The term securitisation brings back bad memories of the 2008 financial crisis and in many ways the Great Recession served to tarnish the reputation of the complex financing tool.
But this much-maligned mechanism may be about to make something of a comeback as pension funds and other institutional investors turn to ever more esoteric investments, such as synthetic securitisation, amid a frantic search for yield.
The rating agency blunders in the run up to the financial crisis has led to a certain degree of wariness around securitised assets as the wounds of 2008 continue to heal. However, there are indications that institutional investors are regaining their appetite for securitisation as the low interest and low yield environment pushes them to invest in alternatives in an effort to generate returns.
But one potential concern about investors venturing into this arena is the inability to ascertain the fair market value of assets. This raises the question of whether investors are aware of the risks they are taking on or are depending too heavily on rating agency assignations.
Speaking at a conference in Malta called Creating Liquidity – Trends in International Securitisation, Alessandro Materni, a director at Zeta Group, explained how although regulation demands the fair market value of securitised assets, everyone in the industry knows this is impossible to actually calculate. To comply with this particular piece of regulation, accountants receive “bogus” models, using figures essentially plucked out of thin air.
Materni, however says the lack of fair market value has no impact on the risk these securitised assets represent. This is because institutional investors are aware of this fact and would not depend on such valuations when assessing assets for investment. “All the players in the industry know that fair market value is bogus. They’re just numbers,” said Materni. He went on to explain that institutional investors consider the assets and the manager when selecting these sophisticated investments.
He added that rating agencies are prudent in their assignations, (possibly more so post-crisis) and usually give a rating lower than how they actually expect the assets to perform. This is done to add another layer of security.
And the growth of the market shows this complication has not turned investors off from venturing into the space. Indeed, PGGM, one of the largest Dutch investors, completed a €2.3bn deal to insure Santander loans in January. The synthetic securitisation trade sees PGGM selling credit insurance against potential losses on a portion of more than 6,000 Santander loans to small and medium enterprises.
The transaction represents a deeper foray into the world of securitisation as it deals solely with the transfer of risk. A simpler version of a securitisation deal is a ‘true sale’ securitisation whereby assets are moved to a special purpose vehicle which then issues bonds to raise capital.
European regulators have committed to improving the securitisation market in light of its historic ability to provide alternative funding sources. Given the current low yield environment and tight lending practices, this could be key to creating liquidity in the markets.
The European Commission has said it aims to “to promote a sustainable, deep, liquid and robust market for securitisation, which is able to attract a more stable investor base to help allocate finance where it is most needed in the economy.”
But in all consultations, regulators have expressly stated and reiterated that this is a market only suitable for institutional investors and issuers should not attempt to offer securitised products to the retail market.
