U.K.-based Internet credit card issuer Egg Banking brings the roadshow for its latest credit card deal to the U.S. this week, stepping up the effort to widen its investor base. The deal, called Pillar Funding 2004-2, will spread the equivalent of GBP500 million ($891.8 million) across several U.S. dollar- and sterling-denominated tranches, each with five-year average lives. The bulk of the deal will be in U.S. dollars, with the senior notes sized at $775 million.
Sources familiar with the offering said the Prudential unit plans to target primarily U.S. investors this time around. Although a previous deal in May included a large chunk in U.S. dollars, this is the first time all the senior notes are in U.S. dollars.
It is still uncertain how the remaining portion will be denominated. Depending on demand, classes B and C might be offered in a combination of both sterling and U.S. dollars. However, the mezzanine notes are expected to total the equivalent of GBP25 million ($44.5 million), with the subordinate bonds worth the equivalent of GBP40 million ($71.3 million).
Barclays Capital and Credit Suisse First Boston are managing the deal, expected to launch and price shortly after the roadshow ends this week.
Bad news for Egg...
Preliminary marketing began in Europe last week, just as Egg was blindsided by a downgrade by Moody's Investors Service. Sources said it was too early to tell whether the unsecured downgrade might affect the securitized pricing.
The agency dropped the company one notch to A3/Prime-2', reflecting what analysts at the Royal Bank of Scotland summarized as weaker support from Prudential and limited business synergies between Prudential and Egg.
Prudential, the second-largest insurance company in Great Britain, spent most of this year trying to sell Egg, but called off the plan last month after it considered the price that bidders offered too low.
Since the roadshow in Europe, which concentrated mainly on London, had started last Wednesday, feedback from investors was scarce. "We haven't really had much interaction with investors yet," one sell-side source said. As of late last week, U.S. investors were scheduling meetings with the bankers and issuer, sources reported.
All three rating agencies gave a preliminary triple-A to the dollar-denominated senior notes, which come with 13% subordination. The preliminary ratings on the mezzanine notes, which come with 8% subordination, are A2' from Moody's and A' from both Standard & Poor's and Fitch Ratings. The C class subs received a preliminary Baa2' from Moody's and BBB' from S&P and Fitch.
The benchmark for all the tranches is expected to be three-month Libor. This is Pillar's fourth transaction from its master trust to date and the second one this year. Its previous multicurrency, five-year deal, worth the equivalent of GBP500 million, finished inside of price talk in May, when Prudential's plan to sell off its share of Egg was in full swing.
With the May issue, offered privately under Rule 144A, Egg tested stateside interest for the first time, and sources described the effort as a success, saying the deal was three times oversubscribed.
In that deal, two classes of notes were partly denominated in U.S. dollars - the triple-A rated seniors included $400 million, pricing at 14 basis points over three-month Libor, and the triple-B rated C class included $36 million, which priced at 100 basis points over. CSFB led that deal as well, along with Banc of America Securities.
Egg is just one issuer in what analysts predict will be a busy sector in Europe during the second half of 2004.
Barclays' Barclaycard is among those expected to bring a credit card deal in the next few months. Morgan Stanley is another potential issuer mentioned by analysts. MBNA Europe Bank, which just issued a groundbreaking deal in August, will likely be back before the end of the year as well.
Looking at the overall European credit card sector, the second half of 2004 is shaping up much like the first half, when the U.K. also dominated issuance. Although rating agencies have seen credit card inquiries from France, Germany, Greece and the Czech Republic, none of the potential new issuers from outside the U.K. are expected before the end of the year.
S&P analyst Chris Such described the first half as a "banner half year" for credit cards with five transactions completed and three others rated since then, including Egg's latest. The five first-half issues came from the most active originators in the U.K. market: Egg, MBNA, Barclaycard and Capital One Financial (which closed two transactions by mid-year).
New structures are also anticipated over the next few months. Such said he is expecting more issuers to follow MBNA, which used its de-linked structure - Chester Asset Receivables Dealings - in Europe for the first time last month.
Such described the structure as revolutionary, saying it offers easier and faster execution and enables issuance of different classes of notes, at different times, with different maturities. Previously, each series had to issue several classes of notes at the same time with the same maturity. Of course, the de-linked structure was pioneered by Citibank N.A. in the U.S. in late 2000, with MBNA, Capital One and Bank One N.A. all following suit.
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