Palamon-led consortium helps HSBC streamline credit card portfolio

European mid-market firms Palamon and Electra Private Equity as well as Morgan Stanley’s alternative investment arm have bought two high-risk credit cards from HSBC at a discount.

HSBC Bank has sold its Marbles and Beneficial-branded UK credit card portfolios to SAV Credit, a company backed by Palamon Capital Partners, Electra Private Equity and Morgan Stanley Alternative Investments for approximately £385 million ($797.8 million; €552 million).

The market is playing into our hands by leaving the sector.
Daan Knottenbelt

The portfolios consist of 338,000 accounts which are more than double the size of SAV Credit’s portfolio of 150,000 accounts, according to Daan Knottenbelt, a partner at Palamon Capital Partners. Both companies provide debt to customers with weak credit histories, Knottenbelt said.

Due to issues in the US sub-prime lending market many mainstream lenders have attempted to exit analogous areas of investment with a high-risk client base. A source close to the transaction said: “This portfolio was sold at a discount as HSBC was looking to decrease its risk.” HSBC declined to comment.

“The market is playing into our hands by leaving the sector. SAV is set up to provide for these kinds of people as provided you have the pricing right and as long as you can risk manage these kinds of consumers such a venture can be very profitable,” Knottenbelt said.

Leverage for the deal was provided by Royal Bank of Scotland. This was secured in July prior to the extent of the problems in the credit markets became apparent. According to sources in the markets it is now increasingly difficult to leverage investments involving high-risk consumers.

“We are extremely pleased with the support of RBS and their ability to recognise the solidity of the economic model of this company,” Knottenbelt said. HBoS, Credit Suisse and NM Rothschild have also helped underwrite and manage the companies’ products.

Knottenbelt said: “We deliberately kept SAV small until it had proved it could control credit risk in this market. The reason for Electra’s investment was this company had proved to us it could effectively underwrite risk.” Given the risks in the market Palamon was only willing to increase the company’s scale at this point, he said. SAV is now looking to buy assets as mainstream investors move away from the high-risk area, he said.

Palamon first backed SAV Credit as a start-up to take a majority stake in 2002 for an undisclosed sum, alongside Morgan Stanley Alternative Investments. It subsequently reinvested several times in the company. Electra Private Equity joined both investors in 2006.

Palamon aims for typical holding periods of seven years. Knottenbelt said given the availability of potential acquisitions for SAV Credit on the back of the problems in the credit market Palamon may well hold the company for longer. The firm is able to hold investments for up to 12 years.

Palamon carried out the transaction from its first fund which raised €440 million ($636 million) in 2002. This closed for new investments two years ago but can still acquire assets to buy and build portfolio companies.

The firm’s €670 million second fund raised in June 2006 is 40 percent invested.