In mid-December, shortly before Christmas, Moody's Investors Service gave a gift to investors in the fast-growing marketplace-lending space: the chance to buy a junior slice of a securitization of "peer-to-peer" loans with a credit rating and a spread of 6 percent over benchmark swaps.
Eight weeks later, investors found Moody's in a much less generous mood. The rating agency announced it was considering downgrading the riskiest portion of the deal, along with the junior tranches of two similar securitizations that had been previously sold to investors.
The reviews for downgrade were "prompted by a faster buildup of delinquencies and charge-offs than expected," Moody's said in a statement dated Feb. 11.
The move by Moody's and the deteriorating fortunes of some other marketplace-lending deals, including one in which losses have overwhelmed their so-called trigger value, have spurred fresh worries about the health of one of financial markets' newest asset classes.
Marketplace, or "P2P," lenders seek to use online platforms to directly connect borrowers with lenders, often at cheaper rates than those available at banks -- and at significantly increased returns for investors. The higher yields on offer from investing in the asset class have drawn interest from Wall Street, with asset managers, hedge funds, and banks participating in the space as they buy or bundle P2P loans into bonds that can be sold to investors.
Sales of bonds backed by marketplace loans, which are asset-backed securities (ABS), have been a particularly bright spot for bankers seeking new sources of revenue and for P2P platforms aiming to diversify their funding away from more skittish individual investors.
However, recent events in the space have led some to worry that the asset class is showing early signs of deterioration. The question now is whether P2P loans prove to be the vanguard of a wider downturn in consumer lending, or simply riskier than more traditional forms of credit.
"Sentiment has changed dramatically [between] last year and now," said James Wu, the founder and chief executive of MonJa, a company that evaluates loan quality and performance for investors buying such debt. Economic factors may be playing some role in the weakening loan performance, but "the story is in the underwriting," he said.
The bonds under review for downgrade by Moody's are known as Citi Held for Asset Issuance, or CHAI. Consisting of loans originated through Prosper Marketplace Inc., the second-biggest P2P lender in the U.S., following LendingClub Corp., the bonds were put together by Citigroup Inc. and are three of the 40 or so P2P securitizations currently outstanding, according to data from Morgan Stanley.
"Marketplace lending has been growing exponentially over the last few years. As institutional investors have gotten more involved securitization has become an increasingly important vehicle for funding," Morgan Stanley said in research published late last week. "In the face of a weakening financial market, many investors are concerned that the marketplace lending universe will be among the first to feel the heat. Hence, it is imperative for us to track their performances closely."