STRUCTURED FINANCE

SECTOR COMMENT23 FEBRUARY 2015

ANALYST CONTACTS

Ariel Weil 33-1-5330-1048VP-Senior Analyst96 Boulevard Haussmannariel.weil@moodys.com

Thorsten Klotz 49-69-70730-734MD-Structured FinanceAn der Welle 5thorsten.klotz@moodys.com

Stefan Augustin 4420-7772-5556VP-Sr Credit OfficerOne Canada Square Canary Wharfstefan.augustin@moodys.com

Igor Zelezetskii 4420-7772-8703VP-Senior AnalystOne Canada Square Canary Wharfigor.zelezetskii@moodys.com

Justyna Kochanska 4420-7772-5615AnalystOne Canada Square Canary Wharfjustyna.kochanska@moodys.com

Ning Loh 4420-7772-5535VP-Sr Credit Officer/Managerning.loh@moodys.com

European ABS

European Peer-To-Peer LendingDevelopments Are Credit Positive forSMEs and ConsumersExecutive SummaryPeer-To-Peer (P2P) lending, also known as marketplace or social lending, is the facilitation ofpersonal lending from one individual or company to another, without the involvement of abank or other traditional financial institutions. Initially, the goal of P2P lending – also calledcrowd-lending, which reflects that purpose – was to allow individuals to lend money to otherindividuals as an alternative to traditional investments. As the industry has evolved, however,a significant portion of the lending has come from financial institutions, professional money

managers and institutional investors.1

Despite the emergence of disintermediated funding mechanisms during the financial crisis,2

P2P lending is one of the few alternative funding mechanisms that is available for typicalSMEs and households alike. P2P lending remains a tiny fraction of overall lending sourcesfor households and SMEs, but one that has been quickly growing. Although Europeansecuritisations are predominantly backed by bank loans, P2P loan securitisations couldexpand the spectrum of potential investors in this alternative funding tool for SMEs andprivate households. While P2P securitisation is not without specific credit risks, operationalset ups may mitigate some of these risks.

European P2P lending platform models vary, but always involve theonline matching of lenders and borrowersP2P lending platforms can fund their loans in several ways, but their main purpose is tomatch cash flows from borrowers with those from lenders through Internet platforms.Specific set ups can vary, but Exhibit 1 shows its simplest form. In practice, however, a bankis often involved in part of the origination process, although the platform generally sets thelending underwriting criteria and pricing policy so the bank’s role is less prominent than intraditional bank lending .

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

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Exhibit 1

A simplified P2P lending structure

Source: Moody's Investors Service

Focus, offers and requirements vary depending on the platforms. P2P lending platforms are created with different purposesand rules, and many differences exist in the geographic or industry focus, type of lenders or borrowers targeted and policy in terms ofloan sizes, as well as credit criteria and operational set up. Some have a social objective, such as some of the non-profit micro-financeplatforms, or platforms designed primarily for families, friends or specific communities; others have a financial objective and competewith commercial lenders.

Exhibit 2 illustrates differences in client focus, loan amounts or interest rates, among a selection of the some of the largest platforms inEurope in terms of cumulative lending volumes, based on publicly available information. The net interest rate to lenders is lower thanthe rate that platforms charge borrowers and both depend on a number of key factors, including loan terms and types, and credit risk.

Exhibit 2

Selected P2P lending platforms show varied features

Start year Country Currency

Cum.lending

(million) Primary Focus Min loan Max loanAverage Net

Rate (lenders)Zopa 2005 UK GBP 747 Individuals 1,000 25,000 5.0%Funding Circle 2010 UK GBP 531 Businesses 5,000 1,000,000 6.3%Ratesetter 2010 UK GBP 511 Individuals 500 25,000 7.5%Auxmoney 2007 Germany EUR 167 Individuals 1,000 20,000 6.7%Prêt d'Union 2011 France EUR 143 Individuals 3,000 40,000 5.5%ThinCats 2011 UK GBP 93 Businesses 50,000 3,000,000 10.8%Zencap 2014 Germany, Spain,

NetherlandsEUR 22 Businesses 10,000 250,000 5.6%

Source: Platform websites, AFME, Moody’s

The majority of European P2P lending goes to SMEs, unlike in the US. In the UK, the largest market in Europe, the P2P lendingindustry has now lent more than £2.1 billion in total, doubling in size since the end of 2013, according to the UK Peer-to-Peer FinanceAssociation (P2PFA). Approximately two-thirds of the net lending flows went to SMEs, and the rest to individuals, based on Q4 2014figures from P2FA. By contrast, in the US, the main target for P2P platforms is prime-consumer loans, with loans taken primarily toconsolidate debt, but also increasingly to finance student debt and medical costs. One of the reasons for this difference is UK SMEs’much higher reliance on bank funding compared with the US, which creates a large potential for alternative funding tools.

