Private securitisations are a relatively recent, post-GFC, development in capital markets. The types of companies that can take advantage of this funding strategy are varied. The key is that the business mix of the company must generate assets over which security can be granted to the note issuing vehicle or special purpose vehicle. These assets can take the form of loans, invoice receivables, units of manufacturing or engineering production, residential and commercial property and any other assets that generate a revenue stream and can be charged as security.
Private securitisations offer several advantages over mainstream broadly-distributed public securitisation transactions. Issuers benefit from a cheaper, more rapid recycling of capital and investors benefit from an established security framework with a calculable risk profile and are being compensated well relative to risk for an inherent lack of liquidity. Let’s take a look at the key features of private securitisations, how they can be used and the reasons for their emergence as a niche, but distinct, funding source.
Private securitisations utilise traditional asset-backed financing techniques. Investors acquire debt securities issued on a limited recourse basis by the SPV. The SPV either acquires or takes security over a portfolio of either credit or real assets, the cash flows of which finance periodic interest payments and evidence the ability to refinance at term via a bullet repayment where there is insufficient cashflow amortisation of the debt. Constant adherence to covenants such as LTV and DSCR control distributions of asset cash-flow and early amortisation during the term. Such structures are common in large-scale public securitisations. However, it is in the divergences from such larger scale transactions where private securitisations add their value. These are summarised below.
Private securitisations can be completed with a portfolio size as low as £50 million (compared to £150 million or more required for public securitisations). This allows Issuers to access cheaper, scalable institutional funding at an earlier point in their portfolio or business growth; diversify capital sources in a manner which can complement existing credit routes (e.g. bank funding and warehouse or credit lines); and establish a capital markets track record that will allow for repeat and larger issuances as their business grows.
Diversity of Portfolios
Private securitisations can accommodate smaller niche markets and esoteric asset-classes and customers across the credit spectrum. As outlined above, securitisable asset-classes can include a diverse range of products such as auto finance, bridging loans, invoice financing, asset finance, second charge lending (which are reasonably familiar) or more esoteric receivables such as storage facilities, whole business securitisations and transport assets. Additionally, private securitisations are an option for issuers in other niche circumstances, for instance where a subset of the portfolio is more challenging to securitise publicly (e.g. limited performance history) or for assets where there is not yet a developed rating methodology.
Typically private securitisations have the ability to increase investor commitment limit (in some cases without investor consent up to an agreed limit) or to bolt-on additional series within a programme under common terms. Both allow for funding to be tailored to a sponsor’s origination capacity within an existing structure and provide for future growth. By contrast, investors in public securitisations are typically fully drawn on closing without the ability to increase funding.
Cost & Complexity
Many of the features of public securitisations that add cost, time and complexity are not essential. For instance, many private securitisations are unrated (instead being internally structured using models based on rating agency guidance) and may be unlisted and/or untranched. As a result, transaction cost and time is significantly reduced versus public securitisations and by structuring in accordance with asset-backed securities principles, albeit with simplifications to improve efficiency, pricing can be anchored to larger asset-backed securities markets.
Yields on sovereign and top-rated corporate bonds may be trading near record lows, but investors still want returns and diversification in their investment portfolios. To this end, investor appetite for private securitisations has increased, and an array of specialty finance products are being securitised to meet the demand. Private securitisations can enhance defensive positioning with structures that are generally similar to traditional ABS, an asset class that in the past decade has seen many improvements in structural simplicity, underwriting standards, transparency and credit enhancements. It also provides investors exposure to a broader spectrum of asset classes that in many cases are being originated by lenders and operational businesses at an earlier stage of growth than would be the case in respect of a full public securitisation.
Private securitisations offer a new model for connecting borrowers and investors. The traditional ABS market is well established and by adapting its structuring techniques to a wider range of portfolios it offers both issuers and investors a mutually beneficial method of participation in capital markets.
Robert Ainscow is head of capital markets and Viktor Petkov is director of structuring and capital markets at Zenzic Partners