Aftera rough first quarter and news that CitigroupInc.'s relationship with ProsperMarketplace Inc. has come to anend, analysts and lenders at LendIt USA had mixed views about the futurefor securitization of marketplace loans.
It appearsdeal volume through the end of the year will depend on whether marketplace lendersare willing to accept a less-than-desirable price in order to secure a funding source.Private equity funds are more wary about programmatically buying the loans marketplacelenders originate in the whole loan market. That could create funding problems forplatforms without dedicated credit facilities to fund loans on their own balancesheets.
Strongersecuritization volume will need strengthened investor confidence, which remainsshaky for the asset class. Improvement will depend on better transparency and morerated transactions that can show strong credit performance, various panelists saidat LendIt USA, a conference this week in San Francisco focused on marketplace lending.
Volumedropped in the first quarter, but several analysts noted that all types of structuredfinance suffered from market volatility. With the recent dislocation, a flight toquality has emerged, more directly damaging marketplace lenders since it is a newspace more reliant on unrated transactions, said Stephanie Yeh, a director withCredit Suisse.
And StevenLee, chief investment officer for MW Eaglewood Americas LLC, said there have beenfewer rated deals than expected because certain marketplace lenders have been slowto address the market's requirements for successful deals.
"Thereare platforms out there who think they are special. Message to all platforms: Thesecuritization market was founded in 1985. That's older than most of you. … Youdon't get special reps and warranties; you don't get to name your conditions,"Lee said.
On theother hand, Yeh said activity among rating agencies in the space has increased recently,leading to a couple more rated deals that can fulfill investor appetite for lower-risktransactions. Recently, Avant and Marlette Funding were able to secure ratings forsecuritizations.
"Lastyear, I said we need more consistency and more transparency and I think that's happened.For a number of the marketplace securitization deals, we've seen loan tapes sharedand we've seen platforms be able to share more information with investors,"Yeh said.
And severalconference attendees said they thought it was possible that Prosper was the oneto end the relationship with Citigroup, pointing to a keynote speech by ProsperCEO Ron Suber in which he expressed displeasure with the execution of certain securitizations.
Ultimately,it seems securitization volume will be determined by whether marketplace lenderscan convince investors their loans can perform at investment grade ratings. Sincethe public markets have taken a dour view on the industry — evidenced by flaggingstock prices among the publicly traded entities — marketplace lenders will needto accept a lower price for securitized loans than they would expect to achievein a whole loan sale.
"Justas no one would IPO into this market, I don't think anyone is going to put out assetswhere the market value and the economic value are diverging," said Eric Wasserstrom,managing director for Guggenheim Partners.
Banks,on the other hand, are eager for the business because other structured finance products,particularly RMBS, have still not recovered to pre-crisis levels, said Perry Rahbar,CEO of dv01, a company that evaluates marketplace loans for institutional investors.
"Banksclearly want to get involved because it's an attractive opportunity in a marketwhere there's not a lot of other options," Rahbar said.
And fromthe marketplace lenders' perspective, Rahbar, a former RMBS and CMBS trader forJPMorgan Chase & Co.,said marketplace lenders need to use securitization as a funding source despitethe difficult pricing environment.
Diversityof funding sources was a prevalent theme throughout the conference and widely viewedas a necessary trait for platforms to survive as the securitization market couldremain rocky and venture capital has become wary of new investment. Several platformCEOs, such as SoFi's Mike Cagney, talked about the benefits of a hybrid model tofund the increasing flow of originated loans, which combines the use of whole loansales, securitizations and on-balance sheet lending using credit facilities.
"Atany point in time, one or two of those sources of capital can disappear. And ifyou relied on only one of those sources of capital, you're toast," said GlennGoldman, CEO of Credibly, a marketplace lender focused on small business lending.His company has a $70 million credit facility and plans to launch securitizationsin 2017.
"You'restarting to see and hear a lot of that here. Folks who rely purely on whole loansales in this space are now scrambling to find capital."