Fitch Ratings has upgraded the rates on several notes that are backed by loans from marketplace lending platform Prosper. According to Fitch, the ratings on the Class B and Class C Series 2018-1 (PMIT 2018-1) notes have improved due to the “growth in hard credit enhancement (CE) available to the class B and C notes since closing.
Fitch has also decreased its lifetime gross default expectation slightly to 16%, down from 17%.
The structure is said to provide sufficient loss coverage to withstand Fitch’s rating stresses at the commensurate rating levels. Additionally, since the class A has been paid in full, the class B notes are currently receiving principle payments.
- Stable Collateral Quality: PMIT 2018-1 currently has a weighted average (WA) original FICO score of 720, including 15.6% of non-prime borrowers with original FICO scores below 680, improved since the closing pool.
- Asset Performance Inside Expectations: Fitch revised its lifetime cumulative gross default assumption to 16.0% from 17.0%, which translates to 19.9% of the current pool. This revision reflects the better than expected defaults observed to date. Fitch assumes a base case recovery rate of 7.0%. At the ‘Asf’ level, a default multiple of 3.3x and a recovery haircut of 30% are applied.
- Increasing Credit Enhancement: Hard CE for PMIT 2018-1 has grown since close to 84.3% from 29.1% for the class B notes and to 47.0% from 17.75% for the class C notes. While subordination available to the class B and C notes will grow as the transaction pays down, overcollateralization (OC) has reached its target release level of 13.25%, and will not grow until it hits its floor of 2% of the initial balance, which occurs at a 15.1% pool factor.
- Rating Cap at ‘Asf’: Fitch placed a rating cap on the notes at ‘Asf’, primarily due to the sector’s untested performance throughout a full economic cycle. History for unsecured installment loans originated via online platforms such as Prosper’s thus far only encompasses a benign macro environment. Further, the underlying consumer loans are likely at or near the bottom of repayment priority for consumers, since repayment does not provide the consumer ongoing utility as auto loans, credit cards and cell phone plans do. The cap currently constrains the ratings.
- Adequate Servicing Capabilities: Prosper will service the pool of loans and Citibank N.A., the named backup, has committed to a transfer period of 30 business days. Systems & Services Technologies, Inc. (SST), the sub-backup servicer, will be responsible for the operations in the event of a servicer transition. Fitch considers all parties to be adequate servicers for this pool based on prior experience and capabilities.
Fitch notes that “unanticipated increases in the frequency of defaults 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 investments. Decreased CE may make certain ratings on the investments susceptible to potential negative rating actions, depending on the extent of the decline in coverage.”