Bespoke securitisations: tailoring the suit to fit the wearer

Today’s investors often seek more flexibility than is provided by public securitisations transactions. Jamie Prins (Managing Director of Trustmoore Ireland) sees bespoke transactions offering investors more access to diverse risk profiles and exposure to innovative asset classes. Trustmoore is a management-owned boutique financial services provider with offices in 11 countries. Trustmoore provides management, reporting and administration services for securitisation transactions such as ABS, MBS, MTN Programmes, CLOs and bespoke (private) securitisations.

How can securitisation structures be adapted to meet the evolving demands that investors are seeking of more dynamic and customized solutions?

Investors in traditional labelled securitisations know that there are fewer variables they can have influence over because structures are pre-determined. By contrast, bespoke securitisation structures offer a lot more investor influence on how a transaction is structured. Bespoke issuers can configure securitisations according to very specific investor needs. There are various categories which issuers, arrangers and investors can influence when structuring a transaction.

Can you give some examples?

Tranching is an obvious category. Although quite “thin” in esoteric/bespoke transactions, you can introduce multiple tranches with variable risk profiles and return characteristics. These could include senior tranches with lower risk returns for investors, but also mezzanine tranches and/or equity tranches. This allows investors to choose tranches that best align with their risk appetites and return objectives.

Are there other customisation options?

Certainly. For example, credit enhancement mechanisms can be built into a transaction. This allows parties to decide on potential over-collateralisation, excess spread or implementing reserve accounts, which can provide investors with increased protection against default risk. That can enhance the attractiveness of the instrument. You can also include other customizable features such as call options, prepayment options and/or amortisation schedules into your structure.

What are the advantages of that type of structure?

A more customised structure can cater to specific investment strategies. For example, investors are able to adjust the maturity profile of their investment, potentially providing options to redeem an investment early. That’s the added flexibility which custom transactions can offer. Not to mention that investors also will have more opportunities to diversify their investment by having influence over the desired composition of underlying (pool) assets in a portfolio.

Does this attract different types of investors?

Essentially, you can build asset eligibility criteria into a structure. You can broaden the range, or narrow it, depending on what kind of investors you want to attract. This works especially well with asset portfolios which veer away from the traditional composition of one asset class such as mortgages or auto loan, which would traditionally be seen in labelled securitisation transactions. Essentially, the answer to this question is both yes and no. As investors can invest in both labelled and bespoke securitisations. The question might better be answered as; yes, this attracts different types of investment strategies.

What types of new asset classes do you come across?

Renewable energy assets, intellectual property rights or specialty finance transactions (such as buy-now-pay later securitisations) are some of which immediately spring to mind. You could even securitise subscription-based services for example, as they generate a steady flow of fixed income (like revenue-based lending). These can offer investors exposure to specific yet diverse risk profiles. Perhaps a music-streaming, or video streaming subscription securitisation is around the corner. We would be excited to work on such a project!

Do these new asset classes demand new technology?

Not necessarily, but there are ways of tailoring transactions to investor demands by leveraging the advancements in (innovative) IT developments to incorporate almost real-time data analytics. Some platforms offer same-day asset performance records, as opposed to the traditional quarterly reports. You can also think of the implementation of blockchain and smart contracts. It can help streamline a securitisation process, reduce operational costs, and enhance transparency.

This can help with the (more) accurate pricing of a transaction as well as provide investors with greater confidence in the underlying assets by giving them instant access to data-trail and performance. There is an argument to turn this around too; innovative IT developments allow certain asset classes and originators to tap into specific investor markets by tailoring their technology accordingly.

Are there other interesting trends which you see?

There is increasing demand from issuers to incorporate ESG factors into their securitisation structures. This can be for a number of reasons. The desire to attract more socially responsible investors, but also to provide transparency regarding the selection and monitoring of assets in terms of ESG-related risks and impacts.

What are other benefits of bespoke structures for issuers?

Certain issuers, arrangers and investors have to comply with evolving regulatory requirements such as (but not limited to); Basel III, Solvency II, MiFID, IFRS 9 to SFDR and EU Securitisation Regulation compliance. The regulatory environment is ever changing and ensuring transactions are structured in accordance with such changes is important. For example, in order to maintain investor confidence and facilitate market acceptance, it pays to adapt your structure to comply with these regulatory changes and leave room for their evolution.

