Citigroup Inc. is preparing to bundle more than $300 million of loans originated through Prosper Marketplace Inc. into securities as Wall Street helps fuel the online-lending industry, people familiar with the deal said.
Peer-to-peer, or marketplace, lenders once set out to bypass big banks by directly matching borrowers with individuals who wanted to fund them. The loans created on platforms run by Prosper and LendingClub Corp. have since gained popularity on Wall Street as fund managers chase potentially higher returns and bankers seek new assets to package into bonds that can be sold to other yield-starved investors.
The securitization of Prosper loans is set to receive a grade in the A tier from Moody's Investors Service, according to two people with knowledge of the deal. That's the best credit grade so far for bonds backed by consumer loans originated by an online marketplace. It's also at least three levels higher than the Baa3 rating granted to the last major securitization of Prosper loans.
Scott Helfman, a spokesman for Citigroup, and Prosper's Sarah Cain declined to comment.
Making securities out of the debt paves the way for investors, such as pension funds and insurers, to hold the loans. At least 10 securitizations of marketplace-arranged credit have been sold so far, according to Autonomous Research and data compiled by Bloomberg.
Prosper and Citigroup initially aimed for a rating on Moody's Aa tier, but achieving such a high grade would've required sacrificing some of the leverage investors use to amplify returns, according to people familiar with the deal. Lending to the safest borrowers on Prosper's platform without leverage can net investors a return of 5.48 percent at a time when two-year U.S. Treasuries are yielding 0.68 percent.
Peer-to-peer loans still face growing pains as bankers, investors and regulators figure out how work with the debt.
Last month, Prosper said it's planning to charge a fee for investors who want to bundle its loans into bonds so it can offset costs from that process. Extra expenses include spending time with rating companies, which weigh the quality of the loans in bonds, and increased legal risk stemming from protections known as representations and warranties that originators provide to investors.
Investors this year have snapped up securitizations of debt from LendingClub and Prosper. Blue Elephant Capital Management sold a private Prosper deal in March. Student-loan firms Social Finance Inc. and CommonBond Inc. also have sold deals backed by the debt they arranged.