CommonBond Inc., the student-loan startup backed by Vikram Pandit, is joining the push to bundle loans created online into bonds, selling $96 million of notes.
The sale will be marketed as soon as this week as CommonBond follows marketplace lenders OnDeck Capital Inc. and Social Finance Inc. in securitizing the debt they helped create. They are among a growing class of firms once better known as peer-to-peer lenders, whose pioneers set out to match borrowers with people looking to invest extra cash, before they expanded to tap Wall Street’s deeper pockets of institutional investors and banks.
The notes, underwritten by Morgan Stanley, will have a Baa2 rating from Moody’s Investors Service and an A grade from DBRS Ltd., CommonBond Chief Executive Officer David Klein said in an interview. The deal will bundle $105 million of student loans originated between September 2013 and January.
“We are at a point where marketplace lending is becoming less and less fringe,” Klein said. “The market is maturing, consumers are open to alternative ways of financing. The more we proceed here, and at the pace we are going, this will become more mainstream than alternative before a lot of folks realize.”
CommonBond raised $100 million in 2013 from investors including Pandit, the former CEO at Citigroup Inc., and Social + Capital, a venture capital fund. In February, New York-based CommonBond said Nelnet Inc. had invested an undisclosed sum and would finance at least $150 million in loans each year.
The growth of lenders such as CommonBond and San Francisco-based LendingClub Corp. is wresting business from large banks. The firms could help the U.S. shadow-banking system take at least $11 billion of annual profit away from traditional lenders, Goldman Sachs Group Inc. analysts Ryan M. Nash and Eric Beardsley said in a March report.
Larger rival Social Finance sold bonds at the highest grade ever issued for an issuance backed by marketplace loans. Moody’s assigned ratings of as high as Aa2 for the deal, which priced last week and was SoFi’s fifth. There are more than 100 marketplace lenders in the U.S., Klein said, and two of the firms, LendingClub and OnDeck, have already sold shares to the public.
CommonBond doesn’t plan to retain any of the risk and investors will be able to buy the equity piece of the deal, he said. It will collect an annual administrative fee ranging from 0.25 percent to 1 percent that won’t be collected if borrowers stop paying. About 80 percent of the loans backing the deal are refinancings while the rest were first-time loans for graduate degrees.
CommonBond has issued about $200 million of loans since it was founded two years ago and is on track for $500 million by year-end. The company’s average borrower is 32 years old, makes $140,000 a year and maintains a FICO score above 760. It hasn’t had a single borrower miss a loan payment, Klein said.
“It’s critically important to us that the way our paper performs continues to be pristine,” Klein said. “That’s what we are fast becoming known for.”