In the midst of an economic minefield and a buyside weary of less-than-stellar names, the most significant and hard-won asset securitizations last year were not surprisingly structured financings for distressed issuers.
While the top two deals were fairly obvious picks, calling either more "Groundbreaking" than the other was no easy task. In the end, editors and several market voices agreed that Providian Financial Corp.'s PACCT 2002-1A, which some have argued allowed the company to continue as a going concern, emerged as more precedent setting and representative of the market's spirit and creativity in bad times. Also, as the deal's collateral was first pre-purchased by managing underwriters Goldman Sachs and Salomon Smith Barney, PACCT is a prime example of a burgeoning area in the structured debt market: principal finance.
ANC Rental Corp.'s $600 million securitization while in bankruptcy was a close second. Both deals demonstrate a fundamental characteristic of the market: providing liquidity to issuers while protecting investors through structure.
With two underwriters, a third-party collateral acquirer and a myriad of servicers, Pass-through Amortizing Credit Card Trust (PACCT) provided $2.6 billion of funding for Providian, allowing it to remain on the financial sidelines as the capital markets became increasingly more difficult to access. While this Rule 144A transaction was an integral part of Providian's 2002 funding plan, the transaction overcame numerous hurdles in order to price.
In a deal described by some credit analysts as "unusually complex," investors and rating agencies put the sell-side to work. In fact, bankers may have legitimately earned their fees on this one, as PACCT was restructured several times throughout its stages of development, some taking place during deal marketing two-month execution. For one, investors demanded shorter average lives and cheaper spread yields. Rating agencies required that the servicing transfer agreement be solidified before signing off on the structure.
PACCT offered fixed- and floating-rate classes. Initially, the deal went out with average lives ranging from 0.80 years to 4.1 years. After the massive overhaul of the capital structure, all eight offered classes had a tenor of 1.81 years. Subordination for the triple-A classes exceeded 80%, and topped 40% for the triple-Bs.
Beyond the liquidity PACCT provided Providian, removing the pool of loans from its portfolio was an integral part of the company's restructuring plan, which stipulated a move into higher credit borrowers. The high-risk pool, with an average borrower Fair Isaac & Co. (FICO) score of 570, was backed by non-prime credits, 15.3% of which were already 30-days delinquent.
PACCT was structured for Providian while it awaited the closing of an $8.2 billion portfolio sale of prime collateral to J.P. Morgan Chase, and a $565 million sale of U.K. loans to Barclays plc.
The transaction priced about one month after initially planned. As mentioned, the portfolio sale, which involved units of CompuCredit Inc., Goldman and Salomon, afforded Providian the luxury of abstaining from the asset-backed market at a time when the credit card sector came under heavy fire from regulators.
Also, Salomon taking on a portion of the pool (prior to the securitization) marked the development of its principal finance unit, joining a modest number of Wall Street firms that have begun purchasing collateral for the purpose of securitizing at a later date.
Servicing, initially performed by Providian, was transferred to two parties: CompuCredit and Cardholder Management Services, a subsidiary of Hyperion Partners II, which is owned by former Salomon MBS trader Lewis Ranieri. Ranieri is a principal personality in Michael Lewis's Liar's Poker.
At 5%, servicing fees for the PACCT portfolio are nearly twice the industry standard. While the deal was being marketed, the servicers had Providian modify the annual percentage rates and fees charged to cardholders.
In addition to the beefed-up servicing fee, this offered Internet-based monoline card issuer CompuCredit, which purchased roughly half of the total receivables, an opportunity to significantly grow its portfolio at a great price, a 40% discount to par value.
Salomon's principal finance group is a unit of its ABS group. Goldman is said to have pioneered the practice. Merrill Lynch has recently formed a similar group and other firms plan to follow.
Also worth mentioning, earlier in 2002, J.P. Morgan and Deutsche Bank Securities co-led a securitization refinancing Providian's existing conduit exposure, also providing the bank liquidity. The $2 billion-plus transaction was structured using senior/subordinate credit enhancement.
"Providian entered the fourth quarter of last year with a need to restructure its balance sheet lialibilities," said a banker on the transaction. "I think that these securitizations were viewed by the market as very successful."
Deal at a Glance
Category: Groundbreaking Securitization
Award Winners: Providian Financial, Salomon Smith Barney, Goldman Sachs
Deal Type: Credit card securitization
Deal Size: $1.25 billion
Date Announced: April 16, 2002
Date Completed: June 18, 2002