No. of Recommendations: 4
VIEs come in two flavors: consolidated and unconsolidated. The consolidated
VIEs are included in the balance sheet numbers. The unconsolidated VIEs are
reported in a note. Upstart has a section in its 10-K that reports on both
its consolidated and unconsolidated VIEs (in Note 3 on the 10-K).
I got around to reading Note 3 in the 10-K.
Consolidated VIEs:
"
The Company established Upstart Loan Trust and Upstart Auto Warehouse Trust to enter into warehouse credit facilities for the purpose of purchasing Upstart-powered loans. (See 'Note 8. Borrowings' for additional information.) The entities are Delaware statutory trusts that are structured to be bankruptcy-remote, with third-party banks operating as trustees.
Upstart Loan Trust 2, a Delaware statutory trust, holds loans facilitated through the Upstart platform that are not pledged or eligible to be pledged to the Company's warehouse credit facilities.
Total consolidated VIEs Dec 31, 2022: Assets: $984,481, Liabilities: $337,830, Net Assets: $646,651
"
Those figures are quite a bit higher than the Dec 2021 figures, reflecting the use of the balance sheet to keep loans flowing, IINM.
Unconsolidated VIEs:
"
The Company's transactions with unconsolidated VIEs include securitizations of unsecured personal whole loans and sales of whole loans to VIEs. While the Company continues to be involved with the unconsolidated VIEs in its role as the sponsor and the servicer of these transactions, the Company does not hold a significant economic interest in these entities and has determined that it is not the primary beneficiary of these entities. The Company's unconsolidated VIEs include entities established as the issuers and grantor trusts for various securitization transactions.
In cases where the VIEs are not consolidated and the transfer of the loans from the Company to the securitization trust meets sale accounting criteria, the Company recognizes a gain or loss on sales of loans. The net proceeds of the sale represent the fair value of any assets obtained or liabilities incurred as part of the transaction. The assets are transferred into a trust such that the assets are legally isolated from the creditors of the Company and are not available to satisfy obligations of the Company. These assets can only be used to settle obligations of the underlying securitization trusts.
"
They claim the maximum exposure to loss from the unconsolidated VIEs, a remote chance they say, is ~$13.3m, down from ~$15.5m last year.
"
The carrying value of assets that relate to variable interests in unconsolidated VIEs consists of $8.3 million and $6.2 million of securitization notes and residual certificates which are included in other assets on the consolidated balance sheets as of December 31, 2021 and 2022, respectively. The Company also had $7.2 million and $7.1 million of cash deposits made to reserve accounts for related securitizations, included in other assets on the consolidated balance sheets as of December 31, 2021 and 2022, respectively.
"
Doesn't look too scary, though I suppose they could be misrepresenting their exposure. The main risk seems to be, as before, that the economy deteriorates causing more defaults, and/or inflation picks back up causing the value of loans on the balance sheet to shrivel as the interest being earned is lower than would be required by the new higher rates.
Recent economic news has showed ongoing strength in the economy (good) and inflation not dropping as fast as some hoped (bad). Short term interest rates have been relatively flat the last several months, so I guess we can deduce that the value of the loans has been fairly stable.
