European P2P lenders expect loans to be securitised
Expansion of the P2P lending market in Europe is expected to be fuelled by securitisation within the next 18 months, enabling institutional investment to be extended from specialist funds to pension funds and wealth managers. Hedge funds have been injecting liquidity into platforms for some time and the US market introduced securitisation more than two years ago; most recently, Citigroup marketed $377m of bonds backed by loans originated on San Francisco-basedplatform, Prosper, and last year investment trust, P2P Global Investments, was launched in the UK, enabling investors to take advantage of the returns offered by platforms such as Zopa, Ratesetter and Funding Circle. 

P2P securitisation is coming: how the industry is approaching the financial practice

Securitisation is still a naughty word. For many, it’s a throwback to the 1980s, while others will think immediately of 2008, when funding locked up. But recently, it’s been heard far more frequently within the P2P and debt-based crowdfunding industry, as platforms grow, take more institutional money and look for further ways to diversify funding options. I spoke to some of the UK’s leading platforms to find out what P2P securitisation will mean.

Securitisation is a way of transforming illiquid financial assets into marketable securities. Similar loans are packaged together in a fund, and securities are then issued, thereby generating more capital. Investors buy those securities to earn a return as people pay their loans back. The process makes markets more liquid – it’s easier for investors to buy and sell loans when they’re part of a traded asset class. And packaging up unsecured loans also spreads the risk of holding them, thereby lowering borrower cost.

THE RIGHT PLACE

The argument is increasingly being made that the P2P market is well-placed to look at securitisation – and do it successfully. Jonathan Gomez, director of capital markets at real estate-focused LendInvest, sums up the sentiment of others: “none of us will just be doing this because it’s possible. We want to do it in the right way. We’ll be watching the regulator and seeing what happens. You could get burned – people have been before – and we’re aware of that.”

Although most platforms simply aren’t big enough to securitise yet – i.e. they don’t have a sufficient deal flow for it to be a worthwhile endeavour – the process has been happening in the US for over two years now. In the summer, for example, $377m of bonds backed by loans originated on US platform Prosper were marketed by Citigroup.

In the UK, investment trusts like P2P Global Investors are currently taking bundles of loans from a platform and putting leverage behind them. But rated public deals, with different investors taking different tranches, aren’t here – yet. Many are predicting they’ll hit the industry in the next six to 18 months: “securitisation is coming to Europe, and that’s a good and healthy thing,” says Jonathan Kramer, director of sales at Zopa.

So what makes P2P so conducive to securitisation? First, platforms are in charge of the quality of the loans on offer. Big consumer and SME-loan players like Zopa and Funding Circle are highly transparent, often publishing the details of every single loan that’s gone through the website. Sachin Patel, global co-head of capital markets at Funding Circle, explains how they credit assess each business (with the process being updated every three months – far more frequently than banks) before listing a loan. Algorithms will then randomly allocate partial or whole loans to retail and institutional investors, ensuring that the former are always on the same footing as the latter, and that every investor is diversified.

Second, if loans are being bundled, they need to be a homogenous asset pool, stresses Kramer. Although platforms have different strategies and deal with different kinds of loans, most just specialise in one or the other – and anyone who remembers the crisis will recall why packaging together all different kinds of assets can be problematic.

LEGS UP

For platforms, securitisation will also bring the opportunity to access further institutional money, providing options for the likes of pension and multi-asset funds, and wealth managers. Of course, the practice requires the involvement of institutions – and it’s no coincidence that the platforms which may be able to offer bonds backed by securitised loans are the largest (i.e. they’ve got some institutional money flowing in). Because most P2P platforms don’t hold loans on their balance sheet – they just facilitate lending and borrowing – securitisation would be originated by the institutions that hold the loans. “We would simply service that loan, and facilitate due diligence via the rating agencies,” explains Patel.

For any platform that was going to do the securitisation itself, because it does hold loans, there would be the question of judging the market and pricing the bond – and making sure the process was still economically attractive. And even then, if the creditworthiness of the loans slipped, would investors then just look to more mainstream asset classes for the same or a greater yield?

Cost would be a critical determiner, says Gomez – and again, size comes into it. “For smaller platforms, securitisation won’t be a possibility, because it’d just eat all their profits,” he says – think of lawyer costs alone. That said, even here there may be a solution. Independent body Alt Fi Data is currently looking at how it could verify the data and track records of small platforms, and facilitate the securitisation of a bundle of the same kinds of loans from a number of small players.

For retail investors, securitisation “should be highly validating,” says Kramer. Because they’ve come in on the same terms as institutions, an investment market buying rated bonds gives credence to their portfolio. And, depending on how the bonds are structured, there may be opportunities for high net worth retail investors to participate in buying on an exchange. But Patel says that you wouldn’t expect retail investors to “get that excited about bonds” – the real point is that securitisation widens the range of products a platform can offer. As Kramer says: “securitisation is just one leg of the multi-leg stool of our funding strategy”.