Moody’s Removes Warning From Citigroup’s Prosper-Linked Bonds

Moody’s Investors Service removed a downgrade warning on bonds sold by Citigroup Inc. and backed by online lender Prosper Marketplace’s loans, partly because it expects less volatility in future loan performance, the ratings firm said Thursday.

Moody’s put the notes on review for a downgrade in February after finding that the loans tied to them were going sour at a faster rate than it had expected. The move came amid weakening performance on similar deals tied to unsecured consumer loans in the sector, affecting trading values for this sort of debt.

But on Thursday, Moody’s said it would maintain its ratings of Ba3 -- three levels below investment grade -- on the affected bonds. It said the loans hadn’t deteriorated substantially relative to its 12 percent expected lifetime losses and that “reduces the likelihood of extreme under-performance of the collateral during its shorter remaining life.”

Costs Soar

Prosper and its competitors saw their funding costs soar in the first quarter amid volatile markets and concern that loan performance had weakened more than expected. The challenges mounted in the ensuing months for the firm that helped pioneer marketplace lending, as Citigroup stopped securitizing its loans and investor demand weakened, prompting the firm to slash its workforce by 28 percent and shut an office in Utah.

Moody’s increased its net loss expectations for the Citigroup-led deals to 12 percent in February from the 8 to 8.5 percent it initially forecast just two months before, bringing it in line with expectations from Fitch Ratings and Prosper’s own outlook.

The higher loss expectations didn’t reflect the loan quality or performance of Prosper loans but was “an adjustment to estimates that were too low from the onset,” Prosper spokeswoman Sarah Cain said.

“There are no established norms in these new deals, and it’s hard to forecast performance of these loans,” said Ann Rutledge, a structured finance expert and principal at R&R Consulting. “There’s a lot of risk in these loans and it’s easy to make a mistake.”

An Overreaction

James Wu, the founder and CEO of data analytics firm Monja, which tracks borrower performance data on loans made by online marketplace lenders, said Moody’s initial loss forecast had been low. “When Fitch came out with an 11 percent cumulative lifetime loss forecast for the same deal in January 2016, it appears that Moody’s overreacted and issued the downgrade watch,” Wu said by e-mail Thursday.

Thomas Lemmon, a spokesman for Moody’s said that volatility in loss expectations can affect ratings. “We arrive at expected loss and other aspects of our opinion independently, based on the data we review at the time,” he said.

Robert Julavits, a spokesman for Citigroup, declined to comment.

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