Bank sells premium finance provider to private equity firm as it sheds non-core assets

Bank of America is selling leading premium finance provider Premium Credit to a private equity investor, Insurance Times can reveal.

The US banking giant is offloading the company, which is one of the two dominant players in the UK premium finance market, as part of the wider sale of its British and Irish MBNA credit card business, announced this week.

As exclusively broken by Insurance Times, a source close to the deal revealed that Premium Credit will end up in the hands of a private equity house as a result of the wider transaction.

Premium Credit’s price tag is an estimated £800m, according to the source, of which around £150m is equity and the rest debt.

The sale of MBNA and its Premium Credit subsidiary is driven by Bank of America’s goal to build up its balance sheet strength by disposing of non-US and non-investment banking assets.

Confirming that Premium Credit was up for sale, a Bank of America spokesman said: “It does not have a natural fit within Bank of America Merril Lynch.”

Atlantic Securities analyst Richard Staite said that Bank of America had been looking for a quick sale of its non-core assets.

Premium Credit’s latest set of accounts show that it advanced £3bn worth of premium finance in 2009 – an increase of 2.1% compared with the previous year, in what it described as a “very challenging market”.

According to the same results, the Epsom-based company’s pre-tax profits were £48.2m in 2009, a 42% increase on the £34m it recorded in the previous year.

The company claims in its accounts that it is the leading provider of premium finance in Britain and Europe, providing its services to half of the UK’s top 50 brokers.

The already small premium finance market has witnessed rapid consolidation over the past three years, with Close’s acquisition of Amber Credit in 2008, the disappearance of Icelandic bank Kaupthing Singer & Friedlander and the closure by The Royal Bank of Scotland of its premium finance arm RBS Finsure in 2009.

As a result of this consolidation, Premium Credit and Close Premium Finance now dominate the niche market for financing premiums.

The two companies account for an estimated 95% of all premium finance.

1 Answer Network managing director Paul Muir expressed relief that Premium Credit would not be swallowed up by its rival Close, but said that there was plenty of scope for greater competition in the provision of premium finance.

He said: “It’s better that it stays rather than disappears, but it would be even better if there were four or five premium finance providers.”

MBNA bought Premium Credit in 2004 from private equity investor Electra Partners as a way of securing cross-selling leads for its core credit card business, before it was in turn swallowed up by Bank of America in the following year. Premium Credit’s holding company Vendcrown Ltd is a wholly owned subsidiary of MBNA Europe.

Bank of America originally put Premium Credit up for sale in 2006, but did not find a buyer for the business before the credit crunch bit the following year.

Bank of America is being advised by Willis’s corporate finance team, which is made up of former Bank of America mergers and acquisitions personnel.

We say …

? Premium finance offers steady returns for investors, confirming that this is exactly the kind of investment that private equity kings love.

? But the extent of premium finance’s dependence on debt means that it is highly vulnerable to interest rate hikes, which look more likely following last week’s US ratings downgrade.

? Brokers are crying out for more competition in the choice of premium finance provider, but it may be a while before a fresh investor dips its toe in this particular pool.