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Typical SMEs find few alternatives to bank funding outside P2P lendingThe development of disintermediation tools reflects a converging search for funding diversification from issuers andinvestors demand for higher yield. While bank loans remain the predominant source of corporate and household funding in Europe,

borrowers have sought alternative funding strategies.3 Constrained bank balance sheets and investor appetite for yield have paved theway for disintermediation of corporate funding in Europe, mostly evident in the significant growth in corporate bond issuance in theeuro area. However, while direct capital market funding has become accessible for an increasing number of corporates, it has remainedelusive for most SMEs and households, with few non-bank funding sources available to fund smaller-sized borrowing needs.

National and multinational policy initiatives have encouraged the development of alternative types of funding. AcrossEurope, we have recently observed a general effort, particularly in favour of SMEs, to (1) define the legal framework that would allow

non-bank funding providers, such as special purpose vehicles (SPVs) in Italy,4 to lend both directly and indirectly to SMEs and mid-caps; (2) favour the emergence of unlisted corporate bond markets (e.g., the mini-bond market in Italy, the French Euro PrivatePlacements); (3) support the creation of dedicated corporate/SME debt funds; and (4) extend public guarantees to non-bank funding.

However, most alternative funding tools outside P2P lending cater for the needs of larger SME and mid-caps. So far,disintermediated financing in bond markets and private placements have focused on larger SMEs and mid-caps. For instance, so farapproximately 50% of the mini-bonds issued in Italy have been for corporates with a turnover exceeding €50 million (the larger

SMEs).5 By contrast, P2P lending covers the entire funding spectrum down to the smallest amounts, whether for businesses orindividuals. Some P2P lending platforms can lend amounts in denominations lower than a thousand euros or pounds.

Although securitisation is traditionally backed by bank loans, P2P loans can be securitised to expandthe spectrum of potential investorsAs with any other receivables, P2P loans can be securitised through the sale of the loans to SPVs that issue corresponding securitiessold to investors. With P2P loan securitisations, the specific nature of the assets, as well as that of the originators and servicer, raisesspecific credit-risk considerations, which we summarise below.

A few securitisations of P2P loans have already occurred in the US. Securitisations have come from three marketplace lendingplatforms (Exhibit 3). As the sector matures securitisation may emerge as a more common funding source. The three US marketplaces

whose loans have been securitized are: the Lending Club6 ; Social Finance, Inc (SoFi)7 ; and Prosper.8

Exhibit 3

US Securitizations of marketplace originated loans

* Rated transaction

Source: Moody's Investors Service, Platform websites

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Securitisation could drive more funds towards European P2P lending. By tapping investors in the rated securitisation market, P2Plenders could attract larger investment volumes or lower their funding costs, and hence increase their scale and the amount of lendingthey provide. Investors that are looking for exposures to SMEs or consumers but are prohibited from investing directly in P2P loanswould be able to invest indirectly through securitisation. Securitisations would also attract investors that seek specific risk and returnprofiles not necessarily available in direct P2P loan investments.

Securitisation allows investors to pick and diversify risk through pooling and tranching. P2P lenders can get somediversification over a portfolio of loans, and some platforms actually make them invest in small chunks to different borrowers.However, securitisations of consumer lending or SME loans typically provide their noteholders with diversification across a muchmore granular portfolio with a wider range of borrower types, industries, geographies and maturities. In addition, securitisations aretypically offered in tranches that correspond to different risk levels, irrespective of the underlying credit risk of the collateral, thanks tosubordination from more junior notes and other forms of structural enhancement.

P2P loan securitisation poses specific credit risks9

Although aspects of P2P business models are novel, the main credit drivers of securitisations of P2P loans are similar to those of otherSME and consumer loan securitisations. While P2P loan securitisations potentially have higher risks in some areas when compared withtraditional securitisations, practical arrangements may mitigate some of these risks. We mention selected examples below.

