Citigroup Selling $377 Million of Bonds Backed by Prosper Loans

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Citigroup Inc. is marketing about $377 million of bonds backed by loans originated through Prosper Marketplace Inc. in the latest example of Wall Street helping to fuel the online-lending industry.

Peer-to-peer, or marketplace, lenders once set out to bypass big banks by directly matching borrowers with individuals who wanted to fund them. The loans created on platforms run by Prosper and LendingClub Corp. have since gained popularity on Wall Street as fund managers chase higher returns and bankers seek new assets to package into bonds that can be sold to other yield-starved investors.

The structure of the deal also differs from earlier peer-to-peer securitizations. A Citigroup subsidiary acquired the loans as part of an agreement with Prosper to purchase a certain portion of the debt originated on the platform, according to Moody’s Investors Service.

Moody’s assigned a provisional grade of A3 to the highest-rated class of notes, the firm said Wednesday in a statement. Those notes cover 54 percent of the loan pool, Moody’s said in a separate presale report, and represent the best credit grade so far for bonds backed by consumer loans originated on an online marketplace. It’s also three levels higher than the Baa3 rating granted to the last major securitization of Prosper loans.

The ratings firm said it expects the loans to incur cumulative losses of 8 percent, the same as the previous deal.

Pension Funds

The loans are on average two months old, with interest rates averaging 13.2 percent, Moody’s said. Citigroup’s main banking subsidiary, Citibank NA, acts as a backup servicer, Moody’s said.

Scott Helfman, a spokesman for New York-based Citigroup, and Prosper’s Sarah Cain declined to comment.

Making securities out of the debt paves the way for investors, such as pension funds and insurers, to hold the loans. At least 10 securitizations of marketplace-arranged credit have been sold so far, according to Autonomous Research and data compiled by Bloomberg.

Prosper and Citigroup initially aimed for a rating on Moody’s Aa tier but achieving such a high grade would’ve required sacrificing some of the leverage investors use to amplify returns, according to people familiar with the deal who asked to remain anonymous to discuss it privately. Lending to the safest borrowers on Prosper’s platform without leverage can net investors a return of 5.48 percent at a time when two-year U.S. Treasuries are yielding 0.70 percent.

Growing Pains

Peer-to-peer loans still face growing pains as bankers, investors and regulators figure out how work with the debt.

Last month, Prosper said it’s planning to charge a fee for investors who want to bundle its loans into bonds so it can offset costs from that process. Extra expenses include spending time with rating companies, which weigh the quality of the loans in bonds, and increased legal risk stemming from protections -- known as representations and warranties -- that originators provide to investors.

“There is no way to determine how much or whether Prosper verified any of the information provided by the borrowers on the loans,” Moody’s said.

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