Industry Pros Write Off Square Program
Count out Square as a near-term issuer of asset-backed bonds.
The San Francisco company, best known for its credit-card processing devices, had been pegged as a potential source of small-business loan securities. But upon a closer look, industry participants have concluded that the underlying accounts would mature too quickly.
Indeed, most of Square’s small-business loans pay off in six or seven months. That compares to up five years for online originators including Marlette Funding and Prosper Marketplace, or as long as 25 years for U.S. Small Business Administration accounts. Because Square’s borrower payments are calculated as percentages of business receipts, its monthly cashflows also are seen as less predictable than those of lenders with set schedules. “There is no duration on the asset you can model out. Securitization isn’t in the cards,” one source said, adding that it’s possible the company could develop longer-term loan products.
For now, the expectation is that Square will continue to fund its lending activities through loan sales.
Structured-finance professionals had been eyeing Square in part because of rapid growth in its small-business lending volume, which saw originations double to $800 million in 2016. The company followed up by writing $251 million of loans in the first quarter of 2017 and an all-time high of $318 million in the second quarter. Asset performance has been strong as well, with defaults of about 4%.
What’s more, Square’s staff includes a number of individuals with securitization expertise. They include financing head Henry Domenici and capital-markets chief Lydia Foo, both formerly Morgan Stanley bankers. Corporate counsel Erica Khalili previously worked in Mayer Brown’s structured-finance practice.
As for other lenders, sources suggest that securitization-related doubts surrounding the cash-advance-like nature of Square’s loans also could apply to potential issuers including Amazon.com and Paypal.