P2P loans have a limited performance history. Forecasting performance of P2P loans is challenging because of limited performancedata. However potential P2P lending securitisation issuers could provide more detail about borrower attributes than SME or consumerloan ABS transactions typically disclose.

Underwriting practices can attract riskier loans. Because P2P companies rely on relatively small data sets compared to moreestablished underwriters to formulate their underwriting criteria, or because of the specific borrowers that they target, the loans theyoriginate may be riskier than similar loans from other originators. To moderate performance risks, however, securitisation issuers mayelect to apply their own loan-selection criteria to choose loans with the most predictable performance.

Loan servicing by P2P companies poses higher operational risks. P2P companies typically are weak financially, owing to theirrelatively small size and short operating histories. However, traditional securitisation issuers have diminished servicing risk by arrangingfor a strong third-party servicer, or by setting up an effective back-up servicing arrangement.

In traditional securitisations, to protect funds that borrowers remit in the event that the originator files for bankruptcy, issuers havedirected borrowers to pay directly to a securitisation account or separate securitisation funds from non-securitisation funds. Some P2Plenders have already put in place similar operational set ups for their regular P2P lending operations, to protect lenders against thepotential insolvency of the platform.

See our operational risk guidelines for further details our considerations for operational risk in securitisations.10

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Moody's Related Research

Sector Comment:

» Peer-to-Peer Loan Securitizations Pose Well Understood Credit Risks, June 2014 (171305)

Special Comments:

» Disintermediation in Europe Continues Even as Banks Achieve More Stable Financial Footing, December 2014 (166618)

» European SME Asset-Backed Securities: A Guide, October 2014 (SF380823)

» Policy Measures Supporting Traditional Bank Lending Will Have Larger Credit Positive Impact on European SMEs than ThoseFavoring Disintermediated Financing, February 2015 (SF396796)

» Peer-to-Peer Lending: Prospects and Pitfalls, January 2015 (177574)

Cross Sector Rating Methodology:

» Global Structured Finance Operational Risk Guidelines, June 2013 (SF328657)

Methodology:

» Moody's Approach to Rating Consumer Loan-Backed ABS, September 2014 (SF368520)

Rating Action:

» Moody's assigns definitive ratings to CCOLT securitization of consumer marketplace loans, February 2015

Pre-Sale Reports:

» Consumer Credit Origination Loan Trust 2015-1, January 2015 (SF393358)

» SoFi Professional Loan Program 2015-A LLC, January 2015 (SF394345)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

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Endnotes1 Note that in this piece, we use P2P or marketplace lending indifferently as is standard market practice.

2 See: “ Disintermediation in Europe Continues Even as Banks Achieve More Stable Financial Footing ”, Special Comment, December 2014.

3 See: “ Disintermediation in Europe Continues Even as Banks Achieve More Stable Financial Footing ”, Special Comment, December 2014.

4 See “ New Government Initiatives to Support the Italian Economy are credit positive for Italian Securitizations ”, Credit Insight, October 2014.

5 See: Policy Measures Supporting Traditional Bank Lending Will Have Larger Credit Positive Impact on European SMEs than Those FavoringDisintermediated Financing , Special Comment, 16 February 2015.

6 See “ Eaglewood Capital Management Upsizes Securitization ”, 13 May 2014.

7 See SoFi’s press release and our press release: “ Moody's assigns definitive ratings to SoFi Professional Loan Program 2014-B LLC ”, 11 November 2014. Butnote that as we explained, while SoFi has frequently been referred to as a “peer–to-peer” lender because initially alumni provided its lending capital, thecompany’s present business model is similar to that of a typical consumer lender.

8 See “ Consumer Credit Origination Loan Trust 2015-1 ”, Pre-Sale Report, 28 January 2015 and “ Moody's assigns definitive ratings to CCOLT securitizationof consumer marketplace loans ”, 9 February 2015.

9 See: Peer-to-Peer Loan Securitizations Pose Well Understood Credit Risks , Sector Comment, June 2014

10 See “ Global Structured Finance Operational Risk Guidelines” . Cross Sector Rating Methodology, June 2013.

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GRADUATERonald Kromer