February 11, 2015

BlackRock looks to securitize purchased P2P loans

BlackRock is planning to securitize loans purchased via internet origination channels. 

The world's largest asset manager has been buying these loans since November 2013, and the fraction BlackRock has acquired represents roughly one-sixth of the volume created by Prosper during this period, according to Bloomberg. 

BlackRock has been snapping up these assets as Prosper's loan issuances surge, Bloomberg reported. In 2014, the P2P lender originated $1.6 billion in loans, which represented a year-over-year increase of more than 350 percent.

Moody's rates bond sale
BlackRock's proposed bond sale - which is divided into two classes of notes - obtained provisional credit ratings from Moody's Investors Service on Jan. 28. The first group, containing $281 million of Class A notes, received a rating of Baa3. The second batch, which included $45 million in Class B notes, obtained a Ba3 rating. 

The simple fact that Moody's rated this particular bond sale represented a milestone for the burgeoning P2P lending industry, as this was the first time a major credit ratings agency evaluated a securitization deal involving debt originated in this manner. 

Consumer Credit Origination Loan Trust 2015-1, a special purpose vehicle created by BlackRock Financial Management, Inc., will issue the securities. 

Debt quality concerns
Moody's predicted in a presale report that it expects the losses on loans tied to these bonds will probably hit 8 percent, which is substantially more than the rates borrowers with similar credit profiles incur, according to Bloomberg. When explaining this forecast, the credit ratings agency said that borrowers who take out this unsecured debt usually prioritize other payments. 

While there are concerns about borrowers making good on their contractual obligations, none of the borrowers in the pool of Prosper loans had a FICO score below 640, and the weighted average for these scores was 706, according to figures provided by the bond documents and reported on by Bloomberg. However, a prospectus shed some light on the quality of the debt. 

"Noteholders should assume that none of this information provided by the borrowers was verified by Prosper or any other person," the document stated, according to the news source. "This information may be incomplete, inaccurate or intentionally false. Applicants may also misrepresent their intentions for the use of loan proceeds." 

Opportunities for banks
While buying loan portfolios can generate substantial opportunities, banks must be discerning about these purchases. 

To maximize the chances of selecting portfolios that coincide with an organization's investment objectives, financial institutions can benefit greatly from working with Garnet Capital Advisors, a loan sale advisory firm with experience spanning many debt types.