Securitization of marketplace loans has been the great hope of the European market, ever since the US market roared to life. Eaglewood Capital Management sold the first ever US consumer deal in October 2013, and the industry has accelerated ever since, with more than $700m placed in April alone.
But the European market has grown more slowly, and with more fragmentation. The biggest firms are UK-based, and are growing fast, but even Funding Circle, one of the biggest, has only originated £1.2bn ($1.74bn).
It’s had institutional money on the platform for a long time though, building up size, while the mandate for a securitization has been out for at least a year. Institutional partner KLS Diversified Asset Management has been building up the portfolio and waiting for the right moment to get a trade done.
It was an open secret that Deutsche Bank had the mandate, while rating agencies jockeyed to position themselves around the new industry. Fitch Ratings criticised the industry in March, and the mandate went to Moody’s Investors Service and Standard & Poor’s. So the debut securitization of loans originated on Funding Circle, when it broke cover two weeks ago, was rightly seen as a moment of great significance — the start of a new asset class, with potential to cut out the banks, revive small business lending and fuel European economies.
Sadly, however, the deal, which totalled just £129.5m, ended up with a large chunk placed with official institutions, while at the bottom of the capital stack, the class D notes ended up placed 125bp wider than initial thoughts.
This does not imply disaster. The average spread on the loans is a punchy 9.57%, giving plenty of room for some widening in the tiny £6.3m class ‘D’.
This sort of price discovery for a new asset class is perfectly normal, and the equity was happy to take the notes if it didn’t hit the reserve price. But it doesn’t look like rocket fuel for a booming new asset class either. Of the £87.8m class ‘A’ notes, £50m went to KfW, wrapped by the European Investment Fund.
Down the capital stack, sole arranger Deutsche Bank was only covered on the class ‘A’ notes by the afternoon of April 28 (following investor meetings the previous week), with the class ‘D’ just 0.06 times done. Class ‘B’ was 0.24 times done and class ‘C’ 0.26 times.
Final terms last Friday had class ‘D’ retained at 4pm, before it was placed at 775bp (from 650bp initial thought) just after 5pm.
On Tuesday, Fitch followed its earlier industry wide scepticism with a specific attack on Funding Circle’s deal, SBOLT 2016-1, saying that the pricing of the trade “highlights investors’ willingness to invest in emerging asset classes in search for yield, despite the limited performance data available on such loans”.
Actually, the hype around marketplace lending was always a little misplaced. Online lending can indeed cut out banks, and may improve access to credit for some borrowers. But it isn’t at all homogenous, any more than “bank loans” are all the same. It’s just a different way of originating familiar assets.
But fundamentally, the deal was a portfolio financing for SME loans, many of them without security or anchored only by a personal guarantee. This has always been a niche lending category, and probably always will be.
The lukewarm reception for the Funding Circle trade should cool the market’s ardour a little. It got done, but it didn’t demonstrate a huge groundswell of demand.
Other marketplace firms, however, may have different experiences, because they will offer fundamentally different assets.
The other big UK marketplace lenders, such as Zopa and RateSetter, offer personal loans, which has always been a larger market, and one which receives less official support. LendInvest, meanwhile, hotly tipped as the next European marketplace deal, is focused on secured property, the mainstay of the UK institutional securitization market since it began.
KLS, Funding Circle, and Deutsche Bank deserve congratulations for finally getting the deal over the line. Other issuers, however, will be hoping the market treats them differently.