Consumer Loan Receivables
are an Ideal Asset
Greg Nelson
President
Aileron Capital Inc.
October 27, 2013
Disclaimer
• The material contained herein is for information purposes only and does not constitute an offer to sell securities.
• An offer can only be made through the Offering Memorandum and the appropriate exemption documents provided to prospective purchasers through a registered exempt market dealer. This material is in no way a complete description of the proposed investment and is in all respects subject to the provisions of the Offering Memorandum. • These offerings may be subject to potential risks associated with the investment, including market, liquidity and investment return risk. Please consult the offering documents for further information regarding these potential risks. In order to be eligible for subscription in this offering, individuals must satisfy the criteria required for Accredited, Eligible and/or Sophisticated investors as described in the Offering documents.
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What is an Ideal Asset Class
We want to have:
•High Cash Yield
•Low Losses
•Low Funding Costs
•Low Servicing/Operating Costs
•High Barriers to Entry
•Conservatively Funded/Structured
•Provides diversification
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The $40+ Billion Secret
• Consumer Credit Finance / Asset‐Backed Securities (ABS)
– Credit cards, vehicles, equipment and installment loans
• More profitable than mortgages
– Higher yields
– Low market risk
– Shorter duration
• Currently dominated by the Canadian banks
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High Yields
Q3 2012 Canadian Credit Card Performance Index
Updated:
September 12
Transaction Performance
Broadway Credit Card Trust
Canadian Credit Card Trust
CARDS II Trust
Eagle Credit Card Trust
Glacier Credit Card Trust
Gloucester Credit Card Trust
Golden Credit Card Trust
Master Credit Card Trust
SCORE Trust
Industry
S
S
S
S
S
S
S
S
S
P
P
P
P
P
P
P
P
P
D
D
D
D
D
D
D
D
D
Pool Balance1
1,217,537,695
1,605,241,537
13,440,769,616
1,881,086,000
3,940,880,569
1,917,813,931
8,624,750,017
7,264,114,882
571,274,948
Debt Balance2
712,363,674
1,361,950,000
6,343,055,786
600,000,000
1,363,661,000
1,101,000,000
6,138,731,158
4,536,821,135
375,000,000
40,463,469,195
23,660,476,336
5
Payment Rate3
17.29%
34.89%
36.17%
47.40%
22.32%
18.68%
40.65%
36.50%
12.90%
Gross Yield4
19.57%
22.73%
22.90%
24.20%
21.10%
18.20%
19.30%
22.17%
16.65%
Net Loss Rate5
6.38%
3.59%
4.17%
3.89%
6.25%
6.64%
2.29%
3.69%
2.68%
34.58%
21.47%
4.01%
Low Losses
Q3 2012 Canadian Credit Card Performance Index
Updated:
September 12
Transaction Performance
Broadway Credit Card Trust
Canadian Credit Card Trust
CARDS II Trust
Eagle Credit Card Trust
Glacier Credit Card Trust
Gloucester Credit Card Trust
Golden Credit Card Trust
Master Credit Card Trust
SCORE Trust
Industry
S
S
S
S
S
S
S
S
S
P
P
P
P
P
P
P
P
P
D
D
D
D
D
D
D
D
D
Pool Balance1
1,217,537,695
1,605,241,537
13,440,769,616
1,881,086,000
3,940,880,569
1,917,813,931
8,624,750,017
7,264,114,882
571,274,948
Debt Balance2
712,363,674
1,361,950,000
6,343,055,786
600,000,000
1,363,661,000
1,101,000,000
6,138,731,158
4,536,821,135
375,000,000
40,463,469,195
23,660,476,336
6
Payment Rate3
17.29%
34.89%
36.17%
47.40%
22.32%
18.68%
40.65%
36.50%
12.90%
Gross Yield4
19.57%
22.73%
22.90%
24.20%
21.10%
18.20%
19.30%
22.17%
16.65%
Net Loss Rate5
6.38%
3.59%
4.17%
3.89%
6.25%
6.64%
2.29%
3.69%
2.68%
34.58%
21.47%
4.01%
Low Funding Costs
Canada Newswire – October 24, 2012
Glacier Credit Card Trust, Series 2012‐2 sold $400 million of Senior and $23.281 million of Subordinated five‐year notes.
•Senior Notes
•Subordinated Notes
2.394%
3.174%
The investment dealer arms of BMO and CIBC were the lead managers.
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Diversification
•
•
•
•
•
•
Different asset class
Not dependent upon asset valuation
Not dependent upon asset sales
No “development” risk
Relatively low correlation with the economy
No derivatives involved
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Why is this Market Untapped?
Significant Barriers to Entry
•Need to Originate Many Small Loans –
Historically the market was dominated by credit card issuers, i.e. banks and financial institutions, or large national retail chain stores, i.e. Canadian Tire Corp.
•Requires hands on management of accounts (experienced collections staff)
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High Rates ≠Poor Quality Credit
Depending on the nature of the asset…
•Necessity products
•Convenience factor
•In many cases, monthly payment drives the decision making process, not the interest rate
Therefore, many high interest rate loans are acceptable to consumers
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Same Consumer Different Rates!
