FlexiGroup expands its investor base with first subordinated green tranche

FlexiGroup became the first issuer in the Australian market to include green subordinated notes in an asset-backed securitisation (ABS) deal with its latest transaction. Deal sources say the expansion of green tranches into the double-A rating space is a continuation of FlexiGroup’s plan to broaden its investor base through the issuance of green product.

FlexiGroup priced its latest transaction, Flexi ABS Trust 2018-1, on 4 May. The deal was arranged by National Australia Bank (NAB) which also led alongside Commonwealth Bank of Australia. According to KangaNews data, with total volume of A$300 million (US$223 million) this is FlexiGroup’s largest-ever deal, eclipsing the A$285 million printed in June 2015.

The transaction included two green tranches – the senior Class A2-G notes and subordinated Class B-G notes (see table). According to distribution data provided by NAB, 56 per cent of the combined Class A2-G and Class B-G notes were allocated to green-mandated investors.

Table: Flexi ABS Trust 2018-1 deal structure

Tranche Volume (A$m) Expected ratings (Moody's/Fitch) Credit enhancement (per cent) Weighted-average life (no. of years) Margin to swap (bp/1m BBSW)
A1 100 P-1/F1+ h22.5 0.3 65
A2 66.5 Aaa/AAA 22.5 1.5 107
A2-G 66 Aaa/AAA 22.5 1.5 107
B-G 15.3 Aa2/AA 17.4; 1.6 165;
C 17.7 A2/A 11.5 1.6 195
D 12 Baa2/BBB 7.5 1.6 280
E 7.5 Ba1/BB 5 1.6 490
F 15 NR/NR N/A 1.6 ND

Source: National Australia Bank 9 May 2018

Subordinated green

FlexiGroup, which issues ABS deals backed by a pool of consumer loans made by Certegy Ezi-Pay (Certegy), issued green tranches backed by solar-power-related receivables in its 2016 and 2017 transactions.

Paul Jamieson, Auckland-based group treasurer at FlexiGroup, says that support for the triple-A rated green tranches on previous deals was such that they decided to test the market on this occasion by adding a double-A rated tranche

“We wanted to find how much support there is for double-A green bonds and help to widen the green securitisation market into the non-triple-A space. We achieved a very good coverage ratio for the Class B-G notes, as well as the other notes, so it is encouraging,” he says.

According to NAB, the Class B-G notes were 4.7 times oversubscribed, while the Class A2-G notes were 4.4 times oversubscribed. Apart from the Class A1 notes, which were 1.68 times covered, all other tranches were between 4.7 and 5.5 times oversubscribed.

Paul Kok, NAB’s Sydney-based director securitisation, says that demand for the product continues to increase as investors become more familiar and comfortable with the certification process.

“We wanted to find how much support there is for double-A green bonds and help to widen the green securitisation market into the non-triple-A space. We achieved a very good coverage ratio for the Class B-G notes, as well as the other notes, so it is encouraging."

“The expected pay-down profile of the green bonds and solar receivables have been modelled to ensure there is sufficient coverage of solar receivables to back the green bonds. This, and the ongoing certification of previous green tranches, provides comfort to investors that the green bonds will continue to meet the green standards,” he tells KangaNews.

The issuer and arranger agree that demand is sufficient for issuers to offer green tranches even further down the capital stack. However, Jamieson cautions that the challenge will be to have sufficient assets to cover the bonds as the assets pay down.

“We could look at going further down the tranches when we issue next year, depending on the feedback we receive from the market and the profile of the green assets,” Jamieson adds.

Investor diversification

The Class A2-G notes rank pari passu with the Class A2 notes for principal repayments, interest repayments and loss allocations. This has been the case in all three of FlexiGroup’s transactions, including for the green tranche. However, according to KangaNews data, until the most recent deal the green tranches derived a pricing benefit for the issuer (see chart).

Kok reveals that despite previously achieving tighter pricing in the A2-G notes compared with the A2 notes, gaining a pricing advantage has never been FlexiGroup’s intention. Rather, the objective was to diversify and broaden the investor franchise.

 FlexiGroup Green/Nongreen Tranche Price Comparison

Source: KangaNews 9 May 2018
NAB data also show that of the 20 investors in the final book, four are new to the FlexiGroup ABS programme. Kok confirms that some of these new investors were active in the green tranches.

Jamieson says: “The offer of two green tranches, along with the larger deal size compared with previous years, enabled us to broaden our investor base. We achieved this with four new investors to the Certegy ABS programme, and more than A$1 billion of bids at the closing price for this issuance.”

Kok insists there is potential for greater volume in the green tranches. “The only constraint we faced in expanding the green tranches was the amount of solar receivables we could put in as collateral. We wanted to be conservative and ensure there was sufficient cover.”

Jamieson adds: “We have a strong position in the solar space and it is a large part of our book. The volume growth in the Class A2-G notes compared with previous deals is more attributable to the growth in the total asset pool with the solar component of this book about 40 per cent. This is consistent with our recent deals.”


Green Securitisation 2018


Wednesday, May 09, 2018