SPA Holdings, which trades as Yes! Car Credit (YCC), has originated the first U.K. securitization structured entirely around U.K. subprime auto loans. The Royal Bank of Scotland (RBS) arranged the GBP108 million deal, and the RBS leveraged finance team has also provided YCC with a GBP20 million mezzanine financing.

Spartacus, a newly established company rated P-1/A-1 by Moody's and Standard & Poor's, bought auto loans from Direct Auto Financial Limited. Direct Auto is the subsidiary of YCC which provides loans. Spartacus will fund the purchase of the loans by means of a private placement. The assets will be put into the TAGS conduit, which will fund the purchase by issuing commercial paper. Spartacus will use collections on the underlying loans to repay the facility.

The deal is YCC's first securitization. "There were several reasons why we chose to do a securitization, said John Meyrick at YCC. "Firstly it provided us with cheaper funds. We were previously funded with straight bank debt, but this way we managed to reduce funding costs substantially. The deal also provided us with access to the capital markets, giving us access to a wider market and more visibility within that marketplace. This will help with future fund raising."

He continues: "By doing a securitization we received a rating. A rating is important for any company in the subprime sector - it enhances credibility. And finance companies which grow at the rate we are growing need lots of cash. When funding requirements reach a certain size banks want to spread their risk. Had we funded through bank borrowing the loan would have been syndicated, which would have been more time consuming and more costly."

Meyrick points out other benefits of securitization. "One of the good things about securitization is that it instills more discipline in the organization," he says. "With securitization there are additional reporting requirements and tighter default triggers so there is more focus on cash control." The deal uses TargetSecuritor, which combines software and consultancy to produce portfolio data. TargetSecuritor is a securitization software solution, developed by U.K. software company Target.

Steff Gray of the asset securitization department at RBS Financial Markets pointed out that YCC's credit procedures and systems provided an excellent platform on which to structure the deal. "Yes! Car Credit are able to track all loan information in detail," she explains.

Meyrick thinks other subprime auto loan lenders may follow. "This is a groundbreaking transaction that others may follow," he says. "There is certainly an appetite out there for this kind of transaction."

Gray added, "I think more subprime auto deals will come to the market in the United Kingdom because the asset type lends itself to securitization, and as the subprime market expands, so will the opportunities for further securitizations. Previously only one other deal has been done in the United Kingdom that had subprime loans as part of its portfolio." There have also been subprime auto loan deals in the United States.

YCC will use the funds to open more branches and fund the majority of contracts generated within the group. YCC currently writes 1000 finance contracts a month, but will be able to write a significantly larger volume with the funds raised by the securitization. At present, YCC has finance receivables worth GBP100 million on its balance sheet. It has 14,000 from a potential non-standard market of about nine million drivers who cannot obtain car finance via conventional lenders.

YCC specializes in the non-standard credit market, and supplies customers with both financing and a vehicle. It allows customers to get a higher quality vehicle at more competitive terms, and to improve their credit rating through regular payments.

YCC plans further securitizations. "The facility we negotiated will last 12 to 18 months, and we will go back to the market when we need more funds," said Meyrick. "When we go depends on how our market expands; how the company performs; how our current funding sources perform; and how long it takes to complete the next transaction, bearing in mind that this transaction took about nine months from start to finish."

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