Brokers advancing into the personal loan space is creating a ‘perfect storm’ which is seeing lenders pricing ever-higher asset-backed security (ABS) deals.
The personal loan area has been significantly disrupted in the last year, with the lower end cleaved off by Buy Now, Pay Later (BNPL) companies and the upper end offering higher loans, bringing brokers into the marketplace.
“There’s a perfect storm,” said SocietyOne chief investment officer John Cummins, who recently priced a $182m ABS bond issue.
“As interest rates have fallen, you see affordability for home loans, which create affordability across the board. People are taking bigger mortgages and bigger personal loans. The autos market went through a couple of difficult years, but has roared back.”
“You’ve got a case where the personal loan market is finding clear areas where people want to play: there’s traditional guys like us, playing in personal loans for higher quality borrowers, you’ve got BNPL at the lower level and you’ve still got the payday lenders out there.”
“All three sectors are doing really well. You see that fragmentation of the market, and you’ve got to be super competitive. The brokers are all over it. The really good brokers are out there and they’ve got multiple products.”
“They’re across all the different fragments, everyone is doing something. It’s booming. It’s really strong.”
Brokers are writing higher loans in the personal sector, and those higher loans are typically from a better quality of borrower, making them far easier to invest in on the capital markets.
“The consumer side, such as us in personal loans, plus the BNPL space, is seeing capital markets and institutions saying that if we can convince them that we’ll write loans to the quality that they can invest in, they’ll buy them,” said Cummins.
“It adds to another product out there. Rather than personal lenders being an exception, you’ll probably now see it quite regularly.”
For SocietyOne, this trend is certainly paying off. The personal lender announced an $182m ABS bond issue yesterday, the first time that they have gone to the capital markets for funding.
“SocietyOne has been around a while, and it’s fair to say that at the beginning, the founders wanted it to be peer-to-peer,” explained Cummins. “We’ve now morphed across to be a non-bank lender, and like a lot of non-bank lenders, we fund ourselves through balance sheet and securitisation.”
“The good part is that it’s been a great intersection of us moving to that style of funding, while having a few years of solid originations behind us.”
“What it has meant is that we made the jump away from peer-to-peer and towards being a more traditional non-bank from a funding point of view, and have been able to put together a high-quality pool of collateral in the funding warehouse that we have with NAB.”
“We always intended to go to the capital markets this year, but it was a case of what Covid would let us do. Ideally, we would have gone a few months ago, but the second wave hit and everyone held their breath to see what would happen to financial markets and lending.”
“The collateral pool itself is solid and well-behaved from a delinquency point of view, so together with the NAB lead manager, we thought that the market wasn’t going to be as dislocated as last year, so we’ll go.”
“There’s always a risk, but it’s turned out really well.”
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