The asset-backed securitisation (ABS) market is at the cusp of a huge transformation, as the industry scrambles to find ways to respond to technological disruption, geopolitical volatility and dramatic regulatory changes such as the LIBOR transition to overnight risk free rates
A delicate balancing act
Amidst this market growth and increased regulatory oversight, the role of the trustee as a uniquely positioned intermediary perched in between issuers and investors is becoming an increasingly vital one. During a panel discussion on day one, Olufemi Oye, Head of Special Situations, Trust & Agency Services at Deutsche Bank, shared his insights on some of the key trends facing trustees.
There is a delicate balance for trustees between fulfilling their fiduciary duties (either actively or passively) and assisting the originators and issuers in maintaining efficient structures within the prescribed mandate.
Oye told the ABS conference that trustees should only step in to amend or modify the terms of a structured finance transaction under a limited set of circumstances, namely to concur with the issuers to make changes which are not materially prejudicial to the interests of noteholders, or which are formal, minor or technical or to correct a manifest error. A trustee should always take such appropriate legal, financial or expert advice as required in order to determine whether it can properly exercise discretion in relation to proposals which have been presented to it. He explained interventions need to be carefully considered and properly reasoned as amendments and modifications can have an impact on the commercial terms of structured finance transactions, occasionally to the detriment of certain bondholders.
Technology and ABS
ABS speakers were divided about the extent to which disruptive technologies such as distributed ledger technology (DLT) will impact the trustee business. Promoters of DLT say the technology’s core benefits – principally its traceability, transparency, incorruptibility, enhanced accuracy, and real-time information flows – could commoditise and endow trustees with a number of advantages, not least cost savings. One speaker acknowledged the securitisation market had made enormous progress and was steadily adopting the technology, citing the recent € 1 billion synthetic securitisation agreement between the European Investment Bank (EIB) and BBVA, a transaction that was entirely recorded on the Hyperledger Blockchain.1
Not everyone, however, is convinced. “The trustee industry is not something that can be commoditised. Trustees and trust is an art and not a science, so technology will not influence my decision on whether to exercise discretionary powers,” highlighted Oye. Other experts concur DLT has a long way to go before it embeds itself in the securitisation process. Ongoing inhibitors include DLT’s lack of proven interoperability; absence of universally agreed upon standards; uncertainty about its scalability; and limited regulatory oversight.
Challengers and Independence
The audience heard that the trustee market is evolving, as a number of independent challengers attempt to muscle in on a business long dominated by banks. Oye said that independent so called challenger trustees are not a new phenomenon, and there are other independents which are longstanding. While there are new challenger trustees entering the market, he felt bank-owned trustees and independent providers could peacefully co-exist, adding that to a degree they complement one and other. Bank trustees may appoint independent providers if there is a conflict of interest (e.g. if a bank either arranges or holds a position in an issuance which its trustee business is overseeing). “However, most trustee banks are fully separated from the parent company’s investment banking arms, so there is little risk of conflict of interest.”
Towards the end of 2021, the LIBOR benchmark underpinning US$350 trillion of financial instruments including securitisations will no longer exist in its current form. In its place will be new calculation methods based on rates such as SONIA (Sterling Overnight Index Average), an overnight risk-free reference rate. Other core markets including the US, EU, APAC, Japan and Switzerland are also migrating away from their equivalent Inter Bank Offered Rates. Speakers at Global ABS conceded the discontinuation of LIBOR would pose challenges for legacy securitisation contracts insofar as they will require updating and amending. While a number of legacy contracts envisaged the possibility that the benchmark rate may one day be temporarily unavailable or inaccessible, few predicted LIBOR would disappear entirely.
Furthermore, there is lack of clarity about the actual fall-back provisions and rates for legacy securitisation contracts once LIBOR ends. Most experts attending Global ABS agreed that issuers and investors are becoming more comfortable with SONIA based calculations as an acceptable replacement for LIBOR and that they are expected to need to work closely with their existing agents and trustees, in addition to the investor community, to manage the transition for existing deals. Global ABS delegates heard about the first successful consensual change for an existing transaction, moving from LIBOR to SONIA, with Deutsche Bank acting as trustee and agent on the deal.
The EU Securitisation Regulation2 which came into effect on 1 January 2019, consolidates and harmonises the European Securitisation risk retention regime and aims to create “simple, transparent and standardised” (STS) transactions. While full adoption by the European Parliament is not expected before Q1 2020, the industry is ploughing ahead with STS certification. Amidst the uncertainty over timings on the implementation of the regulation, industry participants comprising of issuers, collateral managers and collateral administrators such as Deutsche Bank, have joined various working groups to prepare for the complex transparency and due diligence requirements, starting from data source, accessibility, and determining the confidential nature of some of the details required.
Winding down with NPLs
European NPL activity had a bumper year in 2018, with sales totalling more than € 205 billion.3 Ersilia DiMarco at Deutsche Bank said a lot of the transactional activity was concentrated in Southern Europe, principally Spain, Italy and Greece. Spanish banks have made enormous progress winding down their NPL exposures, although financial institutions in Greece are still struggling to offload bad debts from their balance sheets. Meanwhile, Italy was given the go-ahead by the European Commission to continue with its GACs (Garanzia sulla Cartolarizzazione delle Sofferenze) programme for another 36 months as its domestic banks continue in their efforts to wind down more than € 200 billion in NPLs. Despite hopes that UTP (unlikely to pay) loans would be incorporated into the latest GACs scheme, they were not. While European NPL activity has been buoyant, some experts believe the market has peaked as investors look for opportunities elsewhere in places such as China and India.4
1 Banking Technology (December 20, 2018) BBVA and EIB sign € 1 billion synthetic securitisation on Blockchain
3 Ashurst (March 5, 2019) A Global NPL Perspective
4 Ashurst (March 5, 2019) A Global NPL Perspective
Sign me up
Register for exclusive insights
relevant to your area of
Manage your profile and
preferences to receive exactly
what you need