Online student lender CommonBond, which started in 2012 as a way for graduates of the University of Pennsylvania's business school to refinance their student loans, will sell around $100 million worth of student loans assets to investors as securities, with a likely stamp of investment-grade approval from Moody's, the ratings agency.
Tapping investors to fund loans is common in other, more mature parts of the commerical and consumer loan industry (credit card loans, mortgages, and traditional student debt are routinely packaged and sold to investors), but there have only been three marketplace lenders that have successfully securitized their loans on their own. Marketplace lenders use different criteria than traditional banks to lend money (through an intermediary) to individuals and businessess and then sell those loans to investors.
SoFi, which mostly lends to students and graduates but has expanded out into mortgages, and OnDeck, lends to businesses, have done securitziations. SoFi did its first securitization, selling $152 million worth of securities, in 2013, but didn't win a rating from one of the "big three" ratings agencies— S&P, Moody's, or Fitch — for that first deal.
OnDeck did its first securization, with BBB and BB ratings from the ratings agency DBRS, in 2014 for $175 million.
"We're excited about tapping capital markets in a unique way, not a lot of marketplace lenders have leveraged securitziation, and we'll see more of it going forward," CommonBond founder and chief executive officer David Klein told BuzzFeed News. CommonBond expects to get an investment-grade rating of Baa2 from Moody's.
CommonBond doesn't lend money itself like a bank, the loans are originated by an outside bank. Instead, CommonBond evaluates potential borrowers and then sells the actual loans to investors. CommonBond promises lower rates to its borrowers, who are either business school students, business school graduates, or graduates of certain degree programs. Rates range from 1.93% for variable loans to graduates to 6.09% for 15 year fixed-rate loans, if the borrower pays automatically. The loans also offer the possibility of higher returns for investors who have been starved by persistently low interest rates, dragging down the returns from bonds, and expensive stocks.
The marketplace lending market has seen explosive growth after the last few years, with lenders Lending Club and OnDeck going public and still-private companies like Prosper and SoFi having raised hundreds of millions from outside investors to fund their operations.
"We did $100 million in loans funded last year, we're going to surpass $500 million this year, and $1 billion-plus next year," Klein said.
Klein said that while Common Bond had "always known that tapping securitization markets was a potential option," he didn't start talking to the underwriter, Morgan Stanley, until late 2013, which has managed CommonBond's relationship with potential investors in the deal and ratings agencies.
With new money coming in from the capital markets, Klein said, CommonBond will be able to originate more loans because their cost of outside capital that they then lend out will come down. CommonBond refinances student loans for graduates of over 700 degree programs. The company says it is yet to experience a single default or even a 30 day delinquency. Like some other marketplace lenders, CommonBond tends to lend to people with high credit scores and educational credentials that are good indications of high future incomes.
Klein said that CommonBond's deal with Nelnet, the student financial services giant that invested in CommonBond and agreed to fund $150 million worth of student loans, has helped make the company's assets more attractive to potential investors like insurance companies, pension funds, and hedge funds. Winning an investment-grade rating from one of the big three ratings agency can open up the market for more risk-averse investors like pension funds and insurance companies.
"It really does ultimately come down to the consumer benefitting from alternative groups of companies become more mature and sustainable over time, and serving them better over time," Klein said.