Moody’s Investors Service has said it may downgrade three bonds that were sold by Citigroup Inc. and backed by consumer loans originated by Prosper Marketplace Inc. after finding that the debt is going sour at a faster rate than the ratings firm previously expected.
The loans funding the securities are being repaid at a slower rate than projected, Moody’s said Thursday. In some cases missed payments are resulting in the underlying loans being written off as a loss.
“Charge-offs have been coming in at a higher rate than expected, very simply,” Amy Tobey, a senior credit officer at Moody’s, said by phone Friday.
The bond grader had originally assigned ratings of Ba3, or three levels below investment grade, to the riskier parts of those securities. While Moody’s didn’t indicate how deep the the cuts could be the ratings company said it doesn’t expect those rates to improve. “It is not a two-month blip,” Tobey said.
Losses in one of the bonds issued by Citigroup in July 2015 have reached 0.95 percent of the original pool balance, Moody’s said in a report on its website. The bond grader is increasing its net loss expectations for each of the three Citigroup-led deals to 12 percent from as much as 8.5 percent.
Prosper’s own loss projections are between 9.5 percent and 11 percent for loans originated in 2015, according to company spokeswoman Sarah Cain.
Moody’s also revised loss assumptions in another deal sold by BlackRock Inc. That transaction was the first rated bond deal backed by Prosper loans.
"Losses in the BlackRock deal could rise to 6 to 6.5 percent based on what we see in delinquencies," said Dev Chatterjee, an analyst at Moody’s. "And that is getting close to our original expectation of 8 percent," he said. The new estimates aren’t likely to affect the most senior-ranked bonds in that deal, which Moody’s upgraded to Baa1 from Baa3 on Feb.11.
Typically loans more than 120 days overdue can be marked off as a loss.
Prosper’s loans exhibit "solid and consistent credit performance," Josh Tonderys, chief operating officer at Prosper, said in an e-mail. "We take pride in our ability to accurately forecast our loan performance and are always looking at the current environment and calibrating our loss rates appropriately."
Citigroup spokeswoman Danielle Romero-Apsilos couldn’t immediately comment. BlackRock spokesman Brian Beades didn’t immediately respond to messages seeking comment.
Losses on unsecured consumer loans can be more severe than other kinds of household debts because they typically are not secured by collateral and lack guarantees against failure to pay.
Borrowers tend to prioritize other kinds of bills, meaning that when times get tough, a personal loan payment may be less of a priority than a mortgage, said Moody’s Chatterjee.
"It will be interesting to see how it pans out," Chatterjee said. Once a loan goes 60-days delinquent, the likelihood that it is charged off is very high, he said. "It appears the increased pace of charge-offs will endure over the next couple of months."
Prosper is a pioneer of peer-to-peer, or marketplace, lending. Potential borrowers apply for a loan through its website and, if approved, Prosper assigns them an interest rate. Investors then work through Prosper to fund the loans they want to buy. Citigroup, which had invested in the loans, began securitizing the debt and reselling it with credit ratings last year.