Kroll Bond Rating Agency has downgraded six tranches of a Funding Circle US securitisation, citing higher-than-expected borrower defaults as a result of the coronavirus crisis.
The rating agency affirmed the transaction’s Class A notes, but downgraded its six Class B, Class C, and Class D notes, after placing them on watch downgrade at the end of March 2020.
Kroll said that “collateral performance to date has deteriorated” and forecast an expected loss of $11m (£8.34m) on the Class D notes.
The rating affirmation on the Class A note was said to relate to a note which has experienced increased credit enhancement resulting from amortization.
Funding Circle US’s cumulative net losses have risen to 19.55 per cent, Kroll said, higher than the rating agency’s previous projected losses of 11.48 per cent.
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This is due to higher default rates and delinquencies caused by the economic impact of the Covid-19 pandemic and state-wide lockdowns in the second quarter of the year.
“The small business sector continues to be impacted by virus containment measures and the broader economic impact of Covid-19,” the Kroll report said.
“In response to Covid-19, Funding Circle increased their collection capabilities through improved technology and additional collectors.”
Kroll pointed out that Funding Circle has ceased originating loans like those in the downgraded securitisation, and intends to restart its core US lending business soon.
Since March, the platform has approved approximately $595m in Paycheck Protection Program (PPP) applications and originated approximately $388m in PPP loans.
“As the Covid-19 situation is still evolving, recent performance of the Funding Circle portfolio does indicate a decline in early stage delinquencies from the peak in May,” Kroll added.
“Though early stage delinquencies have shown improvement, there remains a high balance of delinquent loans which we believe will lead to a high level of losses over the next few periods.”
The rating agency added that all as of July 2020, all of the transactions’ securities have continued to receive timely interest and none have been subjected to write-downs or principal losses.
“While Funding Circle offers forbearance and extensions to borrower’s impacted by Covid-19, the loans continue to age in their respective delinquency categories and are considered defaulted loans, according to the deal definitions, when any payment is more than 90 days past due,” said Kroll.
“As a result, these delinquencies include any loan 30-90 days past due, including those that are in a forbearance program. Though these loans are considered defaulted loans per the transaction documents, the servicer continues collection efforts on these loans.
“Some of these business may have secured funding through various government stimulus packages and intend to continue operating, potentially giving these loans a different recovery value and timing than observed in the past.”