NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Citi Held of Asset Issuance 2015-PM3 (CHAI 2015-PM3), which is backed by marketplace loans originated via the Prosper platform:
--Class A affirmed at 'A+sf'; Outlook Stable;
--Class B affirmed at 'BBB+sf; Outlook Stable;
--Class C affirmed at 'BB-sf'; Outlook revised to Negative from Stable.
The affirmations above reflect growth to date in hard credit enhancement (CE) available to the notes. The Outlook revision on the class C notes is driven by weaker than expected trust performance and slow CE build expected over the next year, as the transaction has reached its target overcollateralization (OC) release level of 16.5%. Fitch revised its lifetime gross default expectation for the initial pool from 11% at deal closing to 13.6%. The rating on the class C notes is likely to be affirmed again should performance continue as expected, but is exposed to further deterioration, and in particular back-loaded losses, due to the CNL trigger structure.
KEY RATING DRIVERS
Collateral Quality: The 2015-PM3 trust pool consists of 100% unsecured fixed rate consumer fully amortizing loans that are either 36- or 60-month loans terms originated and serviced on Prosper's marketplace online lending platform. Fitch's gross default assumption for life of the collateral is 13.6%, which translates to 15.9% of the current pool given delinquencies and the chargeoff lag. Fitch assumes a base case recovery rate of 7.5%. At the 'Asf' level, a default multiple of 2.8x and a recovery haircut of 30% are applied.
CE and Liquidity Support: Hard CE for class A, B, and C is 70.1%, 39.5%, and 17.3%, respectively. Liquidity support is provided by a non-declining reserve account, which is currently 0.77% of the pool balance. While subordination available to the class A and B notes will grow as the transaction pays down, OC is at its target release level of 16.5%, and will not grow until it hits its floor of 2% of the initial balance ($5.98 million).
Untested Performance Through a Full Economic Cycle: Loans originated and serviced via online platforms such as Prosper's do not yet have performance history through a recessionary environment. Further, given that the underlying consumer loans are unsecured and primarily intended for debt consolidation, Fitch would expect borrowers to treat paying down these loans with lower priority than other borrowings such as an auto loan or mortgage. As such, the pool could experience especially elevated default frequency in an economic downturn. Fitch placed a rating cap on this transaction of 'Asf' category.
Servicing Capabilities: Prosper will service all of the loans in the 2015-PM3 trust, and Citibank, N.A. will act as the backup servicer. Fitch considers the servicing operations of Prosper of consumer loans to be acceptable and Citibank, as a backup servicer, to be effective.
Unanticipated increases in the frequency of defaults or charge-offs on borrower accounts could produce loss levels higher than the base case and would likely result in declines of CE and remaining loss coverage levels available to the notes. Decreased CE may make certain ratings on the notes susceptible to potential negative rating actions, depending on the extent of the decline in coverage.
Fitch conducts sensitivity analysis by stressing a transaction's initial base case charge-off assumption by an additional 10% and additional 25%, and examining the rating implications. The increases of the base case charge-offs are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration of a transaction's performance.
During the sensitivity analysis, Fitch examines the magnitude of the multiplier compression by projecting the expected cash flows and loss coverage levels over the life of investments under higher than the initial base case charge-off assumptions. Fitch models cash flows with the revised charge-off estimates while holding constant all other modelling assumptions.
Under the 10% stress, the senior notes would retain their current ratings, while the ratings on the class B fall one notch and the C notes would be downgraded to 'Bsf'. Under the 25% stress, the class A would still retain their current ratings, while the class B notes would fall to 'BBB-sf' and the class C notes would be downgraded to 'B-sf'.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
Additional information is available at www.fitchratings.com.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01
Criteria for Interest Rate Stresses in Structured Finance Transactions
and Covered Bonds (pub. 26 Oct 2016)
Global Consumer ABS Rating Criteria (pub. 19 Aug 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Dodd-Frank Rating Information Disclosure Form
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