MOODY’S has upgraded Funding Circle’s 2016 securitisation deal as it performed above expectations thanks to early repayments.
The rating agency said it upgraded four tranches of the securitised bonds after a number of underlying borrowers repaid interest and capital ahead of schedule, boosting their credit strength.
Borrowers have repaid as much as 35 per cent of the small- and medium-sized businesses loans backing the £129m deal, which marked the first ever foray of a UK peer-to-peer lender into the securitisation market in May last year.
The senior bonds of Funding Circle’s deal have now earned the third highest quality rating by Moody’s, having been lifted by a notch to Aa2 from Aa3, while class B, C and D bonds are now rated A1, Baa1 and Baa3 respectively.
Loan prepayments have been passed on to the senior notes, which now stand at half the original balance, at £43m down from £87m.
This in turn has increased the so-called credit enhancement of the remaining bonds, based on the typical securitisation mechanism for which junior bonds provide a backstop to more senior notes by absorbing losses first in case the underlying loan start to default.
As the value of the senior bonds is gradually repaid, the credit enhancement is spread across a smaller number of notes, boosting their ratings.
Moody’s also said that defaults in the pool of SME loans were lower than its initial expectation, while late payments have remained at low levels, averaging around 0.8 per cent of current balance.
The rating upgrade of Funding Circle’s 2016 deal sets an upbeat precedent for the P2P securitisation market, which Moody’s expects to grow steadily in the next couple of years as platform seek to strengthen their growth, liquidity, and funding options.
The platform kicked off a new business avenue for the whole UK sector when it became the first to package its loans into a multi-tranche bond, in collaboration with Deutsche Bank and KLS Diversified Asset Management.
Read more: KfW mulls more P2P securitisations