Investor confidence in marketplace lending appears to have rebounded after a drop-off in 1H16, but the sector remains too fragmented to make broad conclusions about whether it has stabilised. The disparity between consumer and student loans originated online and the demise of the original peer-to-peer lending model make it difficult to gauge securitisation performance across the sector.

Indicators of a recovery in marketplace lending emerged towards the end of 2016 and into 2017 (SCI 12 January). Lending Club entered the ABS market with its debut rated deal and several other MPL bonds have been upgraded or affirmed, including seven tranches from three SoFi issuances - SoFi Professional Loan Program 2014-B, 2015-A and 2015-B - and three tranches from CHAI 2016-MF1.

Prosper has also secured a US$5bn deal with a number of large institutional investors to buy loans originated through its platform for 24 months. Additionally, SoFi has closed a US$500m Series F round of funding, led by Silver Lake.

Nevertheless, Lending Club posted large losses for 2016 and several marketplace lending ABS are breaching default triggers (SCI passim). Many platforms also seem to have cooled off their hiring sprees of previous years, focusing on stability rather than growth.

Kruti Muni, svp at Moody's, suggests that the sector isn't homogeneous enough to generalise. She says: "There is still a certain amount of uncertainty in the sector, particularly on the legal front. There are two distinct sectors in this space - the personal/consumer loan sector and the student loan sector. These exhibit material differences in performance. With SoFi private student loan transactions, for example, we've seen very strong performance with losses of less than 20bp."

She continues: "In the consumer space, we've seen losses increase. This was the case with Prosper, for example, and so we revised our loss expectations up to 12% and we have kept that in place. In the consumer sector too, we have limited performance history through a downturn, whereas while student loans refinanced/originated online might be a new method, we've got comparative historical data for this sector."

Rosemary Kelley, md at KBRA, further emphasises that the marketplace lending sector is fragmented and that each platform needs to be assessed individually. "You can look across asset classes, but each platform has its own unique funding strategy and business model. People paint marketplace lending with a broad brush when they talk about the segment, but actually it's important to look at the business model and operations of each platform," she says.

Avant, for one, is a consumer lending platform that has been highlighted by Morgan Stanley ABS analysts in connection with breaching default triggers in three deals - AVNT 2015-A, MPLT 2015-AV1 and AMPLT 2015-A. However, KBRA recently upgraded AVNT 2016-A's class A note to double-A from single-A minus and the class B note to triple-B plus from triple-B minus, while affirming its rating on the class C note at double-B.

The rating agency cites the increased credit enhancement for each class of notes, along with deleveraging, as major reasons for the rating actions. Losses remain above KBRA's base case loss expectation to date, but this is outweighed by the credit enhancement and deleveraging.

Herve Pierre-Beauchesne, vp at Moody's, says that trigger breaches can imply worse performance than is accurate. He comments: "The thing about trigger breaches is that they are there to protect investors against credit risk. They don't always suggest that something is wrong with the deal, as such, but it does get the headlines."

He continues: "When a trigger is breached, it might be that the trigger was set too low or it could indicate performance issues, such as increased losses - which is the case more often than not. But, again, this is not our focus (as a credit rating agency), nor necessarily always the case and it's worth bearing in mind that they are there to protect the investor. The investor might not necessarily be worse as compared to if the trigger was set at a higher level."

Both KBRA and Moody's note that they and investors have to approach each marketplace lender individually and analyse each one according to their individual business models, which differ from platform to platform. Eric Neglia, ABS analyst at KBRA, comments: "Each marketplace platform has its own business model and underwriting model for underwriting loans. KBRA thinks it is important to understand each platform's approach to credit scoring."

He adds: "Some MPL deals have breached triggers (not those rated by KBRA). This could be due to limited performance history, overly optimistic loss projections or a difference in the timing of losses. This needs to be looked at on a deal-by-deal basis, however."

As the sector has evolved, so platforms have changed their funding models - no longer relying on the peer-to-peer model and instead utilising a range of methods, including balance sheet lending, warehouse funding and ABS. Neglia says: "The idea of the marketplace has diminished - there is less emphasis on the middleman acting as a market facilitator, when platforms are using institutional investment and balance sheet funding so heavily. The distinction between marketplace lending and traditional lending is that everything is taking place online - which does bring benefits to consumers in terms of speed and efficiency."

Despite this lack of homogeneity, some suggest that marketplace or online lending firms have now demonstrated some ability to work through a downturn after the difficult conditions at the beginning of last year and may be stronger for it. Pierre-Beauchesne comments: "Last year, after a series of negative headlines, we saw investors pull back and in response platforms made efforts to bulk up their audit, compliance and regulatory teams. Since then, we've seen renewed interest in the sector from investors, which is a sign that they may have regained some confidence in the sector and in the internal controls and compliance of platforms."

He concludes: "Marketplace lending has certainly been through a lot, but I would say that it's in a better place now than it was this time last year, both in terms of platforms' processes and their compliance and regulatory strength. However, these efforts were more reactive to catch up to the situation and there is still a long way to go to achieve best in class status."

RB