I’ll replay to multiple posts here.
- This seems to keep coming up, despite my having the impression that this has been long since explained that they are intentionally opening the market to more people with lower scores, so one would expect the loss to go up, but that this is more than offset by the increased revenue from granting more loans.
I noted that I wasn’t speaking to this. As I understand it, what I brought up is distinct from this prior, and resolved, concern.
- However, I am not convinced that this number, taken in isolation, is that significant. Since, as tamhas suggested, Upstart is also increasing the number of potential borrowers, and the loaners value these new people as potential long-term customers.
KBRA takes all this into account when the project their “expected CNL”. They are giving us this column so we can compare apples to apples.
- Is this a pre-sale report, how can we know actual loss vs. expected loss now?
This pre-sale report for tranche 2022-1 includes current data on past tranches.
- A piece of context that is missing is what cumulative net loss rate Upstart expected to achieve?
This would be something that Upstart could provide but since KBRA produces this report, and for objectivity, KBRA needs to produce what they expect the loss to be. What gives the report merit is the 3rd party opinion.
- Because Expected CNL metric is computed by KBRA from past Upstart trusts, it was neither a plus or minus for me on Upstart as an investment. If anything, actual CNL in the period being close to Expected CNL aggregated from past Upstart pass through trust’s performances seems to be a good sign? It sounds like the performances of current trusts is trending in the same direction as past trusts. Happy to hear other interpretations.
I think the jury is still out on this. KBRA has been giving far more comprehensive data in recent months. Also, we know that Upstart’s tranches over performed because of gov’t stimulus and so I wouldn’t find confidence in looking too far back for data on how these tranches have progressed historically.
It’s been reported via @stockmarketnerd that KBRA started conservative in their loss projection but have loosed up their CNL projections because Upstart finally had enough loan data (think duration of various tranches/securitizations). What KBRA thinks should happen is based on Upstarts historical performance and isn’t “conservative” like in the past. IF, it’s trending above that level now, meaning in more recent tranches, then it’s under performing what they believe is Upstarts model. How much worse can it perform and still be better than a FICO based method? I don’t know but it raises concerns.
I do believe this is something that deserves more understanding because frequently there is a lot of nuance in these details.
- I have reviewed the 2022-ST3 Pre-Sale report dated April 5, 2022. It continues to show CNL’s that are elevated compared to what is expected at this point. I’ve taken the last 3 snapshots (02/04/22, 03/23/22 and 04/05/22) and plotted them against each other. I’m only looking at relatively recent tranches because we know that Upstart performed well during the pandemic when the gov’t stimulus helped the tranches over perform. Upstart has noted this several times. So I have focused on the more recent for this reason and others.
In the “ST” tranches everything is doing worse than expected BUT that margin has narrowed. AND, these are new tranches that have months not years of performance so it’s early. It is still between 9%-167% worse than expected. Let me describe what that means. I took the CNL and divided by ECNL. 0.8% / 0.3% = 167%.
The non “ST” tranches have done much better. None of them are doing worse than expected. But their over performance has narrowed just a tad.
In discussing this with others it sounds like we shouldn’t draw hard conclusions yet BUT we should certainly monitor this. The trend is still above expectation and that’s negative. The positive is that the under performance has narrowed between 02/04 and 04/05.
I haven’t taken the time to understand if there is a difference between ST and non ST tranches. If anyone knows that would be potentially insightful.
- Also, and I’d give credit to the individual but not sure if they want to be cited, it was told to me that the “two columns…to focus the most are the ‘Initial Base Case Loss Projects’ and ‘Current [KBRA Base Case Loss Projection]’.” Compare those two and keep an eye on them. You don’t want them to increase the loss projection and hopefully decrease it as has happened for multiple tranches.
What the CNL v ECNL shows is an early trend and if it stays elevated, without trending back to expectation, would likely lead to a change in the Current KBRA Base Case Loss Projection. That would be a big negative for at least that tranche and raise questions about why that happened.
I really like Upstart and though I’ve stepped out of the investment for the time being I am watching it closely because it has many characteristics that I like in an investment. A strong mngt team, a huge TAM and hopefully a large moat. If that moat can be confirmed, and assuming the economic backdrop is stable, then I’m back in.