Rating Action: Fitch Upgrades Loans Originated by Prosper

Fitch Ratings has taken the following rating actions on Citi Held for Asset Issuance 2016-PM1 (CHAI 2016-PM1), which is backed by marketplace loans originated via the Prosper platform:

  • Class A upgraded to ‘Asf’ from ‘A-sf’; Outlook Stable;
  • Class B upgraded to ‘BBBsf’ from ‘BBB-sf’; Outlook Stable;
  • Class C affirmed at ‘Bsf’; Outlook Stable.

Fitch said the rating actions above reflect the growth to date in hard credit enhancement (CE) available to the notes, despite weaker than expected trust performance. Fitch also revised its lifetime gross default expectation for the initial pool from 11% at deal closing to 14.9%. Fitch added that given the CNL trigger structure, the class C notes demonstrate exposure to further deterioration, and in particular back-loaded losses.

  • Collateral Quality: The 2016-PM1 trust pool consists of 100% unsecured fixed rate consumer fully amortizing loans that are either 36- or 60-month loan terms originated and serviced on Prosper’s marketplace online lending platform. Fitch’s gross default assumption for life of the collateral is 14.9%, which translates to 16.5% of the current pool given delinquencies and the chargeoff lag. Fitch assumes a base case recovery rate of 7.5%. At the ‘Asf’ level, a default multiple of 2.8x and a recovery haircut of 30% are applied.
  • CE and Liquidity Support: Hard CE for class A, B, and C is 52.7%, 39.4%, and 17.3%, respectively. Liquidity support is provided by a non-declining reserve account, which is currently 0.84% of the pool balance. While subordination available to the class A and B notes will grow as the transaction pays down, overcollateralization (OC) is at its target release level of 16.5%, and will not grow until it hits its floor of 2% of the initial balance ($6.29 million). In addition, a growing proportion of the OC consists of delinquent assets. As a result, the class C notes are particularly exposed to defaults occurring later in the transaction life, which is currently the key constraint to their ratings.

Fitch said that loans originated via online lending platforms did not have sufficient performance history through a recessionary cycle. Given that the underlying consumer loans are unsecured and primarily intended for debt consolidation, Fitch expects borrowers to treat paying down these loans with lower priority than other borrowings such as an auto loan or mortgage. Fitch said the pool could experience an elevated default frequency in an economic downturn. Fitch placed a rating cap on this transaction of ‘Asf’ category.

Prosper will service all of the loans in the 2016-PM1 trust, and Citibank, N.A. will act as the backup servicer. Fitch considers the servicing operations of Prosper of consumer loans to be acceptable and Citibank, as a backup servicer, to be effective.

Fitch believes that unanticipated increases in the frequency of defaults or charge-offs on borrower accounts could produce loss levels higher than the base case and would likely result in declines of CE and remaining loss coverage levels available to the notes. Decreased CE may make certain ratings on the notes susceptible to potential negative rating actions, depending on the extent of the decline in coverage.

Fitch conducts sensitivity analysis by stressing a transaction’s initial base case charge-off assumption by an additional 10% and additional 25%, and examining the rating implications. The increases of the base case charge-offs are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration of a transaction’s performance. Fitch examines the magnitude of the multiplier compression by projecting the expected cash flows and loss coverage levels over the life of investments under higher than the initial base case charge-off assumptions. Fitch models cash flows with the revised charge-off estimates while holding constant all other modeling assumptions.

Fitch said that under the 10% stress, the notes would likely retain their current ratings. Under the 25% stress, the class A and B notes would likely be downgraded one notch, while the class C notes will fall into distressed categories.

Given the short remaining life of the assets, Fitch modeled timing curves different from those described in the Global Consumer ABS Criteria. The front, even, and back curves, which are in three month intervals for the 36 month loans and six month intervals for the 60 month loans, were 40%/30%/20%/10%, 20%/20%/20%/15%/15%/10%, and 15%/15%/20%/15%/20%/15%, respectively.

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.