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July 10, 2020  

Bank Warehousers Pinch Personal Lenders

In yet another coronavirus-related blow to online personal-loan originators, banks have jacked up the amounts they charge those operations to accumulate assets for securitization.

Sources have identified Citigroup, Credit Suisse and Jefferies as being among major warehouse lenders to have made such moves, with each institution hiking interest rates for new financing facilities while also offering less up-front capital to clients in the sector.

The upshot is that the strategy of warehousing personal loans for securitization could become uneconomical for many issuers, exacerbating an already-steep decline in fresh bond deals from the asset class.

While deep uncertainty has surrounded the personal-loan industry throughout the coronavirus pandemic, the added warehousing costs didn’t immediately come into focus. That’s because many originators had set aside efforts to find new facilities early in the crisis, with inquiries only resuming later.

Their findings: The prevailing interest rate for a new warehouse line has jumped to 600 bp over Libor from 300 bp. At the same time, banks have reduced average advance rates — the amounts of money they lend against each pool balance — to 50-70%, from 80%.

How unfavorable are those terms? Consider that the average interest rate for a jumbo-mortgage facility has increased by perhaps 50 bp, to 250 bp over Libor, while advance rates in the sector have decreased only slightly to about 90%.

Some lenders, having cut back steeply on origination volume, could respond to the higher costs by remaining on the sidelines or by taking out less financing than they would under better conditions. As one investor put it, “This is the banks’ polite way of telling the personal-loan guys to go away.”

Yet other lenders might have no choice but to pay up as they seek to fund loans originated under stronger underwriting standards adopted amid the crisis.

“It’s a massive increase, really shocking. It’s going to cripple a lot of issuers’ abilities to securitize,” one bond salesman said, acknowledging that the banks had little choice in the face of rapidly worsening loan performance. Warehouse lenders additionally are concerned about signs that borrowers in forbearance are struggling to resume payments, with many receiving additional payment holidays from their lenders.

There hasn’t been a securitization in the marketplace-loan sector since March 5, when Avant priced a $200 million transaction with Credit Suisse and J.P. Morgan running the books and when Upstart separately sold $74.8 million of bonds via Jefferies. Counting personal-loan bonds from originators of all types, $3.4 billion of transactions have priced in the U.S. this year. That represents a 55.7% decrease from $7.7 billion a year ago, according to Asset-Backed Alert’s ABS Database.