KBRA releases research on the small business loan asset-backed security (ABS) sector, with a special focus on online small business loan ABS, which KBRA defines as deals where the collateral pool consists of assets with an initial receivable balance of $1 million or less. Small businesses saw their revenues drastically curtailed or even ceased permanently due to the COVID-19 pandemic. To alleviate some of the fallout, the U.S. government provided stimulus money through Paycheck Protection Program (PPP) loans. While the PPP program has expired and business activity has increased, issuance of small business ABS has not bounced back to its pre-pandemic levels.
Key Takeaways
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Online lenders gained market share in the small business lending space pre-pandemic, only to lose significant ground during the era of PPP lending. Online lenders have since started to regain some of that lost ground, which may translate to higher ABS volumes.
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Online lenders provide small businesses with various types of credit products, including term loans, lines of credit, and merchant cash advances, all of which have unique attributes that KBRA considers in its credit analysis.
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Given the unique attributes of the credit products, KBRA analyzes small business loan ABS deals using metrics unique to the space, such as right to receive (RTR) amount, performance ratios, and missed payment factor.
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The regulatory landscape for small business lenders continues to evolve, with certain states requiring lenders to furnish consumer-like disclosures, as well as the Consumer Financial Protection Bureau’s (CFPB) signaling it may implement requirements for lenders to collect demographic information on applicants, and the federal government’s investigations into PPP lenders.
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Recent trends in the economy and the potential for recession may dampen demand for credit from small business lenders, which may disrupt future ABS issuance in the space.
About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.