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Progreso repackages high risk loans


NEW YORK, July 11 (IFR) - Tiny California-based Progreso Financiero surprised many in the ABS market in June by selling its second securitization based on loans that have a relatively high risk of not being repaid. The niche lender, which targets Hispanics with little or no credit history, underpinned the deal with loans that average just US$1,600 but carry at least a 30% interest rate. Despite what might seem to be shaky collateral, however, Progreso sold the unrated US$102m consumer loan securitization to a wide range of buyers, CFO Jonathan Coblentz told IFR. Led by Jefferies, the deal was sold to institutional investors, banks, money managers and hedge funds, some of whom, he said, had also bought Progreso's first trade. The risks for investors are plentiful, of course, not least because the debt is unsecured; there is no collateral available to seize if borrowers fail to repay. Even so, Progreso sold the A and B classes of the new deal with 3.5% and 6% coupons respectively - even cheaper than the 4% and 8% on its first US$137m trade a year ago, Coblentz said."One reason we have repeat investors is that people were able to look at the track record of the first deal, and it was better than projected," he said in an interview. To help offset the risks to buyers of the bonds, the issuer retained a subordinate 15% slice of each trade.

FILLING THE VOID Like similar firms OnDeck and Social Finance, Progreso is trying to fill spaces in the consumer loan market abandoned by banks in the wake of new regulations since the financial crisis. Even as those traditional lenders have pulled back, however, lending to riskier customers in the United States since the crisis has again been on the rise. According to Equifax, six out of 10 US consumer finance loans now go to subprime or other higher risk borrowers.

That spells opportunity for young companies like Progreso, which was founded by Coblentz, a 14-year veteran of ABS banking at Goldman Sachs and Credit Suisse, in 2005. Licensed to operate in California, Texas and Illinois, Progreso typically makes loans with a 17-month maturity at an eye-watering interest rate of 30%. And some customers likely are on the hook for a great deal more than that. In California, for example, Progreso is part of a pilot program to help borrowers gain access to small loans, said Alana Golden of the California Department of Business Oversight.

In exchange, the company is exempt from state usury laws and other limits on the fees that banks can charge for loans. One ABS banker, who was not involved in selling the new trade and asked not to be named, said at least some customers having trouble paying would simply refinance the loans. And that could mean a new origination fee, late fee, interest charges and other costs - all of which could make it even more unlikely for any loan not to be repaid, and thus increase the risk for investors in the securitizations. Because it is not a public company, Progreso is not required to make public certain information, though Coblentz said the percentage of failed loans was in the single digits. Several ABS bankers said this was a surprisingly low figure, especially as much of Progreso's customer base can simply leave the country, and the loans, behind."It's not a customer pays or doesn't," one of them said. "It's probably more like kicking the can down the road."But Coblentz insists Progreso is seeking quality borrowers, saying it aims to more than double its consumer loan business to one million customers by 2016, and to diversify into auto and small business loans in three to five years."We only want to lend to customers who we believe can repay," he said.

Seven tips for crunching march madness math


More than $9 billion is expected to be wagered on March Madness, the period this month when the annual NCAA college basketball tournament is held, according to the American Gaming Association. That means your co-workers, neighbors and 70 million other people will all be running their mouths over who will win the tournament as they fill out their brackets. With more at stake in gambling wins than for the Super Bowl, you might want to turn to computer science professors for help. After all, filling out your betting sheet is like mining one gigantic dataset that goes back decades. Buried in those numbers are valuable clues about who is going to come out on top. Here is the advice of a few of the nation's top number crunchers about how to assemble a winning office this site THE WINNING PERCENTAGES If a team has been racking up an amazing record by beating weaker teams, that does not tell you a whole lot. What you really want to know is how they perform against stronger teams, because in the tournament, that is all they will be facing."You have to be doing really well against good teams. That's why we had some doubts about Kentucky last year," says Tim Chartier, an associate professor of math and computer science at North Carolina's Davidson College, who has been running March Madness models with his math students since 2009. At his site (marchmathness.davidson.edu), fans can brew their own custom-made rankings. Indeed, the previously undefeated Wildcats shockingly lost to the Wisconsin Badgers in 2015's Final Four. GO EASY ON UNDERDOGS Everyone loves a Cinderella story, but do not bet on it, according to University of Illinois at Urbana-Champaign computer science professor Sheldon Jacobson, whose site (bracketodds.cs.illinois.edu) also helps people compile picks. Lowly teams ranked #13, #14, #15 or #16 average between one and two wins a year in the first round, so if you want to take a flyer on one or two of them, feel free. "But three is pushing it," he advises.

SEEDING PREDICTS PERFORMANCE Amazingly, Jacobson does not even care about which particular teams will be stepping onto the basketball court. All he cares about is seeding, because to a large extent, that one datapoint predicts how a team will fare. His conclusion: For fairly consistent upsets, look at #5-vs.-#12 matchups, or the #6-vs.-#11. Over the last 31 tournaments Jacobson has surveyed, #12s are a respectable 44-80, and #11s are 43-81, which means you should pick at least a couple of those shockers in the first round. TOP PICK? STAY SAFE

Many office pools are heavily weighted towards those who pick the ultimate champion, so much so that they are almost impossible to win without doing so. To that end: Out of 31 tournaments historically, 19 champs were seeded #1, four were seeded #2, and four were #3. "To be prudent, choose a #1 seed as your national champ," Jacobson says. LOOK FOR EXPLOSIVENESS Winning teams need to be able to come back from behind, or pull away from close games. Alan Reifman, a Texas Tech University professor in Lubbock, Texas and author of the book "Hot Hand" about sports streaks, ran the numbers for Reuters about which NCAA teams have demonstrated that ability.

His hint for a team to watch? The Musketeers from Xavier University in Cincinnati, Ohio. WINNING STREAKS MATTER When the little-known Butler Bulldogs, from Indianapolis, Indiana, made a serious tournament run in 2010, one of Tim Chartier's students actually predicted it. "They built their mathematical model to look for sustained winning streaks, which Butler had earlier that season against a series of tough opponents," he says. "The model picked it up."ATTENTION TO RECENT GAMES Blowing opponents out early in the basketball season? Bully for you, but Tim Chartier is far more interested in what you have done lately. His mathematical models are overweight in recent games and underweight in earlier ones. Ideally, you want a club that is picking up steam as March Madness approaches, gelling as a team and taking down tough opponents on the road. Now that you are fluent in March Madness theory, the one thing bettors really want to know is which team will go all the way. When Chartier is pressed about what his models are showing right now, he says one name keeps coming up: Kansas.