Professional Documents
Culture Documents
Primary Credit Analysts: Ildiko Szilank, New York (1) 212-438-2614; ildiko.szilank@standardandpoors.com Robert A Chiriani, New York (1) 212-438-1271; robert.chiriani@standardandpoors.com Secondary Contacts: Cian Chandler, London (44) 20-7176-3752; ChandlerC@standardandpoors.com M. Scott S Sehnert, New York (1) 212-438-2603; m.scott.sehnert@standardandpoors.com Weili Chen, New York (1) 212-438-6587; weili.chen@standardandpoors.com
Table Of Contents
The True Test: Weathering A Full Economic Cycle The New Lending Model Carries Risks P2P Companies Could Face Regulatory Hurdles Potential P2P Securitizations Call For A Multifaceted Approach To Evaluating Risks
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
As Peer-To-Peer Lending Draws Wider Interest, Does Securitization Lie In Its Future?
As the peer-to-peer (P2P) lending market evolves, questions have persisted about the future role of securitizations in this sector. However, Standard & Poor's Ratings Services believes there are some hurdles that need to be cleared before we assign ratings to such transactions. Through various lending programs or platforms, P2P companies function as intermediaries, matching borrowers with potential lenders or investors who often have common financial interests or shared goals. They also act as loan arrangers and servicers, and they generate their revenues from these activities. The P2P originator/servicer does not typically use its own capital to fund the loans. The common thread involves a business model where the originator/servicer of the loans obtains funding for the specific loan from investors, typically through an online platform. We've seen that smaller finance companies that are growing, like many P2P firms are, have typically looked to alternative financing options, such as securitizations. Today's crop of P2P lenders cover a broad spectrum of entities with diverse business models, financial capabilities, infrastructures, technologies, experiences, and target demographics of borrowers, lenders, and investors. Standard & Poor's believes the novelty of this sector and its wide range of players presents unique challenges in assessing the overall risks in future P2P loan securitizations. We monitor developments in this nascent sector from a cross-sector vantage point and draw upon our experience in rating various types of consumer, commercial, and structured debt. P2P lending is evolving, and it's still too early to know what the industry will look like in its more mature state. As with any young and untested market, we believe there are issues that need to be addressed before we can assign ratings. Some of these issues are P2P companies' lack of performance histories through full economic cycles, uncertainty about their long-term commitment to the business, and their financial stability, operational risks, servicing quality, and loan credit performance in a downturn. We also consider the unproven ability and capacity to comply with new and ongoing regulatory and legislative requirements. We believe it is important to understand P2P companies' specific strategies and their target demographic of borrowers and investors. Information about the sector is largely fragmented, and there is no industrywide consensus on how big a role P2P lending will play in the credit markets. Platform operators in the P2P lending sector are diverse, targeting different consumer and commercial borrower segments and offering a variety of services. For example, companies such as Prosper and Lending Club extend a range of personal and business loans to borrowers, while Social Finance focuses on student debt consolidation/refinancing and is now starting to offer home loans. Funding Circle USA is a P2P platform that is focused on small business lending. Other entities, such as Kiva, have built global microfinance networks, serving underserved communities and entrepreneurs, mostly in developing countries. As of March 2014, the two main programs in the U.S.--Prosper and Lending Club--have collectively made $5 billion of loans in the past six years. Lending Club's Web site reported that since 2007, the company's total loan volume has
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
As Peer-To-Peer Lending Draws Wider Interest, Does Securitization Lie In Its Future?
reached approximately $4 billion. Of this, about 83.0% was for refinancing and credit card payoffs, while borrowers used the remainder for home improvement, business, and other needs. Borrowers tap P2P lending programs as alternative sources of financing from the traditional banking services. Investors and lenders participate in P2P lending for the potential returns they will reap from these transactions, particularly given the relatively low returns available to them elsewhere while interest rates remain persistently low.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
As Peer-To-Peer Lending Draws Wider Interest, Does Securitization Lie In Its Future?
Although a few P2P companies have been in business for many years, the market has only recently started to gain more attention as traditional financial institutions like banks have scaled back their lending. On the commercial lending side, new laws--such as the Jumpstart Our Business Start-Ups (JOBS) Act, passed in 2012--to encourage investment and promote the growth of U.S. small and start-up businesses might have also contributed to the entry of entrepreneurial players and helped advance the concept of crowd funding and various P2P programs. If the P2P lending sector's presence in the credit markets continues to grow, we believe the industry could be subject to additional regulatory oversight. In the case of P2P lenders, it isn't yet known how local, state, and federal regulations might evolve to monitor such a wide range of players.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
Copyright 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT