A San Francisco institutional investment management firm that acquires blue chip loans from online lenders is about to securitize some of these loans for the first time.

What sets 6-year-old Theorem apart from many players is that it uses proprietary machine learning technology to assess the likelihood of default of unsecured online consumer loans available for purchase. .

The asset-backed bond offering, Theorem Funding Trust 2020-1, is a $ 255 million transaction sponsored by the company, which relies on its big data analytics platform to select loans from among platforms of several online lenders.

The first collateral pool will consist solely of loans issued on the LendingClub Corp. platform, according to the Kroll Bond rating agency.

The collateral pool of Theorem 2020-1 contains 24,725 loans with an average balance of $ 17,308. The weighted average coupon is 13.58% and the WA borrower’s FICO is 708.

The note offering includes a $ 199.95 million Class A tranche that carries a preliminary “A” rating from Kroll. As is common for an issuer of asset-backed securities for the first time, the rating is lower than a higher quality rating.

But the deal also takes into account risks unique to the online personal lending industry, such as the asset class’s short history of ABS performance. Additionally, rating agencies are worried about the higher risk of late payments now that so many consumers have lost their jobs during the coronavirus pandemic.

The issuer has included a 34.15% credit enhancement cushion for the senior notes (or the excess loan principal balance above the notional value of the capital stack) as a cushion against any loss in equity. credit in the transaction.

Theorem also markets a $ 28.35 million Class B tranche with an early BBB rating and a $ 27.6 million Class C tranche which Kroll says will receive a final BB- rating.

The proceeds of the Theorem 2020-1 note will be used to finance the acquisition of the loans. The notes themselves will pay investors through the cash flows of the underlying loan receivables.

The pool has a weighted average initial loan term of 51 months, with remaining terms of 36 months. All loans are in progress and have never been modified.

In a pre-sale report, Kroll added that he had higher than usual basic default assumptions for the pool – a range of credit losses of 10.45% to 12.45%). He cited as reason his review of the ongoing ratings of several similar portfolios in the industry.

These reviews include a review of LendingClub’s own offerings. Ten of LendingClub’s 17 tranche ratings in 11 of LendingClub’s securitization transactions remain on watch for possible downgrade of Kroll’s rating, due to economic downturn resulting from the coronavirus outbreak in the United States

Although 13% of Theorem’s total loan portfolio purchased from LendingClub (NYSE: LC) is in a hardship repayment program, the loans selected for the current ABS deal “have shown resilience so far in remaining up-to-date on loan payments ”and none signed up for any of LendingClub’s hardship programs, according to Kroll.

Theorem reduced its entire loan purchases in March at the onset of COVID-19 but resumed acquisitions in May.

The investment management firm oversees $ 1.2 billion in assets on behalf of institutional investors.