Smart Lenders Issues Comment on Banking Challenges

Smart Lenders AM, an asset management company specializing in managing portfolios of loans from established marketplace lenders, online-lending platforms and crowdlending platforms, has issued a statement in light of the ongoing market volatility and strain on the banking sector.

Since its launch, Smart Lenders AM has invested in over $1.5 billion of loans on behalf of European institutional and professional investors.

Smart Lenders provided a bulleted mem outlining any exposure to failed banks or other entities, specifically with its Moonstone Lending SICAV.

Per the memo:

Silicon Valley Bank – The fund has no direct exposure to SVB nor to any other smaller banks in trouble. No account there, no deposits, no loans.  Two platforms through which the SICAV has acquired small volume of loans, used SVB mainly as transit account for collection, with minimum overnight exposure. They have now moved these accounts away.

Credit Suisse – The fund’s custodian is Credit Suisse in Luxembourg. The cash balance held on the Credit Suisse account is not material, except for a few days around month-end when we have redemptions, and we transfer the required amount from Wells Fargo to Credit Suisse before crediting investors. The takeover by UBS is good news, even though our risk was very low.

Defaults – Smart Lenders estimates the expected default rate per platform per grade for loans they purchase. They monitor the rate of delinquent* loans against their expectations. This rate appears in the charts below as a grey line and interval. Smart Lenders states that delinquencies (turquoise line) are returning to the expected level after increasing above expectations (less obvious yet for Marlette). This increase was due to the poor 2021 vintage, where issuing criteria had been relaxed after the Covid economic rebound and before the Ukraine + inflation troubles.

High rates and tighter credit scoring – The current loan production is offering higher yields and better credit quality combined. Smart Lenders reports that it started to reinvest significantly from November onwards and will benefit from that.

Rates down – The one and 2-year US rates started to decline after the SVB crisis, creating room for price improvement of loans from the level mentioned above.

Lower FX hedging cost – As short-term US rates decline and the BCE pushing EU rates higher, the interest rates differential, which is the basis for the FX hedging of the EUR and CHF share classes, is decreasing, reducing accordingly the performance differential between the USD and the EUR & CHF share classes.

Crisis surfing – This asset class has proven extremely resilient in all these circumstances, providing low volatility returns due to its unique combination of low duration and high yield.

Comparable -The SICAV is often compared to alternatives such as high-yield bonds and bank deposits. Spreads on high-yield bonds have widened rapidly, linked to liquidity concerns such as future refinancing of LBOs in a tight liquidity environment and the global repricing of credit risk. The unique amortizing nature of US consumer loans is isolating the Moonstone Lending fund from that risk.

 


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