Tough road ahead for U.S. fintech lenders as default risk rises

OneMain Holdings

13/01/2023 22:17

By Matt Tracy
       Jan 13 (Reuters) - U.S. fintech companies that lend to
consumers with impaired credit scores face a tough year as
rising defaults and interest rates limit the companies' access
to cost-effective debt financing.
   "We expect profitability to be depressed for many firms and
funding conditions to remain challenging, as increased funding
costs brought on by rising interest rates will not be offset by
increases in revenue," Moody's said in a report on Thursday. It
revised its outlook for such lenders to negative from stable. 
    During the pandemic, many fintech startups emerged as
lenders to borrowers with imperfect credit. Using artificial
intelligence, their screening tools were more likely to
recommend these loan requests than traditional lenders'. 
    Lenders like Pagaya Technologies  PGY.O  and OneMain
Holdings  OMF.N  financed themselves by pooling the subprime
consumer loans into asset-backed securities, or ABS, which they
sold to Wall Street investors.
    Pagaya declined to comment, while OneMain did not
immediately respond to a request for comment.
    The lenders' ABS were among bonds that raised $36 billion in
2021 and 2022 by pooling consumer and marketplace loans,
according to FinSight data. 
    Investors were comfortable buying the bonds as U.S.
government stimulus ensured consumers had the money to meet
their loan payments.
    But as that stimulus faded, loan losses started rising,
Moody’s said. Inflation has hit subprime consumers who spend
most of their income on rent, groceries and gasoline, and they
are struggling to meet interest payments on personal loans.
    The losses on subprime loans that are assumed to be
uncollectible debt or charge-offs rose on average by some 20% by
the third quarter of 2022 from 2019 levels, said Moody's. 
    Investors in ABS are demanding higher yields for new deals
or avoiding them altogether. Funding costs have also risen by as
much as 200 basis points in the last few months compared to
mid-2022, based on FinSight data.
    But the lenders' securities have not lost investor appeal as
yet, said Theresa O’Neill, ABS strategist at BofA Securities. 
    She said a widening of credit spreads and a deal structure
that lowered investor risk through more credit enhancements 
would continue to ensure interest. 
    "We’re early in the game for what will happen in a recession
or an economic slowdown for a lot of these lenders,” said Tom
Capasse, founder and managing partner of Waterfall Asset
Management.
 (Reporting by Matt Tracy; editing by Shankar Ramakrishnan and
Cynthia Osterman)
 ((Shankar.Ramakrishnan@thomsonreuters.com;))