The Covid-19 pandemic disrupted most aspects of life, including the financial markets. But one unexpected, positive and lasting consequence of the pandemic is the boost it gave to debt issuance linked to environmental, social and governance (ESG) principles.
The ‘S’, or social, component has been the star performer: led by Covid-19 relief bonds, social issuance increased sevenfold in 2020, providing funding for projects that will benefit communities and diversify issuers’ sources of funding. In Korea, where credit card usage is widespread, card issuers like Samsung Card have opened up a new market for social securitisation of credit card receivables.
Breaking new ground
In March this year, Samsung Card completed a $300 million cross-border social credit card securitisation, the company’s first-ever ESG financing, backed by a portfolio of high-quality credit card receivables. It was the first credit card ABS transaction in APAC with a five-year tenor. BNP Paribas was sole arranger on the transaction.
Thanks to the social classification of the securities, Samsung Card achieved significant savings compared to their domestic senior unsecured issuances’ funding costs. BNP Paribas was also ESG advisor on the transaction, and acted as swap provider.
Samsung Card is no stranger to the securitisation market. One of Korea’s leading diversified consumer finance companies, it has launched 30 cross-border asset-backed securitisations (ABS) of credit card receivables since 2001.
“Because credit card companies are directly involved in financing the day-to-day activities of consumers, where the purpose of loan is less restrictive (compared to mortgages to green buildings or auto loans to electric vehicles), it is more appropriate that they execute ESG securitisation transactions with a social use of proceeds,” says Andy Lai, Head of Asset Finance & Securitisation, Asia Pacific at BNP Paribas.
South Korean companies are 90% SMEs, which have suffered during the Covid-19 lockdowns, so Samsung Card will use part of the proceeds to support their initiatives to increase job creation and retentionAndy Lai, Head of Asset Finance & Securitisation, Asia Pacific, BNP Paribas
In this case, the asset-backed securities’ social application conforms to the rules of Samsung Card’s Sustainable Financing Framework, which covers both green and social bond issuance. It includes two categories for the use of social securities’ proceeds: employment generation and access to essential services. “South Korean companies are 90% SMEs, which have suffered during the Covid-19 lockdowns, so Samsung Card will use part of the proceeds to support their initiatives to increase job creation and retention,” said Lai.
A portion of the proceeds will also fulfil the second social criterion under the Framework: providing access to essential services. In this case, that means financial inclusion programmes that provide lending services for people and businesses that may lack access to the banking system.
Issuers gain several benefits from undertaking a transaction with a social application. It enables the company to be a good citizen, contributing to sustainability and social betterment and as a bonus, the social aspect helps provide optimal financial terms.Chaoni Huang, Head of Sustainable Capital Markets, Asia Pacific, BNP Paribas
“Issuers gain several benefits from undertaking a transaction with a social application,” said Chaoni Huang, Head of Sustainable Capital Markets, APAC, at BNP Paribas. “It enables the company to be a good citizen, contributing to sustainability and social betterment and as a bonus, the social aspect helps provide optimal financial terms.”
Company CFOs also appreciate the opportunity to diversify funding resources. “Because the securities’ social classification fits the mandates of many ESG funds, the company is able to access funding from this investment sector,” added Huang. “This provides an extra element of variety within the company’s capital structure.”
Managing the risk
The assets underlying the transaction are regarded as high-quality. “The risk associated with the portfolio of credit card receivables is well-managed,” said Lai. “Not only are delinquency rates for one month or more overdue below 1.5%, but the credit enhancement we have in the deal is over 20%, resulting in very safe AAA rated asset-backed securities.”
In addition, since the South Korean consumer finance crisis of 2004 and the subsequent restructuring of the market, lending and delinquency have been carefully controlled through strong regulation. “The lesson of the crisis was that the origination process of the card receivables is very important: we rely on the asset so its makeup is a key element to us,” explained Lai.
The International Capital Market Association (ICMA) sets out the requirements for securities to be classified under the social label, and this deal’s adherence to these obligations has been verified by external agency Sustainalytics. “The company’s post-issuance performance against the KPIs set out in its Sustainable Financing Framework is monitored by an internal governance group consisting of members of Samsung Cards’ strategy and planning teams who apply an internal tracking process to verify the use of proceeds from the transaction,” said Lai.
More to come
Samsung Card’s social securitisation is the 22nd credit card ABS transaction BNP Paribas has completed in Korea, but Huang sees potential for greater ESG securitisation across Asia Pacific.
“Australia has completed residential mortgage-backed securities (RMBS) transactions with a green tranche, as has Japan,” she said. “With the huge investment needed to fund sustainable infrastructure, investor demand is increasing every day.”
As investors and issuers wake up to the benefits of socially focused issuance, these new securities may follow their green counterparts’ rapid ascent to mainstream status.