Over the past year we have discussed Upstart’s reliance on securitization markets to fund some of their new loans. It may be worth noting that Affirm, which relies on the same strategy for its loans, has encountered problems selling its most recent securitization. Securitization markets are encountering liquidity issues and credit from issuers with relatively short issuance history are under greater scrutiny. It would be fair to assume that they may be in a similar position as Affirm. Just something to keep in mind and on the look out for.
https://www.bloomberg.com/news/articles/2022-03-11/-buy-now-…
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I understand that many on this board follow Bert or subscribe to his service. He wrote on related matters on Seeking Alpha. Rather than summarize here, I will provide the link:
https://seekingalpha.com/article/4487320-investment-case-buy…
Over the past year we have discussed Upstart’s reliance on securitization markets to fund some of their new loans. It may be worth noting that Affirm, which relies on the same strategy for its loans, has encountered problems selling its most recent securitization. Securitization markets are encountering liquidity issues and credit from issuers with relatively short issuance history are under greater scrutiny. It would be fair to assume that they may be in a similar position as Affirm. Just something to keep in mind and on the look out for.
Upstart does not give loans. It provides a software tool for Banks to use to give loans.
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Please read my posts on this topic from a month ago. Upstart is marketing a 400 million+ securitization of their loans.
https://www.businesswire.com/news/home/20220307006010/en/KBR…
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Dave Girouard addressed this in Morgan Stanley interview.
On the asset-backed securitization (ABS) market slowing and the impact on Upstart:
“The majority of our institutional buyers don’t securitize, so the market has no impact on them. The rest only securitize if it’s really productive to do so. Otherwise, they happily hold the loans and appreciate the yield they get from them. There’s only a small fraction that could have a lower appetite without the ABS outlet but that’s not all that material to us… In 2021, the ABS market was extraordinary. You had loans bought at par and sold within a month or 2 at 108% of par…. we expect that because ABS markets have cooled down, a lower fraction of 2022 loans from our platform will end up in ABS markets.”
Considering investor worries over Affirm cancelling a debt offering related to an ABS transaction of its own, hearing this from Girouard was both unsurprising and comforting to me.
Source: https://stockmarketnerd.substack.com/p/news-of-the-week-marc…
P.S. It is worth to read the full interview.
Also from Earnings call last month:
https://seekingalpha.com/article/4487258-upstart-holdings-in…
The securitization markets are almost more of an indirect thing for us because it’s the loan buyers themselves that then securitize the loans. And so it’s more of a – we don’t touch the securitization markets directly other than we help run the deals that the investors themselves contribute into. So I think each of those investors has maybe a different answer as to what, kind of, liquidity they need from the securitization markets behind them. But I would say there’s a significant fraction of a matter more than happy to buy the loans and just earn the yield without looking for liquidity in the ABS market. So I would say the reliance on securitization markets is less relevant to us directly.
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Hello All, been leeching here a couple months. Just saw this link, fyi: 3 of UPST’s ABS financings were upgraded by Moody’s y’day: 1 to Baa2; the other r2 to A2.
https://finance.yahoo.com/news/freed-abs-trust-2020-1-221706…
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Well, I’m not talking about what the buyers of their loans do, I’m talking about securitizations that Upstart thru its entities issues to the market. One of them is being marketed right now, dozens have been issued in the past.
https://finsight.com/sponsor-9367-upstart-holdings-inc?produ…
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Okay, but the credit rating for these loans, depending on the tranche, were upgraded by Moody’s y’day to Baa2 and A2—dependent on the collateral coverage. I would this this might augur favorably to the market’s acceptance of UPST’s risk profile.
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Moody’s upgrading credit issued year ago is as relevant as to ability to sell a deal today as JPMorgan’s stock rating and price target on our companies today. When buyers are not there for higher risk credit, there is not much you can do. This happens time and time again in the credit markets. It may be a temporary blip, it may be a beginning of buyer strike in these markets. All I’m trying to point out to everyone is this one thing… this company relies on securitization of their loans. They will tell you how these are not their securitizations but that is just to obfuscate the reality that it is Upstart loans that are being securities on a large scale sold by no other than Upstart entities and managed on an ongoing basis by no other than Upstart. It is not much different than when American Express lends money to credit card holders and sells these loans in the securitization markets. The only thing that is different is that AMEX will do it directly, Upstart uses entities like Cross River Bank to accomplish the same. Cross River Bank is a small bank in New Jersey which was one of the first to adopt the “bank as service” model … ie they sell banking services to entities like Upstart and Affirm (yes Affirm uses CRB as well) and so they technically “lend” to consumer, do a bunch of magic called seasoning… ie hold the loans for a bit and then they sell them to an entity controlled by Upstart that securitizes them and sell them to Upstart investors. Sure CRB can keep some loans they like, but let me tell you, there is zero change that CRB would be keeping all these loans on their balance sheet had it not been able to resell these loans into Upstart securitization. They simply do not have a balance sheet big enough to do that.
Yes, its far more complicated than “Upstart charges fees to bank”. That is my main point. Upstart does not just rely on bank appetite for their algorithms… they also rely on securitization markets to sell some of their loans. Anybody who tells you they do is at the very least not being transparent. Just ask them how then they explain all these ABS that have been issued over the past 2 years.
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Sorry, I disagree. Recently changed ratings, up or down, on existing loans / bonds / financings are indeed relevant to the marketability of that Issuer’s upcoming transactions. Ratings impact the size of an Issuer’s ‘market’ (how many and what type of Institutions are able to buy the financing) and a gauge on the Credit’s current risk profile.
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You are correct that it matters in normal market conditions. However, when Fannie Mae cannot place its residual mortgages because of market liquidity (as per article I posted), quality of credit has little to no bearing on ability to issuer to sell these instruments. This does happen, it is not terribly frequent but when it does happen things usually do not end well. Some of us still remember 08.
Regardless, I dont want to turn this into conversation about credit markets and I do not want to scare anyone out of their position. All I’m trying to point out to everyone invested in Upstart is that this is a risk you are taking as investors. If credit markets for securitizations in general dry up, and this lasts for a reasonable period of time, Upstart’s ability to issue new loans will be hampered. Thats all.
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