Last week, alternative lender Plenti Group Limited (ASX: PLT) issued its debut asset-backed securities (ABS) transaction, through which it issued $306.3 million of notes to investors, backed by secured automotive loans.
Despite being an inaugural deal, the Plenti Auto ABS 2021-1 issue attracted strong demand from investors across all seven classes (three senior) of notes offered, with the top two classes – accounting for 87.8% of the notes – rated Aaa by global credit ratings agency Moody’s.
The transaction pool was secured by 9,594 automotive loans, made to prime borrowers, with an average contract balance of $31,270. Used cars accounted for 65.4% of the pool, while 34.6% of the loans were new-car financings.
The deal allowed Plenti to lock-in debt funding at low interest-rate costs, with the weighted average margin above the benchmark one-month Bank Bill Swap Rate (BBSW) just 97 basis points (0. 97%). The tranches offered margins above BBSW ranging from 80 basis points for the Aaa-rated top two classes to 620 basis points (6.2%) for the B2-rated Class F notes.
Daniel Foggo, chief executive officer of Plenti, says the deal was “transformative” for the lender, which was looking to diversify its automotive-loan funding from warehouse-based to the “deep and lower-cost” ABS market. “Auto is 50% of our originations, and if you wind the clock forward 24 months, it’s probably going to be higher still. We have one of the Big Four and some mezzanine funders funding a warehouse with $450 million of capacity, but by doing this ABS transaction, we reduced the funding cost on this $300 million-plus portfolio of loans by more than 1.5%. That is quite material funding saving, and actually improves our free cash flow on a monthly basis during the first month, by over $400,000.”
In this, the ABS deal will be a crucial contributor to the three “financial priorities” that Plenti outlined to shareholders in its FY21 (year to March 31) result, released in May. “We said we wanted to reach a $1 billion loan book by 31 March 2022; we wanted to achieve positive monthly cash net profit after tax (NPAT) prior to June 2022, while investing in, and achieving, strong growth; and we wanted to reduce our cost-to-income ratio over the medium term, from 55% last year to 35%,” says Foggo.
“The whole point of our business is that as we scale-up, operational leverage kicks in. Implementing a deal like this, which is so transformative in terms of cash flow to the business, is a major step toward delivering on those three priorities. We had a really strong first quarter, we had record originations by some margin, automotive growth of 300% of thereabouts year-on-year, and generally speaking across the business, we made good progress towards those milestones in the first quarter. Now this transaction gives us another huge boost in terms of achieving those priorities, particularly around cash NPAT,” he says.
The notes were snapped-up by 14 investors, both onshore and offshore, in a diverse response that “delighted” Plenti. “We’re aware it was a pretty small deal in the scheme of things, so attracting 14 investors, quite a few of them international investors, and some large, well-established players, shows you the depth of that market,” says Foggo. “For us, being maybe more used to the equity market, seeing the depth of investor interest was very encouraging.”
Lead-managers National Australia Bank and Deutsche Bank structured the notes to cater to a mix of investors. “With just under 88% of the notes rated Aaa, we knew that would attract a certain type of investor – the life insurance companies and so on. Some of the other tranches, going down the stack, were offering yields in the 4%–6% range, so the high-yield space, and that got some of the credit funds involved. Investors could choose their tranche,” says Foggo.
Plenti’s equity contribution was reduced to just 0.50% of the loan receivables – well below comparable ABS transactions in the fintech lending space. “We’re not aware of any other non-mortgage lender with a recent ABS deal with those metrics,” Foggo says. “Given that we were a first-time issuer, it was really a quite exceptional deal – if you assume that equity probably costs you 10% a year, then actually ours is the cheapest source of capital. We do think that reflects the fact that auto loans are such a great asset class, but also, we’d like to think it reflects the fact that our credit performance has just been so strong.”
In turn, that reflects the proprietary technology that Plenti uses, he says. “The proprietary credit engine we’ve built definitely helps enhance our selection of who we want to fund. We source a lot of third-party data, which is one of the reasons why we can be so fast, but it also means we can be more accurate in our underwriting and more consistent, and we can be clearer with our partners, if they’re referring us customers, around who we will fund. They appreciate it enormously.”
With its first ABS deal bedded-down, Plenti is keen to go again. “Seeing first-hand that there is a very receptive and knowledgeable investor base looking for these kinds of deals, and seeing that the credit performance and profile of the underlying loans gets reflected in both the levels of credit support required by a ratings agency and the pricing that can be achieved, we’re very keen to tap this market again,” says Foggo.
“We expect during the first half of next year to issue our first renewable energy and personal loan ABS transaction. Further out, we’re really looking to bring together our renewable energy and automotive finance businesses, to fund electric vehicles (EVs). Our ultimate ambition to issue the first EV automotive ABS in Australia,” Foggo adds.
Plenti sees “some really helpful trends” playing-into this ambition. “Not only is there the take-up of EVs, which is going to rise in this country, but if you look at the way EVs are sold, a lot of that is just direct to the customer, online. So, where are you going to get your finance? You’re going to get it online, too,” he says.
