Default warning for loan portfolio issued by Prospa

A small business loan securitisation with borrowers from the food, drinks and retail industries could suffer a wave of defaults, says Moody’s.

Prospa’s joint CEOs Beau Bertoli, left and Greg Moshal. Picture: John Feder

An $80 million small business loan securitisation packed with borrowers from the food, drinks and retail industries could suffer a wave of defaults that wipe out even the highest-rated note holders in the bond, according to global ratings agency Moody’s.

The small business loan portfolio issued by ASX-listed lender Prospa, the Trust Series 2018-1, holds a pile of “short-term, high-yielding, largely unsecured loans”, a third of which were doled out to retail industries “severely affected” by the government economic shutdown.

"Given the transaction's significant exposure to Australian small business highly impacted by the ongoing economic disruptions and the unsecured nature of the loans, Moody's expects delinquency and default rates for the portfolio to rise to significantly higher levels than its closing assumptions,” said Moody’s structured finance group senior analyst Alena Chen.

Moody’s said it was preparing to downgrade the securitisation, in a sign of the start of further adverse action in the high-yield credit market and loan securitisation market.

Corporate bonds have been swamped by selling amid the coronavirus pandemic and following the oil price crash, amid fears of a widespread default event. The liquidation out of riskier assets has frozen credit markets and the Australian Office of Financial Management has had to step into the breach to keep issuance markets functioning.

"While the government relief measures will mitigate some of the impact of the coronavirus outbreak on Australian businesses, smaller and more highly indebted businesses, especially in tourism and hospitality, may not have the financial resources to weather the current disruptions,” Ms Chen said.

Ms Chen said class A note holders — responsible for $65m of the bond — were in a more “resilient” position compared to less senior class B and class C note holders. In the event of a default, class A note holders are first in line to be paid.

"However, given the uncertainty regarding future small business loan performance, in our view even a very high default scenario cannot be ruled out,” Ms Chen said.

Shares in Prospa have sunk 75 per cent since late February, and are now 86 per cent lower than where the stock was floated in mid 2019.

The company offers loans to small business between $5,000 and $300,000 in value, with loan applications in under 10 minutes and funding doled out within 24 hours.

There is also no loan security, or collateral, for loans up to $100,000.

Prospa’s Trust Series 2018-1 has enough cash on hand to survive four months without any payments from its borrowers coming in.

The banking sector has given small business borrowers the ability to defer payments for up to six months if they are experiencing hardship.

In an update to shareholders in late March, Prospa said there would “likely to be an unknown adverse impact” on loan originations in light of the COVID-19 crisis and withdrew its guidance.

The company said it had $485m on hand in third party facilities and had $102.5m in cash and cash equivalents, and its debt covenants were not tied to its share price or earnings. Prospa said it had no corporate debt.