Now that I have a full, oversized position I thought maybe I should learn something about the company. Over at Saul’s, this issue of KBRA ratings and data on the Upstart asset backed securities was once again raised. I read the KRBA report(s) and googled a bunch of technical terms and did some head scratching. Down the rabbit hole I went. I passed through the MF premium board on UPST. I found it to be a waste land of “why is UPST up?” and “why is UPST down today” and “why is UPST down today again?”
I found an application to the SEC for Upstart to be classified as a holding company and not and investment company. Interesting stuff I didn’t know, that was probably in the S-1 that I haven’t read. Anyway, what I was/am trying to figure out is the structure and hierarchy and details of the ABS, and whether there is any issue with the later issuances. Here are some details of the latest ABS issuance. I’m rounding off numbers 'cause I’m lazy. I’m not going to do a table because I want to 'splain some stuff.
The “pool balance” is about $504 million of loans. The general drift of characteristics is smaller loan size, higher interest rate and lower FICO. What they call the weighted average coupon is 18.77%. That is finance-speak for interest the borrower is paying. What the buyers of the ABS’s are receiving as interest is 4.14% (the weighted average interest of the three classes of notes, I guess). So these personal loans that average 18.77% interest are bundled and securitized and sold off as investment grade for 4.14%. Neat. But, the face value of the notes sold to investors is only $435 million. That other $69 million of loans in the pool is “over collateralization”. The targeted O/C (which I guess is over collateralization) is 9% which does not compute with my math skills. But…
So who are the parties to all this? Well, the borrowers who on average borrow $7,664; the loan originators (Cross River Bank and FinWise Band) who collect 8% origination fee before the balance is given to borrowers; Upstart Securitization Trust, who/whatever that is, which issues the notes and uses proceeds to fund the “reserve account” and to purchase the loans from Goldman Sachs; Goldman Sachs Asset Backed Securities Corp (how they got the loans? Upstart would have purchased them from the banks and sold them to GS, I guess).
Now then, the secret sauce is: Credit enhancement is comprised of overcollateralization, subordination of the junior note classes, a non-declining cash reserve account and excess spread. Excess spread is, afaik, the difference between the 18.77% and the 4.14%, and the overcollateralization is the difference between the $504 million face value of loans in the pool and the $435 included in the notes sold to investors.
And out of all this, UPST gets… nothing (other than 0.5% servicing fee that they get anyway).
So if UPST gets no revenue from this, who cares? I do, because these ABS securities are the next-to-last source of capital which ultimately flows back to the originating banks to fund the ever increasing volume of loans. At least this is how I see it. So, is there a problem with these latest issuances?
I don’t know. Maybe. Possibly. I’m still thinking and reading. Does anyone see any error in my understanding of the ABS process. What does Goldman Sachs receive, and from whom? It would be from Upstart Holdings or Upstart Securitization Trust…? They ain’t doing it for free.
More later. It is 9:30 and UPST was as low as $100.29 premarket. Bye