Edward Baker, capital markets director at Prodigy Finance, explains how the lender's innovative securitisation was structured and the challenges that the pandemic presented

Q: Prodigy Finance earlier this month issued a first-of-its-kind ABS backed by international private student loans (SCI 7 July). Tell us more about Prodigy Finance CM2021-1?
A: The US$288m issuance is Prodigy’s inaugural ABS and comes under Prodigy’s new social bond framework, marking a double debut in the fixed income market for the lender. 

The senior tranche of US$227m notes have been assigned ratings of Aa3 by Moody’s and single-A plus by KBRA. The class A notes were oversubscribed several fold within a day of launch and priced at Libor plus 125bp. A further three rated debt tranches were all preplaced with a major global asset manager.

The ABS is backed by a portfolio of US$304m of loans originated by Prodigy Finance, mainly since 2017, to postgraduate students attending the world’s top-ranked universities and business schools.

Q: Can you provide more details about how the deal is structured?
A: To meet investment grade rating agency criteria, this static pool structure has 25% subordination for the class A and provides 1.7% of cash reserves; OC targets build credit enhancement and allow for modified pro rata payment. The pool is expected to have a base case CPR of 29% and amortises over four to five years, giving a fast-paying cashflow to investors. The notes and residual have been placed with a broad range of US-based asset managers, institutions and credit funds.

Q: What is Prodigy’s vision for this transaction?
A: The transaction and the ratings have helped recognise and provide credibility to our global enforcement model for unsecured consumer lending, international payments and servicing platform - which is a first. The social bond framework and alignment to ICMA principles has made us the first international student lender to issue a social bond, which shows our commitment to social impact. Not only are we giving investors the opportunity to contribute to achieving the UN SDGs, but we are also diversifying our funding and ensuring we can continue to help even more global students to have access to financing and ultimately access education at the highest ranked schools in the world.

Q: How has the higher education sector been affected during the pandemic and which challenges did you encounter when working on this transaction?
A: International students have been facing many additional barriers in the pandemic (travel restrictions, access to visas and exceptionally limited finance options) and last year the higher ed sector saw a 43% decrease in new international students in the US alone. Schools and universities have accommodated international students as a priority and allowed many to start courses online.

This year we have seen a 50% year-on-year increase in loan applications from prospective students pursuing graduate studies, including MBAs and engineering masters. The first transaction is always challenging and involves a lot of work, but investors were very interested in learning about our model, credit performance and platform. 

Q: The transaction introduces major public market investors and asset managers to Prodigy Finance for the first time, as the start-up looks to accelerate its expansion coming out of the pandemic. What is your advice to anyone looking at anything similar?
A: Prodigy has been able to access public market investors and cheaper funding, which are vital for the business’s future growth. This kind of transaction requires a lot of planning and pre-market sounding - but this helped deliver a successful result.

Q: What is in the pipeline for the rest of 2021?
A: We are working on several transactions to finalise funding requirements and planning expansion for 2022.

Angela Sharda