Losses on a $126 million deal of loans originated through CircleBack Lending Inc. and put together by Jefferies Group LLC have already overwhelmed the trigger value embedded in the bonds, according to data from Morgan Stanley. That would normally mean cash flows due to investors in the lower tranche of the deal are diverted to more senior bondholders, the bank suggested.
Richard Khaleel, a spokesman for Jefferies, and CircleBack Lending CEO Michael Solomon, declined to comment.
Nervousness in credit markets is said to have made it more difficult to sell P2P deals in recent weeks. Delinquencies in riskier auto and credit card loans are also increasing, raising the prospect of a wider downturn in credit.
"There is a slowdown in securitization activity, although the primary driver is a widening in credit spreads -- impacting all credit markets -- and this is translating into increased funding costs and deals getting pushed down the calendar," said Ram Ahluwalia, founder and CEO of PeerIQ, which provides risk management services for P2P investors and platforms.
He added: "We think the apprehension is overstated. Investors today will make money. Most ABS investors simply are not familiar with marketplace lending. There are great opportunities for ABS investors that can analyze the risk and separate the signal from the noise."
P2P lenders including LendingClub and Prosper have already been raising borrowing rates for the riskiest lenders on their platforms. That may encourage investors in the asset class. Meanwhile, CircleBack has been shuttering underperforming loan acquisition channels and tightening its credit guidelines, according to people familiar with the moves.
"It's a bump in the road," said Ahluwalia. "The last few months are a dress rehearsal ahead of a credit cycle turn."