CommonBond brings debut ABS as student loan tensions rise
Less than a week after SoFi priced its fifth ABS issuance, marketplace lender CommonBond has entered the same asset class with a $105m securitization — even as US regulators hone in on traditional operators.
CommonBond’s $105m deal, which securitizes student loans originated through CommonBond’s online platform, consists of a $96.4m senior tranche and an $8.6m equity piece. It is expected to be priced next week.
Morgan Stanley is lead manager and sole underwriter. The senior tranche is rated Baa2 by Moody's Investors Service and A (high) by DBRS.
The transaction is the third marketplace lending securitization to hit investors’ screens in as many weeks — although it suffered some hiccups in coming to market, with the announcement being delayed by a day until Wednesday morning.
SoFi priced its fifth and largest yet securitization of platform-originated student loans last Thursday, while Florida-based marketplace lender CircleBack Lending saw Jefferies package $126m of its loans into an ABS the week before.
Securitizations of marketplace lending collateral have become a hotly-tipped asset class in the past 12 months or so, and consequently CommonBond expects strong demand from banks, insurance companies, credit funds and asset managers.
“Some of the folks we have talked to are active participants in the traditional student loan ABS market,” said David Klein, the firm’s CEO. “Others are not necessarily active in that area but have become increasingly interested in potentially participating on our platform because of the credit quality of our portfolio.”
But the appetite investors have shown for marketplace student loan securitizations — market participants reported strong demand for the junior tranche of SoFi’s latest deal, the first time the sponsor has offered that level of subordination in its five securitizations to date — is in stark contrast to tensions in the student loan industry as a whole.
With federal student loan lending having more than doubled since 2007 to reach around $1.2tr, the Consumer Financial Protection Bureau estimates the non-Federal student loan balance — loans provided by banks and other private lenders — at $150m.
Debtors have defeated some financiers in court, while other former students have urged their peers to wilfully default on their student loans.
A lawyer at a non-profit advocacy group recently told Bloomberg that debt-recovery practices in the student loan sector were reminiscent of the ‘robo-signing’ scandals that engulfed the US mortgage market in the aftermath of the financial crisis and that banks are still grappling with today.
But while larger and more established student loan securitizers like Navient, which appointed new group heads last week and incorporated a new structure in its latest ABS to combat payment risk, are busy grappling with increasingly suspicious regulators, SoFi and CommonBond are growing rapidly by sticking to a narrow borrower demographic.
Like SoFi, which over the past 18 months or so has become a mainstay in the portfolios of several US asset managers, including key account Western Asset Management Company, CommonBond underwrites student loans only to borrowers with very high credit scores and strong earnings prospects, according to Klein.
“In terms of this securitization it will include borrowers with MBA, MD, JD and engineering degrees,” he said. “These are degrees where earnings prospects are quite high.
SoFi has unofficially dubbed its borrowers ‘HENRYs’ — High Earners, Not Rich Yet.
Again, like SoFi, CommonBond sees the securitization market as an important source of funding for growth. The firm is aiming to reach a total underwriting volume of $500m by the end of this year and $1bn by the end of 2016, Klein added.
"Securitization is an efficient way to access capital,” he said. “It allows for a more diverse capital base and for appropriate cost of capital at scale.”
Investors are much less concerned about operational and credit risks in the marketplace lending student loan sector than they are with traditional student lenders, according to the head of capital markets at a leading marketplace lender.
“We have talked about it theoretically, but we don’t really get those questions,” the person told GlobalCapital.
Broader underwriting standards are inevitable, though. CommonBond has already broadened its horizons beyond the particular demographic whose loans it is securitizing in its debut ABS.
“We have already expanded to lend in other graduate degrees like dentistry, optometry and nursing,” said Klein. “That expansion came after reaching critical mass for this particular securitization. And we will likely expand further before the end of the year."
Klein said he expected CommonBond’s team, which consists of around 30 employees at present, to double in size by the end of 2015.