SLF Europe: Key Takeaways

Ashurst were a lead sponsor and the 2nd Annual Specialist Lender Finance Europe conference, with nearly 1000 issuers, investors, banks, lawyers and more coming together to discuss the most important trends shaping the industry this year and beyond.

Below, our team summarise the key topics discussed, including:

• the forward flow market;
• when (and if) to securitise;
• esoteric assets;
• 确保健康的业务;和
• loan portfolios.

Forward Flow

Whilst Forward flow arrangements can offer benefits to both purchasers and originators (such as diversification of funding sources, access to risk and reward and balance sheet management), they also pose some challenges.

A number of potential issues need to be carefully considered and addressed, such as regulatory permissions, servicing and jurisdictional licensing. The nature and extent of these issues will depend on the type and structure of the forward flow arrangement, as well as the asset class and the jurisdictions involved. Proper due diligence, documentation, and risk mitigation are essential to ensure a successful forward flow transaction. Not a magic bullet for originators, but if integrated with other funding tools and aligned with an originator's business model and strategy, forward flow can provide much needed diversity of funding, whilst private credit funds have the optionality of take and hold strategies, or securitising/back leveraging.

For more on this topic, do take a look at our recent article "Forward Flow in a Moving Market".

Securitisation

Securitisation can provide specialist lenders with access to a large and diverse investor base, lower funding costs, and provide balance sheet relief. However as securitisation can be costly, complex, and has regulatory requirements, it may not be suitable or available for every specialist lender or asset class.

Specialist lenders should have a clear growth plan and a long-term vision; they should not rush into securitisation without having a sufficient track record, scale, and quality of assets, and indeed warehouses are likely only one piece of the puzzle. With volatility in the public markets, private securitisation has become increasingly popular, however even with the same, specialist lenders should pay attention to and consider, ratings requirements, servicing and backup servicing requirements, necessary transparency, and accessibility.

Esoteric Assets

Esoteric assets, being assets that may have unique or complex characteristics, such as contractual, legal, or operational risks (including music royalties, aircraft leases, cloud computing contracts, and environmental, social, and governance (ESG) data), can offer attractive returns and diversification benefits to investors as well as a non-correlated profile.

They do however often also require a high level of expertise and due diligence to understand and price the risks involved. The importance of having knowledge not only of the jurisdiction of the asset, but also of the culture and behaviour of the asset class and the end-users deters many would be investors, particularly from the world of private credit. In the alternative, underwriting the corporate, not the asset class, and placing greater reliance on an experienced and highly expert management team is a developing trend. Watch out for asset classes involving specialised cloud providers, technological innovation, and ESG data.

For more on the esoteric asset class that is litigation funding, do take a look at our Speciality Finance podcast "A spanner in the works for litigation funding".

Healthy Businesses

The specialty finance sector has faced significant challenges and changes over the past 48 months, due to the continued impact of the Covid-19 pandemic (with the regulatory and governmental responses thereto) and the rising interest rate environment. These factors have increased borrower stresses and heightened the liquidity risk for specialist lenders. The importance of having a robust and resilient business model and strategy has been continually highlighted, combined with selecting the right long term funding partner.

Specialist lenders should never be complacent when it comes to the basics - a focus on responsible lending practices, effective risk management (including regulatory compliance), and maintaining effective communications with stakeholders is always sensible. Specialist lenders who are well-capitalised, well-run, and well-diversified in their funding sources should be able to cope with the rising rate environment and changing borrower demand. Some have now gone through their first true downturn, having grown-up in a historically low-rate environment, and benign macro environment; it is the time for those strong survivors to shine.

Loan Portfolios

The debt purchase market, from the purchase of granular assets to the purchase of mid-market deals, continues to develop with funding being deployed from private credit as well as the traditional sources. The loan portfolio and the speciality lending markets continues to converge, as together they work their way up the sophistication curve, on a fast growth agenda. Increasingly sophisticated modelling is core to correctly pricing risk against prospective yield, and strategic alliances have sprung up with some innovative solutions.

Documentation continues to flex, and financiers have sympathy with non-standard processes required in order to maintain competitive advantages. However, given the macro direction of travel, sellers should expect investors to be more focussed on 'house' points. Funders will also be looking through policies and documentation beyond the FCA approvals and looking for evidence in relation to best practice around customer journey and consumer outcomes, where applicable.

For more on the loan portfolio asset class, do look out for the next in our Speciality Finance Podcast series focussing on loan portfolios and debt trading.