This transaction, priced in October 2023, is backed by a portfolio of Dutch unsecured consumer loans originated by Qander Consumer Finance. The exposure is via an unrated and less liquid lower mezzanine debt instrument (Class G) issued as part of Qander’s public consumer ABS deal, AURUS 2023-1. As is often the case in a European securitisation structure, the lower mezzanine debt tranche, the Class G, is designed to be well protected by the issuer’s 5% risk retention of junior notes, as well as expected excess cashflow. The deal was short at 2.2 years, and the Class G carried material income of around 13% in euros through a coupon of Euribor+910 basis points (bp).
Qander Consumer Finance is a credit provider in the Netherlands with over 25 years’ experience. It originates and services unsecured personal loans, credit cards and point-of-sale store credit. A lender since 1996, from 2003 to 2012 Qander (then known as LaSer) was owned by Belgium’s Fortis Bank, which became a subsidiary of BNP Paribas in May 2009 following the global financial crisis. In 2012, the delevering of the banking system and pull-back in activity saw the business labelled non-core, and it ceased lending. The company was restructured and in 2014 was acquired by specialist credit manager Chenavari, which recommenced lending.
The Dutch consumer lending market is relatively small at around €32bn. Traditional banks retain a dominant market share of 58%, with Qander having 5%.
TwentyFour began a relationship with Qander in 2016 prior to its first ABS transaction, performing preliminary onsite due diligence in the Netherlands covering the market, origination and servicing.
Having issued three previous consumer ABS transactions, Qander was an established issuer when it brought its fourth deal from its “Aurorus” platform to market in 2023. AURUS 2023-1 offered six publicly rated tranches of bonds (Class A through F) syndicated to a broad array of investors, in addition to a lower mezzanine debt tranche (Class G) which is the one we are focused on in this case study.
The €345m deal comprised 36,060 loans with an average interest rate of 6.7% and featured a one-year period for replenishing early-redeeming loans and a redemption at year three. Each tranche pays a coupon of Euribor plus a margin, and the issuer retains the first loss tranche of 5% to comply with European risk retention rules; alignment of interest is a key component of our analysis.
The Class G tranche is therefore protected by this 5% junior note held by Qander, plus a cash reserve fund of 1.03% and annual excess cashflow estimated at 2.5%.
The credit approach to evaluating potential investments typically focuses on three pillars:
1. Collateral – using loan level data and historical performance information to determine a future cashflow profile of the asset pool.
2. Structure – review of legal documentation and covenants discussion.
3. Counterparties – due diligence of all parties involved to assess competency, risk appetite and experience.
Modelling and stress testing harnesses the information from the three pillars above, and helps us to build a view on the robustness of cashflows and the stability of income and principal in differing market environments. In the case of AURUS 2023-1, the default and recovery data provided spans 15 years up to 2023, giving valuable insight on asset performance through the global financial crisis. The weakest cohorts of loans historically saw 9-10% of cumulative defaults at the peak of the crisis, versus 2-3% in benign years, with a recovery rate averaging 35% consistently.
Our stress testing suggests the Class G would require an 10.83% cumulative default rate before the first euro of capital would be lost. However, due to high annual income, annualised returns would remain at 11.9% even with the 10.83% default rate. For the investment return to fall to 0%, cumulative defaults would therefore need to exceed 15%, more than 1.5x those experienced at the peak of the global financial crisis.
The short and robust nature of this AURUS transaction, from a longstanding lender, combined with strong alignment of interest, long performance history and a double-digit coupon, demonstrates the opportunities asset-backed finance transactions can offer for investors.
Important Information
The views expressed represent the opinions of TwentyFour as at 28 October 2024, are subject to change without notice, and may also not be shared by other members of the Vontobel Group (collectively “Vontobel”). This case study is for informational and education al purposes only to illustrate the typical structure of an asset-backed security and as a means of demonstrating TwentyFour’s investment management processes when reviewing such securities. The AURUS 2023-1 example was chosen to further illustrate the subject under discussion due to its relatively simple structure and it’s a repeat transaction from a well-known Dutch issuer.
No representation is given that the securities discussed herein are suitable for any particular investor nor is this intended to provide a sufficient basis on which to make an investment decision and should therefore not be considered as investing advice or a personal recommendation of any particular security, strategy or investment product, or as investing advice of any kind. TwentyFour, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in securities (or related derivatives) identical or similar to those described herein. Investment discussed herein should not be considered as a reliable indicator of the performance or investment profile of any composite, product, or client account. Further, one should not assume that any investments identified were or will be profitable or that any investment recommendations and decisions we make in the future will be profitable. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.
Past performance is not a guarantee of future results. Investing involves risk, including possible loss of principal. Value and income received are not guaranteed and one may get back less than originally invested. Asset-backed securities are complex investments and not suitable for all investors. Investors in asset-backed securities generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. Investors in asset-backed securities may be subject to other types of risks and should refer to the respective offering document(s) for further details.
Stress testing uses historical and forecasted data on metrics such as delinquencies, defaults, recoveries and prepayments to project an asset pool’s future cashflows based on TwentyFour’s internal processes and assumptions. Information provided should not be viewed as a guarantee or certainty in connection with future, actual outcomes as actual results may differ materially from the outcomes associated with stress testing results.
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