Significant oversubscription greets Latitude’s step into the unknown

Appealing pricing and extensive predeal marketing enabled Latitude Finance Australia (Latitude) to attract a multiple-times oversubscription to all tranches of its debut credit-card asset-backed securities (ABS) issue, according to deal sources. This was despite the combination of a new name, new collateral type and a new deal structure for the Australian market.

Latitude Australia Credit Card Loan Note Trust priced on 31 March, as the first Australian-origin securitisation of credit-card receivables and the first Australian ABS of any type to be issued from a master-trust structure. Bank of America Merrill Lynch (BAML) arranged the transaction and acted as lead manager alongside Deutsche Bank and National Australia Bank (NAB).

The deal had total volume of A$1.1 billion (US$839.4 million) including A$100 million of retained notes. Lead manager data show that the whole structure was significantly oversubscribed with particularly strong bids coming in for the mezzanine and subordinated notes (see table below). In total, 36 investors participated in the deal.

Latitude Australia Credit Card Loan Note Trust deal structure and subscription

Note classRating (S&P/Fitch)Volume (A$m)Weighted-average life (years)Credit enhancement (per cent)Margin (bp/1m BBSW)Oversub- scription (x)Number of investors
A1 AAA/AAA 685.9 3 34.5 125 2.9 17
A2 NR/AAA 125.7 3 22.5 185 4.1 14
B NR/AA 57.6 3 17.0 240 6.2 13
C NR/A 52.4 3 12.0 300 6.0 13
D NR/BBB 41.9 3 8.0 375 4.8 11
E NR/BB 36.4 3 4.5 525 6.7 11
Originator VFN NR 100.0 3 N/A 160 area N/A Retained

Source: National Australia Bank 31 March 2017

Issuer and leads say the transaction was always expected to see significant offshore distribution given the relative familiarity of investors in Europe and Asia with both credit-card collateral and master trusts.

In the end, 38 per cent of paper was sold to accounts in the UK and Europe, Asian buyers took 33 per cent, Australasians 28 per cent and the remaining 1 per cent went to the US. Real money dominated, accounting for nearly three-quarters of the transaction overall, with the remainder going to balance sheets.

Price discovery
Price discovery posed some challenges given the deal’s expected diverse investor base, both by location and level of familiarity. Tristan Cheesman, director and head of EMEA structured-finance syndicate at BAML in London, adds that credit-card ABS deal flow is sufficiently limited in Europe that recent comps were hard to come by even for regional investors that were already comfortable with the asset class.

Cheesman explains that UK major banks have significantly reduced their credit-card master-trust supply, leaving a small clutch of local nonbank deals and some equivalents in the US as the nearest similar transactions to Latitude.

The fact that credit cards are new securitisation collateral to Australian investors added another element to the price-discovery process. Paul Varro, Latitude’s Melbourne-based treasurer, tells KangaNews that the first comparison used was UK credit-card issuers, after which domestic investors were keen to see relative levels to local residential mortgage-backed securities (RMBS) and ABS deals.

“Once we had established a base for initial price talk the question became what the appropriate premium was for a first deal, whether for liquidity or structure,” Cheesman adds. “We were also looking at different comps depending on investor location – in the US, for instance, credit-card deals traditionally price tighter than RMBS whereas in Australia RMBS tends to be the benchmark.”

The good news for the issuer was that its eventual senior level proved extremely attractive to European investors. “At 125 basis points over bank bills for the senior notes the margin was appealing even when swapped to sterling,” Cheesman tells KangaNews.

He explains that the landed level was around 90 basis points over equivalent sterling Libor, in an environment where it is increasingly difficult to find triple-A rated structured assets in Europe close to triple-figure spreads. For instance, Cheesman adds, CLO triple-As are pricing in the high 80s to low 90s and a recent deal of reperforming Spanish RMBS priced seniors at 90 basis points over.

The use of a master trust had a beneficial impact for international accounts. Tim Richardson, director and head of securitisation at Deutsche Bank in Sydney, confirms that the soft-bullet notes issued out of the master trust allowed for more efficient swap transactions for accounts without natural Australian dollars to allocate.

Predeal marketing
Latitude conducted an extensive roadshow on- and offshore ahead of its debut and Lionel Koe, Melbourne-based director, securitisation at NAB, says the feedback provided by investors in the UK – where master-trust and credit-card issuance is well established – was particularly timely and constructive as the deal process progressed.

In fact, the leads believe the deal’s extended lead time contributed significantly to the level of interest it eventually attracted. Cheesman explains that while distribution may have been naturally limited to the subset of investors with the ability to swap or with natural Australian dollar liquidity, Latitude allowed a greater bid to amass by running a longer deal process including extensive nondeal roadshows dating back to 2016.

This result was the fortunate byproduct of a necessary process. “An in-depth marketing and investor education process was critical to the success of the transaction as we were presenting a new name to the market in Latitude, with what is effectively a new collateral type in credit cards and new structure in the master trust,” Richardson suggests.

