%) and the Class C (1.90%) Notes suggest reductions of 50% in issue margins for similarly rated instruments on the MOCA 2016-1.
Moody’s Credit Comparison MOCA 2017-1 vs MOCA 2016-1
MOCA 2017-1
MOCA 2016-1
Class A Rating/Total CE
Aa3/21.25%
Aa3/25.5%
Class B Rating/Total CE
A3/16.25%
A2/20.5%
Class C Rating/Total CE
Baa3/12.25%
Baa2/15.5%
Class D Rating/Total CE
Ba3/8.25%
Ba3/9.5%%
Class E Rating/Total CE
B3/5.25%
No Class E notes
Weighted Average Yield
7.2%
7.6%
Estimated Excess Spread
4.4%
3.9%
Aaa Portfolio Credit Enhancement
32.5%
35%
Cumulative Gross Defaults
7.0%
7.0%
Observed Recoveries
42.7%
39%
Mean Recovery Rate
10%
5%
The above table shows how Moody’s credit opinion on these type of assets has favorably improved within the space of 12 months through the benefit of an extra year of historical loss data. First, the mean observed recovery rate on Zopa’s portfolio has increased from 39% to 42.7%. This has resulted in Moody’s assumed recovery rate doubling from 5% to 10%. Secondly, whilst the cumulative gross default (a measure of observed defaults) has remained unchanged at 7%, the Aaa Portfolio Credit Enhancement has reduced from 35% to 32.5% (a measure of future volatility or Moody’s outlook on the portfolio). This has the effect of Moody’s modeling a less skewed default distribution resulting in lower credit enhancement requirements.
Unlike MOCA 2016-1, DBRS’ ratings on the Class B, C, D & E Notes do not address ‘full and timely payment of interest’. Instead DBRS’s ratings on these notes addresses the ‘full and ultimate payment of interest’. In all likelihood this reflects DBRS credit opinion on the Liquidity Reserve, which is only available to cover shortfalls in interest on the most senior notes outstanding – hence prejudicing the liquidity needs of the lower tranches.
Lastly, it’s worth revisiting Fitch’s recent upgrade of the MOCA 2016-1. As we predicted at the time in our piece on S-BOLT 2016, new asset classes very often benefit from ratings uplift purely by dint of their seasoning and beneficially revised criteria. And it seems, time did reward the brave in the form of a price uplift. Less than a year after issue, Fitch Ratings upgraded the notes between one and three notches. This was achieved by dialing back both the base case cumulative default numbers (from 5.1% to 4.7%) and the stress multiples (AAsf from 6.0x to 5.5x) - remember you read it here first.
Luke Mellor works for Creative Capital Partners, a securitisation consultancy, who hold seminars worldwide on securitisation structuring and financial modelling.
