Providing Consumers with Access to Credit in a Conscientious Manner

Access to credit for individual consumers in the UK had narrowed following the Global Financial Crisis (GFC), as high street banks tightened their credit card-eligibility requirements. According to a report by PwC, the percentage of UK consumers who were ineligible for a bank card had increased to as much as 25% in 2015 from 5% before 2008 1 . In addition, the UK population that falls into the near-prime bracket grew even more as a result of the COVID-19 pandemic.

These trends created a dislocated market where alternative capital can fill the gap. Drawing from our experience underwriting and managing revolving credit cards for non- and near-prime consumers in the U.S., Castlelake found opportunities to address this need while generating attractive risk-adjusted returns for investors.

Castlelake identified a credit solutions provider and experienced management team focused on the near-prime UK consumer, a cohort with credit ratings generally found in the fair to poor category depending on the credit bureau. This provider helps consumers build their credit over a period of a few years under what we believe to be manageable terms that position the borrowers for credit card eligibility. Castlelake provided two financing facilities totaling $68 million to the provider to help it provide loans and cards to these UK borrowers.

Responsible lending is paramount to this project, so our deal team—working with consumer credit due diligence specialists—reviewed the provider’s efforts to ensure loan affordability through borrowers’ income and expense verification. We determined that, with no fees, significant transparency and a manageable interest rate, this was an affordable and suitable product for UK’s near-prime borrowers that would be accretive to their credit story.

Before investing in a lender, Castlelake performs ESG-focused due diligence to ensure compliance with our standards across the credit card life cycle. We require data demonstrating positive borrower outcomes and set a bar for measuring credit suitability and affordability. As an example, before and after investment, we strictly manage how lenders define affordability—or how much debt a consumer can reasonably bear.

Castlelake also monitors borrowers’ ongoing financial status and works with the provider’s management team to manage credit limits dynamically based on real-time feedback, helping to ensure that struggling borrowers do not carry persistent debt and are guided to pay down their outstanding balances.

We view these types of credit opportunities as critical to helping underbanked consumers gain access to financing, particularly during a time of hardship, and look forward to uncovering more opportunities globally to participate in these solutions while seeking to generate compelling risk-adjusted returns for our investors.

1 PwC “Banking the under-banked: the growing demand for near-prime credit”

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