The Growth of Securitization
The Growth of Securitization panel at LendIt USA 2015 with Nino Fanlo, CFO & COO of SoFi; Zhengyuan Lu, SVP Capital Markets of OnDeck; Larry Chiavaro, Executive Vice President, Principal of First Associates; Ram Ahluwalia, CEO & Co-Founder of PeerIQ; Stephanie Yeh, Director, Investment Bank Division of Credit Suisse; William Black, Managing Director of Moody's; and moderator John Bunting, Managing Director of Garrison.
Securitization is scalable, brings discipline, recognition and can be tailored for buyers and lenders with different risk and time profiles. This, along with the hedging would help draw longer term institutional investors that can help drive the growth for online lending platforms. The securitization market is primed to grow. Rated transactions with 30 to 40 investors and other connections and integrations with the ABS market are getting more sophisticated and ubiquitous according to Stephanie Yeh of Credit Suisse.
Zhengyuan Lu mentioned that securitization is scalable and can be the funding for our growing origination. Stephanie Yeh also praises the validation securitization brings is important. Nino Fanlo believes this validation stems at least partially from the discipline securitization forces. Discipline reduces capital cost and increases the capital base. The discipline it offers is integral in improving your process.
Securitization is also way to create leverage and the more long term investors like bank and institutional investors get involved, the more they will seek these tools. According to Ram Ahluwalia, hedging instruments in general will grow because institutional investors are required to hold assets for 3-5 years and these assets are relatively illiquid. That period may extend through a credit cycle that leaves institutional investors overexposed.
Securitization is also attractive because it can be tailored. It lets a hedge fund buy one type of risk and another for an insurance company. It allows people to buy the risk they want according to Nino Fanlo.
Whether or not the online marketplace lending is a new origination channel or a new asset class, innovative tech and scrupulous transparency are integral to the success of participants in the field thinks Ram Ahluwalia. There are many risks, as the moderator pointed out. Ideally one should seek securitization and diversification of both funding and buyers.
William Black from Moody’s big concerns are data, history and plumbing.
Data: While it is the greatest strength of marketplace lenders, especially when coupled with their transparency. Black's concern is primarily one of quality, both of the models these companies make and the data they plug into these models.
History: Mr. Black believes this is the biggest weakness of these marketplaces. These companies, their partners and models are relatively untested.
The plumbing (e.g. the cash flow, cash allocations servicing etc): For example, startups often fail. Ratings agencies need to know: Is someone capable of stepping in should the originator go out of business? We don’t know what will happen if one of these companies goes under. Since we are rating securities, divorced from the credit of the originators, we, the rating agencies need to see if the obligations will still pay if these startups fail.
Ram Ahluwhalia thinks that there is a wedge between the regulatory capital of banks and the often institutional capital market lending platforms are so good at collecting. Securitization is integral in putting both types of capital to work on these platforms. There needs to be evolution on both ends.