DEAL: Europe’s first insurance premium loan securitisation

Author: Lizzie Meager | Published: 21 Jun 2017
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Europe’s first securitisation of insurance premium loans provides a template for unprecedented levels of originator freedom in the region.

The £300 million ($379.8 million) deal allows Premium Credit to diversify its funding sources, giving it the flexibility to tap the public market when conditions are right, while maintaining an existing bank facility.

The assets – loans issued to consumers to help them pay off insurance premiums on claims – were sold to a special purpose vehicle (SPV), which holds them in a master trust. There are two SPVs; one holding the assets to repay the private bank finance and another that will issue notes in the public capital markets. Each one has a beneficial interest in the collective pool of assets.

"The complexity actually gave the company the flexibility it needed, and got the best possible treasury result," said Angela Clist, partner at Allen & Overy in London, who advised the arrangers. "It could be replicated by other issuers looking for that same flexibility."

UK credit and store card provider NewDay carried out a similar deal in 2014 which gave it access to warehouse loans as well as public debt. But Premium Credit’s deal uses different assets, and contains a few other novel features.

Concentration limits

The issuer’s loss rates are historically low as the underlying loan is technically dual recourse – if the consumer defaults, Premium Credit can go directly to the insurance company to be repaid.

"But risk does exist – the issuer is still reliant on insurance companies, for example," said Jeremiah Wagner, partner at Cadwalader Wickersham & Taft, who advised the issuer.

KEY TAKEAWAYS

  • Europe’s first securitisation of insurance premium loans provides a template for unprecedented levels of originator flexibility in the region;
  • The deal utilises of a master trust structure, which holds two SPVs, which service the bank facility and public debt facility accordingly;
  • It contains several innovative features that are entirely new to the European market, including adjustable concentration limits, giving the business even more flexibility;
  • The deal is testament to investors not being afraid of innovation and complexity in ABS markets as long as it is well explained and serves a valid purpose.

The central risk here is the issuer’s exposure to event-driven changes that could affect liquidity. For example a merger in the insurance market – which is common – would distort the facility’s exposure and potentially cut off funding. If the concentration in one facility is exceeded, the limit can be adjusted.

"The number of different concentration limits reflect the different product lines of the company, and setting them separately for each series allows future issuances to flex with the company as it grows," said Michael Hodgson, director of securitised products at Lloyds, which acted as arranger along with Bank of America Merrill Lynch. "It can be potentially difficult to change those in a public context for existing series."


"Investors are not afraid of complexity as long as that complexity is serving a purpose"


This feature could be used by any issuer affected by event-driven change – small and medium enterprise (SME) loans, for example, added Wagner.

Master trust

The issuer opted for a master trust platform, typically used for residential mortgage or credit card portfolio securitisations, which allows for programmatic issuance and funding diversification.

As the loans are generally short-term, averaging around 10-11 months, if the company had opted for a standalone securitisation, it would have been returning to the market much more frequently than necessary, explained Hodgson.

"It also alleviates potential investor concerns about cherry-picking assets, as they are all on equal footing with regards to asset eligibility," he added.

Turning to the public

Chicago-based private equity house GTCR acquired Premium Credit via a securitised buyout in 2012, so the company has had a private securitisation in place since then. Since February 2015 it has been owned by Cinven.

"Although that private securitisation worked very well for us, putting in a public source too diversifies our funds and reduces our funding and liquidity risk," Premium Credit CEO Tom Woolgrove told IFLR.

He added that with this structure, the company plans to become an annual issuer of public notes, dependent on market conditions.

With this deal at £300 million and the company’s total funding needs at around £1 billion, he foresees similar sized tranches on a three-year cycle, along with the bank facility.

Esoteric securitisations are go

Investor feedback was incredibly positive, sending a strong signal for the European asset-backed securities (ABS) market.

"This deal is testament to the idea that investors are not afraid of complexity as long as that complexity is serving a purpose," said Wagner. "When we talk about esoteric assets, this is definitely one, but investors in Europe have been dying for diversification."

Clist thinks the time has come for more innovative deals like this in Europe.

"Investors are looking for yield, which such deals may give them, and there is a growing recognition by regulators of the importance of securitisation," she said.

Plus, central bank purchase schemes for eligible assets and notes (typically SME loans and residential mortgages) have hit the available supply of ABS, paving the way for different types of assets.

STRUCTURE OVERVIEW
  • Two SPVs are held within a master trust; one repays the public notes and the other services the bank debt;
  • Concentration limits are adjustable, giving the issuer immense flexibility.

ASSET TYPE
  • The book is comprised of personal and commercial loans, specifically for the purpose of repaying insurance premiums over an average 10-month period;
  • Around 10% of Premium Credit’s book is made up of other types of instalment financings including school fee and membership fee loans.

LOAN/FINANCING
  • It’s a capital market financing with a bank facility sitting alongside.

TRANCHES
  • There are four tranches, A-D.


ORIGINATOR'S ROLE
  • The originator, Premium Credit, will continue to service the loans and originate new ones to enter into this programme.


Tear sheet

Premium Credit’s £300 million securitisation of consumer insurance premium loans closed on June 15.

Cadwalader Wickersham & Taft advised Premium Credit. Allen & Overy advised Lloyds Banking Group and Bank of America Merrill Lynch as arrangers. The senior notes received an AAA rating from Moodys and DBRS.

IFLR1000’s Deal Data can be found here .

See also

STS agreement good for EU securitisation
Deal: Virgin Media’s mobile-backed bonds
Deal: Zopa consumer loans securitisation


 


 

 

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