Credit card lender NewDay, the only UK ABS issuer to price a dollar tranche since Nationwide in January 2022, is happy to pay up for the diversity of dollar ABS funding, Graham Stanford, the firm’s head of funding and rate management told GlobalCapital.
“We are totally cognisant that dollars are always likely to cost a bit more than issuing in sterling,” he said. “We are happy to pay that up to a point to access the wider funding base in the US.”
NewDay's most recent deal, on November 6, had a $75m triple-A rated tranche. Before the pandemic, dollar securitization issuance from UK issuers had been more widespread, but high swap costs have limited issuance since then.
“We’ve been issuing in dollars on and off since 2018,” Stanford said. “It’s a really important part of our diversification strategy, so we like to do it when we can. It just hasn’t been possible for the last 18 months. It’s a combination of costs and just where the appetite coming out of the US has been.”
There were two deals from NewDay in 2023, the November transaction from its NewDay Funding Master Issuer shelf, and an earlier deal from its NewDay Partnership Master Issuer shelf in July that includes collateral from its partnerships, for example with John Lewis.
“2023 was a slightly quieter year for us from an issuance perspective, simply because our deals tend to be three year tenors,” Stanford said. “We're three years on from the outbreak of the Covid pandemic, and we didn't do very many deals in 2020, as most didn't.”
Real money returning
Credit cards are a closely watched sector in European ABS, as many have suggested that unsecured lending is where the first signs of pressure on the consumer will tell. Stanford said those concerns have not put investors off NewDay deals.
“There’s certainly a view out there that unsecured consumer credit will be the first asset class to show signs of stress,” he said, “so people are always interested in what we are seeing in our book. But I can’t think of any of our traditional significant investors who’ve stepped away.”
Stanford highlighted the November trade as a particular success.
“I’m pleased with the subscription level we got all the way down the capital stack,” he said. “It was also really pleasing to see the number of asset managers, real money investors, coming back into the senior tranches. That’s where the investor space has been dominated by bank treasuries in the last year or so.”
Some have found senior tranches difficult to place this year, with syndicate bankers saying the class ‘A’ notes are consistently the most difficult part of the stack for which to find demand, particularly in the euro market. However, Stanford was pleased with what he has seen in the sterling market in the later part of of the year.
“It’s been a really encouraging end to this year,” he said. “There’s been other deals that have looked good as well, but we’d be cautious in assuming that 2024 is going to be a lot easier.
“There’s a lot of macro and geopolitical uncertainty. We will take each deal on a case by case basis and formulate our strategy dependent on the prevailing market conditions.”
Performance holding up
Stanford added that asset performance, which was exceptionally strong during the pandemic, was getting to closer to pre pandemic levels.
“We’ve definitely seen some impact of the macro [on credit card performance], but it has been limited,” he explained. “Looking at our near prime business line, it’s a very resilient customer base. There’s been some normalisation from the artificially low loss levels after the pandemic, but it’s not back to where it was pre pandemic.”
Stanford said NewDay had lowered its risk appetite since the pandemic, “so you’d expect performance to be better, all else being equal”.
Rising interest rates have challenged lenders this year. Stanford explained how NewDay have coped.
“We do most of our hedging on the asset side of the business,” he said. “Our credit card APRs are linked to the Bank of England base rate. That’s not 100% effective. We also have a programme of corporate interest rate swaps [that] we started to put in place right at the beginning of this interest rate cycle, which plug that gap.”
For securitization, credit card collateral is an advantage.
“Credit cards have quite a high level of excess spread,” Stanford continued. “Low double digits at the start of this cycle, probably high single digits now, so there’s quite a lot of room to absorb some compression without it causing too many problems structurally from a securitization perspective.”