Cheesman adds: “This isn’t always needed, but for a new borrower with a new asset class and ambitions to become a programmatic issuer it was certainly extremely useful to meet investors to discuss the business, expansion plans and the like.”

Latitude itself emphasises its desire to become a regular issuer, and agrees that in this context it was important to run an extensive predeal marketing effort and a measured transaction approach – especially when it came to volume.

Varro says Latitude is keen to be active on an annual basis, conditions allowing. With this in mind, the issuer did not want to saturate the market despite encountering a high level of demand for its debut. He adds: “We didn’t have a hard volume cap but we wanted to retain capacity to allow us to become a programmatic issuer in future. For this reason it was important for us to retain discipline even as the deal book grew.”

Domestic interest
An extended marketing process was also helpful in Australia, as the deal team says it was conscious that it was marketing a new asset class and structure. Koe explains that Latitude’s performance track record and availability of historical data added to investors comfort, however the team also invested a significant amount of time to discuss the asset class and structure.

Varro tells KangaNews that Latitude was very pleased with the level of domestic engagement it received in the debut deal. “There was certainly more work on the master-trust structure needed in the domestic arena,” Varro acknowledges. “In addition, investors wanted to understand what Latitude is and how it emerged from the GE Consumer Finance business.”

He adds: “Local investor engagement is a crucial part of Latitude’s funding programme, but there was no specific target for the local versus international mix for the inaugural deal. With the deal now priced and the new master-trust structure in place we believe ongoing local investor engagement should be strong.”

On the master-trust structure in particular Koe reveals: “Some of the key questions surrounded ensuring asset quality in the revolving portfolio, describing the interactions of this debut issuance relative to future transactions from the perspective of credit enhancement, cash flows – both principal and interest – and structural features of the transaction such as pay-out events.”

Overall, Koe describes a deal process in which a positive feedback loop developed. He says early interest gave the leads confidence to launch a transaction at A$750 million, while incoming bids facilitated an upsize to the capped A$1 billion and also allowed the deal to test and eventually tighten pricing.

There is still latent demand for the new asset class, Koe tells KangaNews. He explains: “There were a few investors that looked at the deal but chose not to participate on the basis that they wanted to see this sector and structure develop further in the domestic market before committing. Given the success and quality of the book I anticipate future participation from these accounts.”

Lower-rated bid
Demand stretched well beyond the senior notes. Cheesman comments: “We know there is a relatively well-established bid for Australian senior notes from both domestic and offshore accounts. The latter can be somewhat transient depending on spreads and their volume of currency available at any point in time, but we were pretty confident it would come through for this deal. What surprised us was the level of engagement with the lower-rated notes.”

He adds that this demand came from a range of sources including habitual Australian buyers and real-money accounts from the UK and US. The driver continues to be the general hunt for spreads in a compressed credit environment.

“It was really positive to see this amount of interest – in senior and sub – for the first Australian credit-card deal and its first master trust,” Cheesman tells KangaNews. “This type of structure has been in the pipeline for a long time but we think this transaction demonstrates that it has legs. We certainly hope it lays the ground for future issuance.”

Richardson is also encouraged by the demand Latitude uncovered from a whole-market perspective. “The level of investor interest in consumer ABS and the master-trust structure delivering soft-bullet bonds reflects the ongoing development of Australian securitisation markets and their increasing relevance to global investors,” he claims. “This transaction forms part of a broader theme whereby consumer ABS collateral [that was] originally balance-sheet funded is successfully finding its way into public ABS programmes.”

Currency and collateral
Despite the offshore interest and relatively intensity of the domestic investor-relations effort, Varro says Latitude decided fairly early in the deal process – which stretches back to inception around six months ahead of pricing – to focus on an Australia dollar deal rather than to use the ability of master trusts to facilitate foreign-currency tranches. Offshore issuance remains a possibility for the future, Varro adds, with US dollars of notable appeal.

Having decided to issue domestically, Latitude was not tempted to offer the more familiar pass-through deal structure in an effort to maximise Australian investor familiarity. Varro explains that the decision to adopt a master trust was based on the company’s desire to become a programmatic ABS issuer.

He says it is far more efficient for Latitude to move additional assets from its warehouse facilities to the master trust as a prelude to future loan-note issuance than it would be to establish new standalone vehicles every time it wants to come to the public market.

There are also advantages to a master-trust setup from the perspective of managing assets. “Other repeat ABS issuers have to monitor and report on all their transaction pools separately, across what can be a range of different transactions,” says Steven Mixter, head of funding at Latitude in Melbourne. “A master trust means only one pool of receivables, which are similar to – and thus have pretty much identical reporting processes as – warehoused assets.”

The issuer may also look to add different types of collateral to its Australian credit-card debut. “One of the questions we received from investors was around the different types of collateral we originate, including unsecured consumer loans and New Zealand credit cards and unsecured loans, and whether we might publicly securitise these in future,” Varro reveals.