This can minimise diverse impacts on investors, not only at closing of transaction but also in the future. Also, corporate originators can now easily arrange for self-financing, securitisation has become a well-trodden path. There is comfort and trust in these structures as there is evidence that they have survived market volatility. There are still structures in place that have survived the financial crisis in 2009.

Any other specific benefits of bespoke transactions?

Well, I could talk about this all day! A general benefit would be that a bespoke transaction can be tailored across levels a labelled transaction cannot. For example, there can be a more varied mix of asset types, credit qualities, geographic regions and/or focus on varied sectors or industry. Labelled transactions tend to focus on one such asset type, a certain credit quality category, geographic region or sector or industry. The main essential benefit of customisation is that both issuers and investors engage (intensively) very early on in the structuring process (compared with public, or labelled structures). Which allows for early tailoring to investors’ needs.

This means investors’ and issuers’ unique requirements can be aligned: from risk exposure to regulatory requirements. It also provides the opportunity for investors to have (early) input on asset selection, origination sources, asset classes and risk profiles which may exactly match their investment strategies. Basically, bespoke allows all parties to cherry pick on a level you cannot do easily with a label securitisation. However, please do note that both labelled securitisations and bespoke securitisations have their place. Both have advantages and disadvantages and will suit varying parties at different moments in their lifecycle.

You mentioned ESG factors as a trend in new issuances, could you sketch the market from your point of view?

ESG (also SDG) is obviously an important consideration these days. We see ESG influencing the transactions we manage in a variety of ways. Green and sustainable securitisations are becoming much more prevalent. These include security-backed assets and projects which have positive environmental impacts, renewable energy projects, energy efficient buildings and sustainable infrastructure in general. However, we are also seeing transaction that help fund social projects and (private) welfare schemes, such as financing of affordable housing, healthcare facilities or education initiatives.

We are always proud to be part of such transactions as they align with Trustmoore’s core ESG values. These all strive to adhere to the ever-evolving green and sustainability (finance) standards. Also, ESG integration in the underlying asset selection may require green (or other ESG sectors) bond verification agents, or external reviewers, to screen those assets. We are seeing a lot of movement in this area, as many parties want to become early adopters whilst regulatory framework is being developed.

How does the market look for ESG-related securitisation in Ireland and beyond?

In Ireland, the market is developing similar to other EU countries. There is a growing focus on sustainability and ESG investing. Here in Ireland our services are sought by local clients who are setting up such structures. In recent times, the Irish government and financial regulators have been taking steps to promote sustainable finance and encourage the integration of ESG factors into investment decisions. However, we also work with global parties, but there the ESG landscape is varied.

Are there geographical differences?

Absolutely! There are essential three discerning factors for each market: regulatory environment, investor preference and the current market development. Europe has a very sophisticated ESG-related securitisation market thanks to, for example, the EU Sustainable Finance Disclosures Regulation (SFDR) and the EU Taxonomy Regulation which establishes a classification system for sustainable activities.

By contrast, the US has a much more fragmentary regulatory landscape for ESG investments but there is growing interest. This predominantly down to various initiatives at federal and state levels. There is no comprehensive federal regulation specifically addressing ESG disclosure for example. There is however growing interest in ESG issues among investors in the US and the SEC has signalled increased scrutiny of ESG disclosures, so may introduce new regulations in the future.

How about Asia?

The Asian market very much depends on which country you are considering: Japan and South Korea have implemented voluntary guidelines to promote ESG reporting and sustainability. China recently introduced ESG-related regulations and guidelines, particularly in areas as green bonds and green finance standards. However, developing countries in the region, for example, do not yet have the luxury of being able to focus on ESG right now…

But is ESG securitisation growing?

ESG-related securitisations are certainly gaining traction, particularly among institutional investors and asset managers. There is also a growing recognition of the importance of ESG factors in investment decision making. But the main drivers currently are investor demand (driven by the public opinion?), the economic situation per region and the varying regulatory landscapes.

What do you hope to gain from the Securitisation Event this year?

I’m half Dutch and half Irish, so it’s always a moment where I can return home for a few days. It is great seeing past colleagues and partners with whom I have worked in the past, or with whom we are working now. In essence the securitisation community in Amsterdam has a good representation and has a “village” feeling to it. It’s always very gezellig (cosy). Also, the Dutch securitisation market is mature, and the Securitisation Event is a great way to reconnect, get inspired and keep up to date on the latest market developments.