European banks eye the potential for securitization in peer-to-peer financing

According to Bloomberg.com, peer-to-peer lending platforms, such as Funding Circle and Zopa, are increasingly coming into focus as investment bankers seek new types of debt to spur Europe’s moribund issuance of asset-backed securities. The region’s first sale of bonds tied to loans made via these online services could be just months away, according to Royal Bank of Scotland Group Plc, Moody’s Investors Service and Banco Bilbao Vizcaya Argentaria SA.

Moreover, Aaron Baker, a BBVA credit analyst, expects to see the first European peer-to-peer deal this year and strongly believes that it will come from the UK. He also added that a multitude of funds are being built in order to invest in these products and banks are looking at how to provide finance to the sector.

The potential for securitization underlines growth in peer-to-peer financing, which has been fueled by investors seeking higher returns and borrowers being less able to get loans from banks. For instance, Morgan Stanley expects peer-to-peer loans in the UK to reach GBP 15 billion a year by 2020, a 10-fold increase from 2014.

The drivers in securitizations are hedge funds and other institutional investors looking to sell loans made via peer-to-peer services, instead of using platform operators.

In the US, more than USD 8 billion of securities tied to peer-to-peer loans have been sold since 2013, according to Morgan Stanley. Investors may favor securities over making or buying loans directly because notes can be easier to trade, and because they can have credit ratings, said Sachin Patel, global co-head of capital markets at Funding Circle and a former Barclays Plc banker. Some funds can only buy rated securities.

Peer-to-peer, or marketplace, loans are unlikely to be enough to revive European issuance of asset-backed securities, which remains well below the pre-crisis peak. The collapse is due to a regulatory crackdown on the notes, which were blamed for stoking a credit bubble. Only EUR 9.8 billion of new notes were sold this year through March 4, the least for the period since 2009, according to JPMorgan Chase & Co.

However, although the investors have appetite to for marketplace-lending securitizations, any future issuance from alternative lending providers is likely to remain very small.