49.9% Computer
2.9% Mortgage
14.9% Used Car Loan
24.9% Jet Ski Loan
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What we Bring to the Table ..
• We have consolidated a network of consumer lending companies in Canada that originate and administer consumer loans.
• Originate consumer loans for:
–
–
–
–
Home Improvement – HVAC, windows, doors etc.
Vehicle financing, including recreational Small appliances
Consumer electronics
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Solid Infrastructure
•
•
•
•
•
•
We have assembled a team with securitization and operational expertise to create an institutional‐grade investment structure.
We have engaged a Backup Servicer who currently manages 11 billion in assets across North America.
Annual income to the noteholders of between 6.50% and 9.25%.
Safety in NumbersTM:  Numerous small loans rather than a concentrated portfolio  High overall gross yield on portfolio > 35%
 High excess spread to absorb losses
 Overcollateralized by 10%  Class B notes (Subordinated debt) as added security for Class A notes.
Locked in superior return for 5+ years NO deductions for expenses of offering (every dollar is invested)!
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Benchmark Portfolio
• As of June 30, 2013 a Benchmark Portfolio of consumer loans originated and serviced by one of our originators consisted of $26.2 million of principal receivables with the following characteristics:
 Average number of receivables outstanding were 8,796
 69% of the portfolio at this date had interest rates in excess of 25%
 Net losses for the six months ended June 30, 2013 were 1.81%. For the 12 months ended Dec 31, 2012, net losses were 3.96 %.
• The top four geographic concentrations of receivables were: Ontario (59.65%), Alberta (17.56%), British Columbia (8.15%) and
Saskatchewan (5.49%).
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How we Compare
Benchmark Portfolio
Benchmark Portfolio vs. CCQI
Average receivables outstanding (C'000s)
Net losses (%)
Canadian CCQI (i)
2013 (ii)
2012
2011
2010
15,724,296 26,224 21,510 18,139 11,424 3.5
1.81
3.96
1.89
2.25
(i) As at June 30, 2013, Canadian CCQI ‐ Standard & Poor's ‐ Canadian Credit Card Quarterly Index
(ii) Benchmark portfolio as at June 30, 2013
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Controlling Loss Rates
Portfolio servicing and specifically the Collections team management are paramount to the success of the portfolio:
– Low defaults: less than 4.0% annualized loss rate (In the benchmark portfolio) since inception in 2010. This compares to ~7% net loss rate for Canadian Tire. – Demonstrates the value and necessity of real‐time, hands on collection activity.
– Senior managers individually have in excess of 20 years credit and collection experience.
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Credit Support
Credit Support
Senior Notes
Subordinated Notes
15%
10%
25%
10%
25%
Subordination
Overcollateralization1
Excess Spread (estimated at closing)
Plus: Cash Collateral Account
(Zero at closing, and up to 6% depending on the level of excess spread)
1"The"Eligible"Receivables"are"expected"to"be"purchased"with"a"minimum"discount"of"10%"of"the"face"amount"of"the"
receivable"balance."
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Belts and Suspenders!
Early Amortization Triggers:
• If Default Rates increase and/or Excess Spread decrease to certain levels, the program stops purchasing loans and begins to amortize early.
• After a defined Trigger Event, all collections are used to retire Class A Note Interest and Principal, followed by Class B Note Interest and Principal
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A Quick Comparison
Overcollateralization
Subordination
Overall Portfolio Yield
Portfolio Losses
Coupon ‐ Senior
Coupon ‐ Sub
Ratings
Beacon (Series 2013‐1)
10.0%
15.0%
>30.00% 1
~3.50 – 4.00% 1
6.500%
9.250%
None
1 – For full portfolio details, see Beacon Consumer Holdings Inc. Offering Memorandum
2 – For 8 months ended Aug 31, 2012. As per DBRS rating reports.
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Glacier (Series 2012‐2)
5.5%
5.5%
21.19% 2
6.83%
2.394%
3.174%
AAA(sf)/A(sf)
Available Now
•
•
•
•
•
•
•
Accredited or OM Exemption Investors only
$10,000 minimum
RSP, RIF & TSFA Eligibility Approximately 5 yr. Term (6 for Sub Notes)
6.50% Series 2013‐1 Class A Notes, and
9.25% Series 2013‐2 Class B Notes
Interest paid monthly
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Summary
An alternative…but not new
• Retail access to a proven market
• Excellent yield
• Low market risk
• No currency risk, no hedging, no derivatives
• No sale of assets required to repay investors
• Safety in numbers
• Overcollateralization
• High gross yields fund margin of safety
• Senior Notes benefit from Subordinates Notes
• Both Notes benefit from 10% overcollateralization
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How to Participate
Available though Registered Exempt Market Dealers across Canada
CONTACT YOUR DEALING REPRESENTATIVE or visit us at
www.beaconconsumerholdings.com
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