Peer-to-peer loans, bankable.

Peer-to-peer lending matches lenders and borrowers on a digital platform, bypassing traditional banks. Platforms offer lower rates to borrowers and higher yields than comparable fixed-income assets, and institutional interest has grown alongside them.

Institutional investors face one major obstacle to investing in this loan segment. The loan principal is often too small in relation to the investment size, which burdens the loan selection process. That translates into higher deployment time and higher costs. Lack of track record and low fungibility compound it.

Securitizing a basket of loans solves the selection problem. An independent Swiss asset manager sought a solution flexible enough to actively manage a portfolio of Swiss P2P consumer loans on behalf of clients. After consulting several banking institutions it became clear that securitizing P2P loans conflicts with the business model of traditional banks, which leans towards direct credit, and that the terms those institutions dictated did not offer an appropriate framework for the strategy.

Through a flexible, bank-independent issuance vehicle, the asset manager implemented the strategy and issued certificates to a network of institutional investors, with transparency and no bank balance-sheet risk.

• Attractive yields. Higher yields than comparable fixed-income assets in a low-rate environment.
• Steady cash flows. Reinvestment opportunity, with potential partial repayment of loans before maturity.
• Diversification, cost-effectively. Portfolio diversification through loan securitization rather than loan-by-loan selection.
• Low duration. P2P loans run one to five years, which reduces interest-rate risk. Rates are set by the originators, acting like a rating agency.