Avant plans to switch to a full balance-sheet lending model over time, while Prosper will start holding some of its personal loans on balance sheet, according to executives speaking at the ABS East conference this week.
As consumer credit deteriorates and spreads tighten, more MPL platforms are seeking stable funding by diversifying their lending models, according to several analysts.
Online consumer lender Avant currently holds roughly 50% of its loans on balance sheet, and funds the rest through whole loan sales and securitizations, said James Paris, executive vice president of strategy and capital markets, on a panel.
“Over time you’ll see us balance-sheeting more and more, because for us using the loan sales is fine, [but] it’s less profitable than booking the loans ourselves,” he said. “Over time, we’ll drift more towards 100% balance sheet, but at this time we’ll continue to sell about half.”
The company will fund its originations via its own equity and securitizations.
The lender will continue selling half of its loans for at least the next three years, a spokesperson said. The spokesperson declined to disclose investor yields on whole loans sales. Avant offers consumer loans in the USD 1,000-USD 35,000 range, with APRs between 9.95% and 35.99%, according to a company website.
Avant significantly cut originations and reduced its staff by 30% last year to recover from mounting delinquencies, according to a source familiar with the company. The lender began to recover in early 2017, but it won’t originate “full-speed” this year, according to the source. The lender is on track to originate about USD 1bn in loans by year end 2017, according to the company’s spokesperson.
Another online lender, Prosper, will begin exploring balance sheet lending for its platform, said Chief Financial Officer Usama Ashraf on the panel. However, the majority of its loans will continue to be sold, he said.
“Our funding model is divided into two buckets right now, retail investors and institutional,” with bulk of the funding coming from the latter, he said.
In February, Prosper secured a USD 5bn loan purchase agreement with a consortium of investors including New Residential Investment Corp., Jefferies Group LLC and Third Point LLC, as reported (see story, 27 February). “Over time, we will look to use our balance sheet strategically for personal loans, but the primary business will still be funded through a marketplace lending model,” Ashraf said.
Both lenders said they plan to issue securitizations on regular basis.
Avant will issue its second ABS of the year in 4Q17, and plans on two to three deals a year going forward, according to the spokesperson. Its previous deal, the USD 218.9m AVNT 2017-A, closed in May. Its USD 147m A- rated (KBRA) A notes priced to yield 2.4%, while the USD 48.8 BBB- B notes priced to yield 3.7%, and its USD 23.1m BB rated C notes priced to yield 6.1%, according to Debtwire ABS data.
Prosper has issued two USD 500m ABS, PMIT 2017-1 and PMIT 2017-2, so far this year.
Balance sheet trend
Online lenders have been moving away from pure marketplace lending models since the industry downturn in 2016, according to analysts speaking on an ABS East panel.
“Really, since then, we have seen an emphasis around stability, and diversification of funding sources,” said Randal Johnson, director at Deutsche Bank. During that time, many platforms reduced their production volumes, tightened their credit standards and increased pricing, he said.
“As markets improved, a lot of the platforms relaxed some of those [measures], especially on the pricing side,” and migrated to a more hybrid lending model, he added. “LendingClub started a securitization program, for instance, while OnDeck moved from funding 40% through loan sales, to less than 10%.”
Finding a stable funding source would be especially crucial in case of a downturn, according to the analysts. Already, the industry is seeing climbing loss rates, as well as increased debt balances, which worry some investors, as reported (see story, 20 September).
“If there is a downturn, lenders will have a real opportunity to take on [riskier] loans, that they think are good, but others may not,” an analyst said on the panel. “So if you don’t have the ability to put those on your balance sheet, there will be many opportunities you won’t be able to take advantage of.”