Upstart

Investment Analysis Clubs Where Angels Fear to Tread
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Now that I have a full, oversized position I thought maybe I should learn something about the company. :slight_smile: 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

KC

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Under $100!

POMO.

But, I could buy at $97.50, sell the Friday call for $3 and have net cost of $94.50…

KC

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I also been trying to wrap my head around it. You seem to be on proper track. I guess this is what Saul meant by too complicated.

I am just going to keep investing on the results of the business. Maybe dumb and blind on my part but they obviously know what they are doing it seems by the revenue and profits.

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These ABS’s are a murky lot, at least for me. UNI “sponsors” them. It has Variable Interest Entities that have certain involvement, mostly with regard to regulatory requirements for ABS’s. I have written to UPST IR, asking “what entity owns the loans that are included in the ABS’s pool of loans”. Some entity owns the loans, has them on its balance sheet, and is collecting (via UPST, the servicer) the principal and interest(18%). Big spread, but the Net Cumulative Loss is a big percentage, too.

Interesting fact: Upstart Holdings, Inc (trades as UPST) originated from Upstart Networks, Inc. (UNI). UNI was incorporated in 2012 and had this platform which connected graduates (or would-be graduates, i.e., students) and investors for student loans. The loans were secured by income share agreement held by a series trust 2012. This business was terminated in favor of generalized personal loans using the same AI platform that identified students who would complete degree and obtain substantial employment and income.

UHI owns UNI which is 100% of UHI’s assets. UNI had 3 trusts that held loans, UWT, ULT, and ULT 2. UWT was being dissolved at the time of the Nov 5 2020 SEC application. These trusts held loans that UHI believed could neither be resold to either passthrough investors nor securitized.

Fact 2: Whereas the weighted average interest on the loans being securitized has remained in the 18% range, the interest paid out to the investors in the AB’s has increased from 2-ish percent to 4-ish percent. As interest rates rise, the ABS investors will demand increasing % return.

AND then there is the KBRA report which you have to register (free) to get. But MF has a much simplified (and less informative) interpretation thereof: https://www.fool.com/investing/2022/03/31/is-upstarts-credit… . I note the “deteriorating” two issuances are for loans that originated in the “fraud attack”. So that might be a factor in the net cumulative loss.

Enough for now.

Is $88.88 in the cards?

KC

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Bought more at $93.51, and placed a good 'til order at my old favorite, $88.88.

Pricing the April 15 calls…it says April 14??? Anyway, $100 strike is around $3.70 to $3.80. That is about 10% if called. Not sure. The last two buys are definitely trading blocks. I am about 50% cash and nearly 50% UPST plus a few shares of other stuff.

KC

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I hate UPST so much right now. I never time UPST correctly. I think I may have done $80 to $96 and exited once, but mostly I get in too early and sell too early. Grrr.

Dreamer