New investors want new styles of securitisation
Europe’s public securitisation market is so highly regulated that dealmakers and investors are seeking alternative avenues in order to create favourable transaction terms, asserts Huub Mourits, Global Head of Structured Finance and Capital Market Services at Trustmoore. Trustmoore is a management-owned boutique financial services provider, with offices in 11 countries. Mourits’ team of specialists provide management for securitisation transactions such as ABS, MBS, MTN Programmes, CLOs and bespoke (private) securitisations. He sees the Dutch securitisation market slowly waking from hibernation and believes innovation is a key driver to the breakthrough in what he sees as the rather traditional world of structured finance in The Netherlands.
What does today’s market look like from your point of view?
The securitisation market is moving in a positive direction. However, the general economy, the pandemic and geopolitical circumstances have created considerable volatility and uncertainty, which has kept many parties on the side-lines. Having said that, it is certainly picking up as parties acclimatize to the new situation.
What could give it some impetus?
I think more parties (including investors) would come to the securitisation market if the regulations were slightly toned down. Technology could also provide a spark. I think technology in the ABS market could be used a lot more effectively than it is now. Today, transactions in the securitisation industry are still being constructed in more or less the same way they were 30 years ago. However, new technologies such as the blockchain, could conceivably be implemented to solve issues concerning transparency, accuracy, and real time and give the securitisation industry new momentum.
What would you like to see in terms of changes in the regulatory frameworks for securitisation?
There is a certain irony surrounding the European Commission’s Securitisation Regulation. This was implemented to revive the securitisation market and to safeguard all market parties and to provide an STS label: simple, transparent, and standardised. However, The European Commission report on the functioning of the Securitisation Regulation finalised in October 2022 concludes there is “room for improvement”. Also, high on the list of market participants’ grievances is the “complexity of STS criteria”. In my view, without openly admitting to it, the Commission realises that some aspects of the securitisation market are currently over-regulated.
The whole reporting cycle — including public and private securitisations reporting requirements — places far too large a burden on the resources of market parties. I hope the Commission makes changes in favour of simplicity for public securitisations and for the whole securitisation market. There is no reason to doubt the good intentions of the Securitisation Regulation, but the final set of procedures is in various ways not fit for purpose to establish a flourishing securitisation market.
Do you think the regulatory burden is partly why public securitisations have been rather dormant recently?
I think supply and demand were a bit broken for some time in the European securitisation market. There was “free money” thanks to quantitive easing, purchase programmes and rock-bottom interest rates. Recently, as ECB and central banks have begun tapering their asset purchase programmes and interest rates have risen, there are more opportunities to alternative sources of funding such as securitisation or transactions using the securitisation techniques is some way. However, investors seeking better yields do not automatically go for widely syndicated public transactions.
What are possible alternatives?
Bespoke private securitisations offer much more interesting yields and can be tailor-made. Many of the major parties are entering into the private placement space. We have recently been involved in a number of private transactions.
Why are private securitisations popular?
They are easier and more cost effective for market parties to set up and to structure. Institutional banks are highly regulated and prefer to see an STS label on securitisations. However, if you’re an asset or fund manager, or operating in a less regulated part of the financial sector, why would you go through all the pain of the STS procedure for a standard securitisation which doesn’t offer you the returns which you could achieve on another transaction? I believe this trend towards private deals is a direct result of ill-thought-out regulations implemented to satisfy public opinion.
Are there new product types which you see in the market which can help encourage more interest in the securitisations market?
A new generation of investors is emerging. I believe they might well be interested in more tokenised securitisation structures, for example. The securitisation market has been conservative. I believe the new generation of investment and portfolio managers will look at specific transactions and ask themselves: “why should I wait months for an investor report on this particular asset portfolio, when everything else I am busy with is updated live on my smartphone?”. That generation of investors will not accept investing €20 million into a securitisation product and then having to wait up to a week or few weeks for a monthly investor report: they simply won’t tolerate that.
Could such new ways of working be blockchain related?
Don’t get me wrong: there is a lot of baloney being talked about the usefulness of blockchain. So, we must be cautious. However, if you could store securitisation transaction data on the blockchain on a near-real-time basis, and all relevant parties involved did this. That would mean your new-real-time information would represent the “single source of truth”, it would be irreversible and incorruptible, because it could not be changed or altered after the fact. Once you had that chain of information there are numerous relatively simple software systems to report that data. Why circulate a monthly report (say two weeks after the months’ end) when you could have a daily, or hourly, report more or less instantly?
Is this a realistic proposition in what you politely call a “conservative” industry?
The smaller fintech parties are leading the way on this. They have nothing to lose. The larger more established parties have less interest in disrupting a business model which has worked fine for many years. You won’t change this ecosystem overnight. Actually, we are working on blockchain-based smart contracts deal right now, but I cannot reveal any more than that at this moment. This is a real laboratory-style pilot project. The biggest challenges we have with this project is not how to solve the puzzle from a technical perspective, but from a regulatory one.
Are there other initiatives you would like to see in the marketplace?
I would like to see Europe launch something similar to the PACE bonds as issued in the US, but better structured. The US Property Assessed Clean Energy financing gives households favourable credit if they commit to energy efficient house improvements. This could trigger a wave of ESG-related transactions and contribute significantly to the energy transition goals in my view.
Has Trustmoore been involved in any ESG-related transactions?
We have been working on a couple of asset-backed medium term note programmes, also with the backing of the United Nations SDG goals. We are currently working together with a very large NGO on frontier-market microfinance securitisations. That means that the proceeds of the notes will be provided to SMEs/microfinance parties in frontier markets. We are also working with other parties who have specific ESG-related securitisation programmes to finance off-grid solar installations in Sub Saharan Africa and wind parks, as well as carbon-reduction programmes. Finally, we have been delighted to provide our services to an ESG CLO which has won numerous awards.
Sounds interesting. Any other innovative projects?
We are also involved in an asset backed programme centred around the shipping industry. That is a particularly interesting initiative. Shipping is known to be particularly polluting. This initiative addresses the need to ensure that when ships engines are revised or replaced, much more efficient and less polluting motors are built into those vessels. These were all private transactions we set up between for example NGOs, forward-looking asset managers and investors investing in emerging/frontier markets. We have not been actively marketing our services to these transactions, and do not really shout about these deals, but we believe they can make a difference to the planet.
What do you hope to gain from the Securitisation Event this year?
I hope to see new faces. Many of us in the Dutch industry know each other quite well. I am particularly looking for new initiatives in the marketplace. I would like to see completely different types of real-world assets being securitised in an innovative way, opening up new doors.
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