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March 20, 2020  

Small-Business Loan Bonds in Crosshairs

Small-business lenders are facing a sudden and severe threat to their operations and to the performance of their securitized assets.

Acting on their own accords or following orders from state and local governments, a vast number of small businesses nationwide have suspended or reduced operations amid the coronavirus outbreak. And lenders already are feeling the effects.

Why small-business loans in particular? The accounts often carry greater payment frequencies than other types of debts, sometimes weekly or even daily, and thus are exposed to more immediate deterioration when the underlying borrowers run into trouble — not to mention when they do so en masse. And because the number of missed payments would mount more rapidly than they would for loans with monthly installments, the fear is that lasting business interruptions could quickly cause asset-quality indicators within the lenders’ securitization pools to breach approved levels.

Once those thresholds are tripped, the issuers must take steps that could include diverting cashflows to senior bondholders or unwinding their deals ahead of schedule.

In a March 18 report on the impact of the coronavirus pandemic on small-business loan securities, Kroll warned that a decline in incoming payments could affect many transactions in the form of “rapid amortization trigger events based on delinquency levels, excess spread, weighted average yield and concentration limits.”

In such scenarios, Kroll said, the lenders would experience reductions in their access to capital and abilities to originate new loans. The agency has rated all four of the small-business loan securitizations that have priced this year, from Funding Circle, Harvest Small Business Finance, Oxford Finance and Velocity Commercial Capital.

For their parts, bond issuers including Funding Circle, Kabbage and OnDeck Capital are said to be taking urgent steps to mitigate defaults, avoid hitting loss triggers and shore up their businesses.

Funding Circle is closely monitoring the portfolios backing its only securitizations so far, a $198.5 million issue that priced on Aug. 16, 2019, and a $252 million offering completed Jan. 22. OnDeck, meanwhile, especially appears to be keeping watch over a $125 million deal that priced on Nov. 8, 2019, and a $225 million offering from April 2018.

The fears also are apparent elsewhere in the lenders’ financial-market interactions. Apparently fearing a swift deterioration, MidCap Financial already has pulled a $50 million credit facility that it had been supplying to Chicago originator Lendr.

Enova International stopped offering new loans through its Business Backer unit yesterday while continuing to service current accounts.

There is hope that as the federal and local governments roll out aid packages for small businesses, loan performance will stabilize. Funding Circle regulatory-affairs head Ryan Metcalf sent a letter to Congress yesterday supporting a bailout for small businesses and their lenders.

But industry participants warn that borrowers’ abilities to keep up on their debts ultimately could be dictated by the duration of the lockdown. A sudden explosion of unemployment also could prove difficult to overcome. In Ohio, for example, jobless claims shot up to 78,000 for the first three days of this week compared to 5,700 for all of last week.

CORRECTION (3/23/20): This article had been revised. The original version incorrectly reported that Kapitus was planning to lay off 50% of its staff last Friday. No such layoffs took place.