Research: Rating Action: Moody’s Provides Preliminary Ratings for Upstart Securitization Trust 2022-4


Approximately $179 million in rated asset-backed securities

New York, August 10, 2022 – Moody’s Investors Service (“Moody’s”) has assigned preliminary ratings to the notes to be issued by Upstart Securitization Trust 2022-4 (“UPST 2022-4”), the fourth personal loan securitization the UPST shelf this year. The collateral for UPST 2022-4 consists of unsecured consumer installment loans originated by Cross River Bank, a New Jersey State-licensed commercial bank, and FinWise Bank, a Utah State-licensed commercial bank, each of which is the Upstart program to use. Upstart Network, Inc. (“Upstart”) will act as administrator of the loans.

The full rating actions are as follows:

Issuer: Upstart Securitization Trust 2022-4

Grade A grades assigned (P)A3 (sf)

Class B grades assigned (P)Ba2 (sf)

REASONS FOR VALUATION

The ratings are based on the quality of the underlying collateral and its expected performance, the strength of the capital structure and the rapid payback of the assets, Upstart’s experience and expertise as a service provider, and the security agreement with Wilmington Trust, National Association (“Wilmington”) and its designated sub-agent Systems & Services Technologies, Inc. (unrated S&ST).

Moody’s mean cumulative net loss expectancy for the 2022-4 pool is 16.9% and the stressed loss is 58.0%. Moody’s based its cumulative net loss expectation on an analysis of the credit quality of the underlying collateral; historical performance of similar collateral, including securitization performance and managed portfolio performance; Upstart’s ability to perform its maintenance functions; the ability of Wilmington and its sub-agent to perform the backup maintenance functions; and current expectations for the macroeconomic environment over the life of the transaction.

To close, the Class A and Class B debt are expected to benefit from 32.5% and 20.5% of the hard credit enhancement, respectively. Hard credit enhancement for the Notes consists of a combination of over-collateralization, a non-declining reserve account and subordination for the Class A Notes. The Notes may also benefit from excessive spread.

The social risk for this transaction is high. Marketplace lenders have attracted an increased level of regulatory attention at the state and federal levels. Therefore, regulatory and borrower-side challenges to marketplace lenders and their third-party lending partners regarding true lender status and interest rate export could result in some of Upstart’s loans being deemed void or unenforceable in whole or in part.

BASIC METHODOLOGY

The main methodology used in these ratings was Moody’s Approach to Rating Consumer Loan-Backed ABS, published July 2022 and available at https://ratings.moodys.com/api/rmc-documents/390487. Alternatively, you can check out the Assessment Methods page https://ratings.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of ratings:

High

Moody’s could upgrade the debt if the level of credit enhancement is consistent with higher ratings given current expectations of portfolio losses. In sequential payment structures such as that in this transaction, credit enhancement as a percentage of the collateral balance increases as collections repays senior debt obligations. Moody’s pool loss expectation could decrease due to better-than-expected improvements in the economy, changes in service practices that improve collections, or refinancing opportunities that result in prepayments. In addition, increased certainty as to the legal and regulatory risks of this transaction could result in lower loss volatility assumptions and therefore an upgrade of the Notes.

down

Moody’s could downgrade the debt securities’ ratings if pool losses exceed its expectations and the level of credit enhancement is consistent with lower ratings. Credit enhancement could decline if the excess spread is insufficient to cover losses in a given month. For example, Moody’s pool loss expectation may increase due to a deterioration in performance due to a downturn in the US economy, poor service performance, error on the part of the transaction parties, inadequate transaction execution or fraud. In addition, the legal and regulatory risks arising from the banking partner model used by Upstart could expose the pool to increased losses.

LEGAL DISCLOSURES

For more details on Moody’s key rating assumptions and sensitivity analyses, see the methodology assumptions and sensitivity to assumptions sections of the disclosure document. For Moody’s rating symbols and definitions, see https://ratings.moodys.com/rating-definitions.

For more information on the representations and warranties and enforcement mechanisms available to investors, please visit https://ratings.moodys.com/documents/PBS_1337175.

The analysis includes an assessment of collateral characteristics and performance to determine expected collateral loss or a range of expected collateral losses or cash flows on the rated instruments. In a second step, Moody’s estimates expected collateral losses, or cash flows, using a quantitative tool that takes into account credit enhancements, loss allocations and other structural characteristics to derive expected loss for each rated instrument.

Moody’s quantitative analysis includes an assessment of scenarios affecting stress factors that contribute to ratings sensitivity and considers the likelihood of severe collateral losses or impaired cash flows. Moody’s weights the impact on the rated instruments based on its assumptions about the likelihood of events occurring in such scenarios.

For ratings provided for a program, series, category/class of debt instrument, or security, this announcement contains certain regulatory disclosures with respect to each rating of a subsequently issued bond or debenture of the same series, category/class of instrument, security or under a program for which ratings are derived solely from existing ratings in accordance with Moody’s rating practice. For ratings provided by a support provider, this notice contains certain regulatory disclosures in relation to the support provider’s credit rating action and in relation to each individual credit rating action for securities that derive their credit ratings from the support provider’s creditworthiness. For preliminary ratings, this announcement contains certain regulatory disclosures in relation to the preliminary rating assigned and in relation to a final rating that may be assigned after the final issuance of the Debt Instruments, in each case where the transaction structure and terms have not changed before issuing the final rating in a way that would have affected the rating. For more information, see the issuer’s issuer/deal page https://ratings.moodys.com.

For any affected security or rated entity that receives direct credit support from the primary entity(ies) of that rating action and whose ratings may change as a result of that rating action, the related regulatory disclosures are those of the guarantor entity. Exceptions to this approach exist for the following disclosures where applicable to the jurisdiction: Benefits, Disclosures to Reviewed Entities, Disclosures by Reviewed Entities.

The ratings have been disclosed to the rated entity or its nominated representative(s) and are issued without any changes resulting from this disclosure.

These reviews are requested. Please see Moody’s policy on the naming and assignment of unsolicited credit ratings, which is available on Moody’s website https://ratings.moodys.com.

The regulatory disclosures contained in this press release relate to the credit rating and, where applicable, the associated rating outlook or rating summary.

For Moody’s general principles for assessing environmental, social and governance (ESG) risk in our credit analysis, see https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the rating action(s) announced and described above.

The global scale credit rating in this rating communication was prepared by an affiliate of Moody’s outside the EU and is confirmed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Article 4(3) of the rating agency Regulation (EC) No. 1060/2009 on credit rating agencies. For more information on EU endorsement status and the Moody’s office that issued the rating, go to https://ratings.moodys.com.

The Global Scale Credit Rating in this rating communication has been issued by one of Moody’s subsidiaries outside the UK and is certified by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA in accordance with UK rating agency laws . For more information on UK endorsement status and the Moody’s office that provided the credit rating go to https://ratings.moodys.com.

Please see https://ratings.moodys.com for updates on changes by Moody’s lead rating analyst and the rating entity.

Please see the issuer/deal page at https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Selven Veeraragoo
Vice President – Lead Analyst
Structured Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, New York 10007
United States of America
JOURNALISTS: 1 212 553 0376
Customer Service: 1.212.553.1653

Pedro Sancholuz Ruda
VP – Senior Loan Officer
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Customer Service: 1.212.553.1653

Approving office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, New York 10007
United States of America
JOURNALISTS: 1 212 553 0376
Customer Service: 1.212.553.1653

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