OREANDA-NEWS. October 06, 2015. A lack of historical performance data on UK marketplace lenders' SME and consumer loans would make it hard to assign a high investment-grade rating to a securitisation of such loans, Fitch Ratings says. Ratings caps may be lower for SME than for consumer deals, because we think there is a greater risk that marketplace lenders may focus on, or struggle to identify, riskier SME borrowers.

Marketplace lenders aim to bypass banks by connecting consumers and small businesses directly with "peer-to-peer" lenders or, increasingly, institutional investors who fund balance-sheet lending.

This need not mean a focus on riskier borrowers. Marketplace lenders have aimed to take consumer loan market share from banks by passing on to borrowers their lower costs resulting from centralised electronic platforms for highly automated loan origination and servicing.

But marketplace lenders charge higher rates for SMEs than high street banks. This would suggest that SME borrowers who turn to marketplace lenders in the UK have been rejected by the large retail banks. Performance to date has been comparable to traditional SME portfolios, but this may not be the case during the next downturn. Comparing the credit risk of market place portfolios with bank portfolios of UK SMEs is challenging, chiefly due to the absence of an effective centralised credit bureau covering individual UK SMEs.

We would cap ratings and assume more volatile asset performance for the same rating than in other UK SME CLOs, unless a marketplace lender can show its portfolio is of comparable credit quality to SME portfolios from UK banks for which we have data covering at least the most recent cycle.

The ratings cap could be higher and performance factor lower for SME deals in jurisdictions, such as Germany, which have reliable centralised SME credit scores, than in the UK.

The cap may also be higher for UK consumer deals. Credit bureaus provide both negative (eg adverse payment history) and positive (eg timely payment of existing loans) information on UK consumers, and marketplace lenders typically enhance bureau scores with their own information and underwriting tools.

The greater challenge for rating UK consumer marketplace ABS is the lack of performance data for meaningful origination volumes. This tends to be only available for two to three years for loans with typical terms of three to five years. This is not sufficient to define a robust performance benchmark, and data from non-marketplace lenders is unlikely to be a good proxy due to the differences in origination channels and possible borrower behaviour.

Marketplace platforms' advanced IT systems may over time permit faster and more sophisticated credit scoring models for consumers and SMEs, if the gap on available information can be bridged. They should also enable more detailed disclosure of loan characteristics and performance to investors.