Marketplace loan ABS involving a multi-seller approach is expected to become more commonplace, due to the extra control that online lending platforms can exert over the securitisation process. Investors and loan sellers also benefit from a consistent securitisation programme, but a degree of expertise is required to handle the greater complexity involved in executing such transactions effectively.

Marlette Funding recently priced Marlette Funding Trust 2017-1, a US$304.47m ABS backed by consumer loans originated through the firm's Best Egg platform (see SCI's primary issuance database). Unusually, the deal utilised a multi-seller approach, whereby loans that the platform had sold to seven loan buyers were sold back to Marlette and then securitised.

Marlette's hybrid lending model facilitated this process, whereby once the loans are sold back to Marlette, it then sells them to the issuance trust. Karan Mehta, head of capital markets at the platform, illustrates: "It's like a funnel, where loans are poured in from independent sellers, which are not linked in any way - although all the loans are originally applied for through the Best Egg platform and underwritten by Cross River."

In terms of closing the transaction, it is much like any other ABS, but the earlier stages are more novel. "On the day of closing the transaction, the loans are sold by the seller to the depositor, Marlette, and then transferred to the SPV. This happens in one day, but is preceded by weeks of behind-the-scenes work and there are many quite complex - but also very detailed - agreements made to ensure consistency in how the asset owners sell the loans back to Marlette."

Mehta adds that loan buyers have to be on the same page. "Many factors need to be pre-agreed and ironed out. There can't be a perception of unfairness between sellers and we value the long-term relationship with all our partners."

While the process adds complexity, it also provides benefits for both the platform and investors. Eric Neglia, senior director at KBRA, which rated the Marlette deal, comments that Marlette and its investors benefit from the transaction structure due to standardisation, a consistent message and greater control over the securitisation process. By bringing the securitisation process in house, Marlette can control aspects such as credit enhancement levels, ratings, structure and timing, as well as frequency of issuance - the last two factors being especially valuable in terms of creating a programmatic shelf.

Neglia adds that investors further benefit because they can "achieve economies of scale, by spreading fixed securitisation costs across larger deals and reducing execution risk through frequent and consistent programmatic issuance. Execution risk is reduced, as investors can become part of the regular programme and they're able to tap the market more easily. Investors are encouraged by such multi-seller deals going through successfully, particularly since they don't need to worry about competing with other issuers for deals from the same platform."

Prior to platforms structuring their own deals in this way, renting out securitisation capabilities was more common, such as through the Citi-sponsored Citi Held for Asset Issuance shelf, by which a number of platforms have securitised their loans. Bringing the transaction under one roof, however, is cheaper and more efficient, according to Mehta. He adds that the major benefit of transactions undertaken in this manner is controlling the message put out, establishing a long-term vision for the firm and reducing a fragmented approach, which is harder to manage for all parties.

Mehta agrees that while the final execution is familiar, the initial stages are more complex. "Multiple sellers and various details of each raises the complexity level - generally, there are more challenges in the front negotiation and back-end settlement too," he comments.

Despite this complexity, investors do not receive greater compensation because the final product looks like any other consumer loan or marketplace lending ABS from a risk perspective. Different loan sellers, however, have portfolios with different characteristics, so have to be appropriately compensated for the different collateral they sell.

Mehta stresses that some platforms underestimate the level of complexity involved and that sufficient expertise is therefore vital. These transactions also require time investment to build relationships with loan buyers.

For Marlette Funding Trust 2017-1, all of the loan sellers have established relationships with the lender, with "forward flow agreements" - whereby it sells a certain number of loans over a set timeframe. Mehta says that this is "a fundamental principal of these transactions."

Multi-seller deals are not limited by the number of loans or the number of sellers involved. Mehta concedes that greater size in either respect increases the complexity and Neglia concurs that the due diligence process is "labour intensive", which would only grow with more loans or loan sellers.

KBRA approaches multi-seller transactions in the same way as any other consumer loan ABS, but Neglia suggests the agency might favour the Marlette transaction more favourably over an ABS issued by an investor that doesn't have ongoing involvement in the platform. Marlette has ongoing involvement from the platform to the securitisation shelf and "alignment of interest with loan performance through the risk retention requirement."

He points out that a potential risk is that of "cherry picking", whereby loan buyers could sell off the loans with the higher risk characteristics and keep those with less risk. This is, however, avoided because all the whole loan buyers receive a random allocation of the originations from the Marlette platform.

Mehta says that overall multi-seller transactions, such as his firm's most recent issuance, are in the best interests of all parties involved and it stands to reason that further platforms will follow suit. Neglia concludes: "I think this will be the type of execution that we'll see going forward. I think we'll see less single-seller, whole loan buyer securitisations, similar to the CHAI and MPLT shelves. Platforms are looking to create more standardisation in their securitisation shelves and investors are looking for lower cost, consistent securitisation options."

RB