Market consolidation dominates discussion

As marketplace lending continues to rapidly evolve in Europe, the fate of small lenders is an emerging theme. SCI's inaugural Marketplace, Direct Lending & Securitisation Seminar in London last month featured a diverse set of views on how consolidation will foster securitisation through a concentration of more sophisticated platforms.

Panellists at the seminar pointed to an increasing expectation that the pressures of a growing and more demanding market will prompt players to thin out. However, opinions were divided on the way this will come about.

"I'm not sure that the market can sustain 70 to 80 platforms," said Kevin Allen, head of insight at RateSetter. "The volume demand has increased to the point where it is not sustainable for many of the smaller businesses. Very niche platforms may able to survive; otherwise, I'd expect a lot of companies to be run out of the market."

Another path would involve larger lenders stepping in to buy out their smaller counterparts. One such example was RateSetter's purchase of GraduRates' loan book back in 2014. The acquisition was agreed after GraduRates decided that it would run down its operations ahead of impending regulations.

"For marketplace lenders, lending capacity is critical. If you have been running your platform for two to three years and only have capacity for £20m or £30m of lending, it's just not enough," added Andrew Whelan, ceo and director of lending at GLI Finance. "In the end, consolidation comes to every market as the winners continue to get bigger. It's already happening in this market."

However, the diversity of assets and services on offer in marketplace lending could be used by many smaller firms as leverage to survive longer. This would allow a number of them to grow at a stable pace without succumbing to ambitious growth goals.

"It's what many of the larger players forget," observed Partel Tomberg, ceo and co-founder of Bondora. "Yes, there are a lot of lenders, but most have nothing in common other than their self-description as marketplace lenders."

The case with many small platforms will also be whether the consolidation of their infrastructure and operations will be beneficial to larger firms. Ravi Anand, md at ESF Capital, stated that many small platforms are too unsustainable, sparking concern as to whether larger firms will be getting value for what they purchase.

"Most of these smaller platforms don't have a scalable origination edge as it is," Anand explained. "Because of this, there is likely going to be more companies falling out of the market rather than being gobbled up by the larger players."

Such factors can help explain why securitisation is still yet to kick off in the UK market, with small lenders lacking the capital or sophisticated operations to venture into such territory. Comparisons with the US can shed light on how far the lenders in the market must go before they can replicate similar success.

"The key difference is that the idea of P2P in the US has transformed into a more capital market-based mentality," says Holger Kapitza, director and structured credit analyst at UniCredit.

Specifically, he notes the role institutional investors are playing, which has enabled the US market to transitions from a P2P market to a popularly phrased I2P market - referring to the investor-to-peer relationship. Many panel members agreed that this will be a key factor to boosting the UK and Europe's securitisation capabilities in the sector.

"This starts with creating a trusted brand that both customers and institutional investors will be willing to commit towards," adds Anan.

Until such time, one to two securitisations will be the likely volume this year in the UK. Panellists speculated on how the inaugural deals will be rated, if/when they hit the market. Based on recent developments in the US, a single-A rating is considered a viable goal for the senior tranches.

"It's possible that we will see the same rating assigned in Europe," says John Woodhall, senior counsel at Sidley Austin. "The rating agencies have stressed that it is not a new asset class that we are dealing with; the underlying loans are, after all, coming from familiar sectors - such as SME lending and consumer lending - which have substantial rating coverage. The origination methodology is, of course, more novel."

It is anticipated that rating agencies will use their existing methodologies for consumer and SME marketplace ABS deals, due to the similar structural features of marketplace lending assets. However, they will likely adjust their assumptions to account for risks, such as the short operating histories of platforms.

With this in mind, Kapitza noted that a single-A rating is not a certainty - recent US deals were rated up to A3 by Moody's. "Recent trends say that this could be what the first deals are assigned, but the agencies were initially looking at a triple-B rating," he said. "However, I think investors will be the key factor in the end. They will make their determinations from assessing the risks, knowing that historically investors are familiar with the risk of consumer and SME assets."

He concluded: "They will also consider borrower performance history, the structure of the deal, representations and warranties, the underwriting process and so on."

JA