Europe ABS Bankers Eye Loan Markets Designed to Sidestep Banks

  • Loans made via peer-to-peer platforms may be turned into ABS
  • U.K. online lending may reach 15 billion pounds a year by 2020

European banks may soon find a new way to earn money from markets that were set up to bypass them.

Booming peer-to-peer lending platforms, such as Funding Circle and Zopa, are coming into focus as investment bankers seek new types of debt to spur Europe’s moribund issuance of asset-backed securities. The region’s first sale of bonds tied to loans made via these online services could be just months away, according to Royal Bank of Scotland Group Plc, Moody’s Investors Service and Banco Bilbao Vizcaya Argentaria SA.

“I do expect to see the first European peer-to-peer deal this year and it will almost certainly come from the U.K.,” said Aaron Baker, a London-based BBVA credit analyst. “A multitude of funds are being built in order to invest in these products and banks are looking at how to provide finance to the sector.”

The potential for securitization underlines growth in peer-to-peer financing, which has been fueled by investors seeking higher returns and borrowers being less able to get loans from banks. Morgan Stanley expects peer-to-peer loans in the U.K., by far Europe’s largest market, to total 15 billion pounds ($21 billion) a year by 2020, a 10-fold increase from 2014.

Securitizations will be driven by hedge funds and other institutional investors looking to sell loans made via peer-to-peer services, rather than platform operators. A U.K. fund managed by Eaglewood Europe has previously said it may pursue a deal. KLS Diversified Asset Management is also a candidate, according to BBVA’s Baker. The New York-based investment manager agreed to loan 132 million pounds through Funding Circle in 2014.

A spokesman for Eaglewood declined to comment on the company’s progress. KLS didn’t reply to request for comments.

U.S. Securities

In the U.S., more than $8 billion of securities tied to peer-to-peer loans have been sold since 2013, according to Morgan Stanley. Investors may favor securities over making or buying loans directly because notes can be easier to trade, and because they can have credit ratings, said Sachin Patel, global co-head of capital markets at Funding Circle and a former Barclays Plc banker. Some funds can only buy rated securities.

Peer-to-peer, or marketplace, loans are unlikely to be enough to revive European issuance of asset-backed securities, which remains well below the pre-crisis peak. The collapse is due to a regulatory crackdown on the notes, which were blamed for stoking a credit bubble. Only 9.8 billion euros ($11 billion) of new notes were sold this year through March 4, the least for the period since 2009, according to JPMorgan Chase & Co.

“Investors do have appetite to invest in marketplace-lending securitizations because they give exposure to the real economy and might offer higher yields,” said Monica Curti, a senior analyst at Moody’s. “However, any future issuance from alternative lending providers will remain very small.”

ABS Issuance

Peer-to-peer lending only began about a decade ago. That will bring challenges in securitization as the there is little history to look at when assessing risk and underwriting standards, said Ganesh Rajendra, RBS’s head of fixed income, credit and mortgage strategy. Investors will have to rely on the platform operator to underwrite and service loans.

“If the economy hits a major problem and defaults increase, there is a concern as to whether the platforms have the capability to properly deal with that,” said John Woodhall, a senior counsel at Sidley Austin in London, who focuses on asset-backed securities..

The peer-to-peer sector may also have weaker borrowers than traditional loan markets and potential for fraud, said Curti at Moody’s.

Default Rates

The industry has moved to ease investor concerns with major U.K. operators regularly publishing loan-book data and default rates on their websites. The Financial Conduct Authority began regulating the market in 2014.

Operators are also increasingly toning down “anti-bank” rhetoric and instead seeing traditional lenders as useful allies, said Funding Circle’s Patel. The company already has U.K. tie-ups with RBS and Banco Santander SA, related to small-business loans.

“As the industry has evolved, so has its relationship with the banks,” said Patel. “Now we work together. Securitization is just the latest example of this.”

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