Travers Smith's Specialty and Structured Finance team were among the more than 1,200 registered delegates at DealCatalyst's ABSF Global Conference at the Royal Lancaster on Monday 25 November 2024.
The mood was upbeat as originators, funders and service providers gathered to recap on the year to date and look ahead to 2025. In panel and plenary sessions throughout the day, there was discussion of (i) emerging trends, funders, products and asset classes, (ii) the regulatory environment and (iii) challenges and opportunities for first time and seasoned originators.
Senior Associate Adam Burk spoke on a panel entitled "Funding Considerations | Securitisation: When and How to Think About ABS", setting out some of the considerations involved in inaugural warehouse securitisations and the journey from specialty finance facilities to securitised products. For many participants, this is the crucial stage in the debt journey of originators across the space, and Adam was delighted to have been able to provide insight into our experience advising funders, originators and other stakeholders at this important juncture in the funding cycle.
Our key takeaways from the day included:
- The trend towards "incubation" of originators: funders are increasingly supportive of early-stage originators and have recognised that partnering with them at the beginning of their growth journey (potentially as early as their first capital raise other than through HNWs and angel investors) is strategically important and a long-term investment. Funders are more likely to support early-stage business that (i) have a strong management team (ideally with a track record for successfully originating the relevant asset class which the funder has already lent against), (ii) have prepared a comprehensive and realistic investment deck and (iii) are able to provide clean and useable historic performance data.
- Originators' focus on scaleability: in turn, originators are increasingly focused on scaleability and growth strategy from their early days. While an originator with an initially narrow investor base may not get all the flexibility they want from day one, wider investor bases may come at the cost of ROFR rights which may inhibit growth. Increased flexibility from funding partners will typically follow once there is a proven track record.
- The ongoing development of private credit: private credit has a key and emerging role to play in the early stages of the originator lifecycle, with the flexibility to both lend debt and provide equity (either in the form of actual equity participation, warrants or other share options). It also has a unique ability to bridge the gap in warehouse and specialty finance lines between senior banks and equity, and, as a business grows even further, provide funding at all levels of a more complex securitised ABS capital stack.
- The state of forward flow: forward flow purchasers are continuing to explore partnering with earlier stage originators. This is particularly true of forward flow purchasers who offer other capital solutions as well (and may view an early forward flow as a way to incubate originators). The 100% (or more) advance rates available are attractive to originators who see forward flow as an opportunity to achieve scale without the additional commitment that would be required from their investors in a warehouse (or even a specialty finance) structure, but who should also be aware of exclusive or uncommitted forward flow arrangements which may initially appear palatable, but which are often unattractive in the long term.
- The emergence of esoteric assets: various esoteric asset classes are emerging. Of most note are data centres and the gaming sector, but also fibre transactions, insurance-linked securities, as well as SRTs to a certain extent - particularly as a response to regulatory capital requirements. Funders tend to approach the credit analysis and pricing in much the same way as for any existing asset classes, but, as with any new assets classes, there can be questions around (i) the reliability of cashflow forecasts given the lack of historic performance data and (ii) more esoteric issues, e.g. jurisdictions which have issued a moratorium on the development of new data centres.
Bridging and HMO investments were often mentioned as promising/growing asset classes, as was NAV lending in the fund finance space. - Regulatory risk and change: engaging legal counsel early on often pays in the long run (and can for example flush out any potential issues with underlying customer documentation, particularly within the regulated consumer finance sector). Legal counsel can also horizon scan for other issues, whether legal, structural or regulatory. For example, there is currently significant discussion around the motor finance commission cases, where legal counsel are well placed to advise on the likely impact of similar commission arrangements in other sectors.
