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Announcement:

Moody's: European marketplace lenders incentivized to manage credit risk, as they need investors to finance new loans

22 Feb 2017

Current securitisations have similar asset and structural characteristics

Frankfurt am Main, February 22, 2017 -- Europe's first marketplace lending securitisations have common credit positive features that balance the credit risks related to the asset class, says Moody's Investors Service. Both transactions address critical aspects, including the alignment of interests between platforms and lenders, operational risk, and the sale of a sufficiently large loan portfolio into the securitisation.

"Funding Circle and Zopa's securitisation structures mitigate risks specific to marketplace lending similarly. In part, relying directly on private and institutional investors to finance new loans puts the onus on the platforms to manage credit risk and be transparent in a competitive market," says Armin Krapf, a Vice President-Senior Credit Officer at Moody's.

Moody's report, entitled "Marketplace Lending ABS -- Europe: Inaugural SME and Consumer Loan Deals Share Many Asset and Structural Characteristics," is available on www.moodys.com. The rating agency's report does not constitute a rating action.

Moody's says that while lenders' lack of skin in the game could affect loan portfolio quality (since portfolio volume drives platform revenues), the platforms are incentivized to manage portfolio credit risk owing to their transparency towards their lenders regarding portfolio performance. UK marketplace lending platforms need to generate sufficient funds from private and institutional lenders to function. Some institutional lenders acted as the respective securitisations' liquidity providers during the ramp-up period in order to generate a sufficiently large portfolio, and served as the risk retention holders during the life of the deal. Moody's says relying on private and institutional investors to finance new loans puts the onus on the platforms to manage credit risk and be transparent in a competitive market.

Both current European marketplace lending securitisations (Small Business Origination Loan Trust 2016-1 DAC and Marketplace Originated Consumer Assets 2016-1 PLC) employ structural features to address the alignment of interests and operational risk. Marketplace lending platforms in the UK have short lending histories and fee-based business models. Their loans have not been through a full credit cycle. As a result, they supplement their lack of loan performance stats with outside credit data when making loan decisions. Neither lender holds loans on balance sheet or retains risk in their securitizations apart from certain representations and warranties on the securitized portfolio.

In both cases, institutional investors were exposed to portfolio credit risk during the ramp-up period and monitored the origination process together with the platform. UK marketplace lending platforms do not take any portfolio credit risk, but rather manage the loan origination process and profit from increasing origination volumes. That said, the platforms may have a long-term business interest in showing a decent portfolio performance to their lenders and to earn the servicing fees during the life of a loan. Other parties check the quality of the platform and the loan portfolios. In both securitisations, the institutional investor that supported the platform during the portfolio ramp-up period provided certain representations and warranties for the securitised portfolio and retains the requisite 5% stake in the deal as per European risk-retention rules. The platforms provide some representations and warranties concerning the validity of the loan receivables. Both securitisations are static, which means that only an initial portfolio is securitised and no additional loans can be sold to the issuer, reducing potential uncertainty about the loan origination process.

Funding Circle and Zopa concentrate on small unsecured loans, which leads to more granularity and diversification in the loan portfolios, which is positive from a credit risk perspective. The Funding Circle portfolio's largest exposure accounts for just 0.2% of the portfolio, and it's top 10 exposures account for just 2.0%. The consumer loan portfolio originated through the Zopa platform is even more granular, with a top exposure of 0.02%, and with the top 10 exposures comprising just 0.2% of collateral. In SBOLT, the business loan portfolio shows limited industry concentrations at closing, with the top three industry segments being property & construction (16%), manufacturing & engineering (14%) and retail (12%).

Subscribers can access the report at: https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_1047362

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Armin Krapf
VP - Senior Credit Officer
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anthony Parry
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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