Peer-to-peer online platforms are assuming greater importance in securitising loans, and Deutsche Bank’s asset-backed security experts have been quick to see their potential in Europe. Edward Russell-Walling reports.

Deutsche Bank Team of the month 1216

This year has seen Europe following the US’s lead in securitising loans made via peer-to-peer (P2P) online platforms. Earlier this year, Deutsche Bank was the sole arranger of Europe’s debut rated deal backed by marketplace loans to companies. More recently, it has arranged the region’s first rated securitisation of P2P consumer loans. 

The international history of this new segment of the debt capital markets goes back to 2013, when US hedge fund Eaglewood Capital sold a $53m bundle of P2P loans in an unrated deal. In 2014 SoFi was given an investment grade rating by Standard & Poor’s for a $270m securitisation of US student loans. Last year, Moody's rated its first package of P2P consumer loans, originated by Prosper, the US P2P market number two. The $327m deal was arranged by BlackRock Financial Management.

As returns on P2P loans attracted more institutional players, alongside the retail lenders originally targeted, the US market took off. While some have called this a bubble, related asset-backed security (ABS) issuance has risen accordingly.

“There is a much bigger credit market in the US, with higher levels of origination,” says Harlan Rothman, Deutsche Bank’s head of ABS Europe capital markets. “But Europe’s P2P lending sector has been around for many years. It has grown at a conservative steady rate and the larger platforms are now originating enough to support public transactions.”

Matching the US

Indeed, the world’s first P2P platform was actually established in the UK. Zopa, of which more later, led the way when it set up shop in 2005. But European marketplace lending has taken longer than the US to hit its stride. Lending Club, the largest US platform, originated $8.4bn of personal loans in 2015 alone, almost as much as all European P2P lending ever.

Total cumulative European marketplace lending stands at £8.3bn ($10.3bn), according to a Liberum index, with about £3bn of that logged in the past year. ‘European’, however, is something of a euphemism, since 85% of the total has come from the UK. France comes a very distant second with 4%.

Europe’s largest corporate P2P funding platform is the UK’s Funding Circle, which has lent £1.6bn to businesses since its inception in 2010. In April, £129m of small and medium-sized enterprise loans originated through Funding Circle was sold in Europe’s first rated P2P securitisation, Small Business Origination Loan Trust 2016-1 (SBolt). The loans had been acquired by US hedge fund KLS Diversified Asset Management, and development bank KfW bought most of the senior tranche with support from the European Investment Fund.

Deutsche Bank was arranger and sole lead manager. In September, it was the arranger on Marketplace Originated Consumer Asset 2016-1 (MOCA), a £150m securitisation of consumer loans originated on the Zopa platform.

Key preparation

The key to both transactions was to build sufficient assets before going out and doing a public deal. “You can’t just do a £50m transaction,” says Mr Rothman. “Investors wouldn’t spend their time on a deal that size, and there would be no liquidity in the secondary market.”

Zopa is the UK’s largest P2P platform for consumer borrowing, and has arranged more than £1.6bn of loans since its inception. It doubled its loan disbursals in 2015 to £532m and expects to turn a profit for the first time in 2017.

The MOCA package consisted of consumer loans acquired by P2P Global Investments (P2PGI), a London-listed investment trust dedicated to investing in P2P loan assets. The structure included class A, B and C notes respectively rated AA-/Aa3, A/A2 and BBB/Baa2 by Fitch and Moody’s. Class D notes, rated BB/Ba3, and an unrated tranche were retained by P2PGI.

“While this asset class is slightly non-vanilla, we kept the structure very straightforward to make it easier for the rating agencies to evaluate,” says Mandeep Chandhok, Deutsche Bank vice-president, ABS Europe. “They were looking at P2P assets for the first time in Europe, which is a time-consuming exercise.”

Keep it simple

Relative simplicity is also important from the investor perspective, according to Deutsche Bank vice-president, ABS Europe, Gareth James. “With a new asset class, you are very conscious of the need to be plain vanilla, which is what investors expect,” he says.

Getting investors acclimatised to an unfamiliar asset type was an intrinsic part of Deutsche Bank’s task. “In both SBolt and MOCA, the biggest challenge was to arrange investor education in this new asset class,” says Mr Rothman. “At the core, these financial institutions look very similar to banks. But there are differences in how they originate and underwrite, and they can often be more efficient from a technology perspective.”

There was a “good mix” of interested investors, according to James Gray, Deutsche Bank’s head of ABS Europe syndicate. They included asset managers, insurance companies, mezzanine investors, hedge funds and some central banks. “This gives them diversification into a new asset class and a spread pick-up,” says Mr Gray. “And the opportunity to buy into a new asset class should be helpful, given that there will be more of this to come.”

The education process for MOCA began in May, when calls and meetings were held with investors who had expressed interest. The looming June UK referendum on EU membership was seen as a serious risk to execution, and UK ABS spreads duly widened in its wake. By late July, however, they had begun to tighten again, and the climate became more conducive to a deal.

The team reasoned that an early start on the credit update, the documentation and the ratings agency briefing meant that they could then wait for the right window.

“Once spreads had tightened in the UK, it was our view that the technicals would continue to support a sale through the autumn,” says Mr Rothman. “While we were concentrating our efforts around the agencies, we suspected that a window around September could be favourable for a transaction.”

The deal was announced in the last week of September, in more favourable market conditions than those attending the SBolt launch. Initial price thoughts were one-month Libor plus 160 basis points (bps) area for the A notes, plus 320bps area for the B and 425bps area for the C.

“Because of the time we had and the small size, we got good investor interest very quickly,” says Mr Gray. Based on feedback, price thoughts were refined to a guidance range of 145bps to 155bps, 290bps to 300bps and 400bps.

Investor overlap

There was some investor overlap with those who had bought Funding Circle’s SBolt, but Zopa’s MOCA order book was slightly larger. That was partly to do with the development of the asset class since the debut deal, and partly to do with the assets themselves. Because SBolt’s underlying assets were corporate loans, they carried higher concentration risk, which may have deterred some investors.

“Zopa’s consumer loans are more granular by nature, which allowed a broader range of investors to participate,” says Rene Trautner, Deutsche Bank vice-president, ABS Europe.

Given a healthy level of oversubscription, the transaction priced at the tight end of guidance for each tranche. While this type of bond does not typically see a great deal of trading, each traded up marginally on the break. Now the process of building the portfolio begins again, with an eye on the next deal.

The jury is still out on how fast supply from the rest of Europe may grow. “There are a lot of online lenders trying a similar business model, but they are still young,” says Mr Rothman. “However, the investor community is very much open to this type of ABS bond. Investor appetite is there. It’s a question of how quickly the asset class can grow.”

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