Introduction

Securitisation is a means of raising funds secured on the back of identifiable and predictable cashflows derived from a particular pool of assets. In the last few decades a wide range of assets have been securitised. The more usual types of collateral used in securitisation transactions include residential and commercial mortgages, credit card and trade receivables, and corporate, consumer and student loans. Are there alternatives to these traditional assets that are suitable for securitisation? The answer is absolutely positive. The intention of this article is to shed light on an innovative financing channel, whose full hidden potential has not yet been realised—securitisation of non-traditional assets.

Non-traditional assets suitable for securitisation

Whole business securitisation (“WBS”)

Securitisation transactions could be backed by not just a single class of assets but instead the income stream of a whole business, such as the London City Airport securitisation in 1999. WBS is a type of securitisation secured against the cashflows derived from the entire range of operating revenues generated by the whole business of an operating company. Over the years, WBS has been used by a wide variety of businesses to raise funds, from Five Guys (restaurants and food sectors), Planet Fitness (fitness industries), Mitchells & Butlers (bars/pubs), Odeon Cinemas (entertainment venues and productions), to infrastructure-related sectors including airports, railways, utilities, roads and highways and others.

There is no formula that determines whether a business is suitable for securitisation. However, in WBS to-date the businesses in question produced stable, predictable cashflows backed by historical data. In particular, the following types of businesses seem well-suited:

·             regulated industries because of the difficulties faced by companies trying to set up in competition;

·             established businesses which require high initial capital investment because this acts as a barrier to entry into the market for potential competitors; and

·             businesses which, to a degree, are recession-proof.

Intellectual property (“IP”)

Formerly, most companies only relied on tangible assets for asset-backed financing, but today, intangible assets can also be securitised for funding purposes. Whilst, in the field of IP, raising funds for research and development, creation of new inventions and works has never been an easy task, IP securitisation may now be considered. Among the famous cases of securitisation of IP rights are the securitisation of a HIV drug patent held by Yale University, the trademark of the Domino’s Pizza chain and the copyrights of the U.K. rock musician David Bowie.

Insurance policies

Some funds have started to turn to securitised insurance policies for their liability-driven investment strategies, filling the gap in the market for long-duration bonds. This also gives individuals an opportunity to sell his/her insurance policies to aggregators looking for these insurance policies. In the 1980s, when AIDS was rampant and incurable, many AIDS victims sold their life insurance policies to pay for expensive treatment and these life insurance policies were then securitised and sold to investors. These securities are referred to as “death bonds”.

Commodities inventory

Commodities that have been securitised in the past include inventories of crude oil, refined metals (such as lead, nickel, zinc, copper and aluminium), wool, and diamonds. Securitisation activities in this area are mostly, if not always, initiated by large, multi-national natural resources companies and commodity traders. What is required is not just a large inventory of commodities, but also a portfolio diversified enough to hedge against geo-political and macro-economic risks, as well as in-house financial expertise to understand the structure of these securitisations before even approaching a financier.

In this area, notable cases include Glencore International’s 2002 securitisation of refined metals in a US$750 million deal. In 2017, Trafigura also launched a US$470 million securitisation programme backed by its inventories of crude oil and refined metals, located in storage warehouses in 12 jurisdictions across Europe, the Middle East and Asia-Pacific. It should be noted that in this transaction, the risk of fluctuating market prices were hedged by futures, which helped to stabilise price volatility of the underlying commodities.

Equipment leasing

Equipment leases are split into small, medium and large ticket leases. In particular, small ticket leases refer to consumer equipment leases and rentals. For medium ticket leases, office equipment, printing machinery, and small machinery items are involved. Finally, large ticket leases could cover heavy industry machineries or high cost medical equipment such as MRI equipment. A typical equipment leasing securitisation will pool together hire-purchase agreements, operational leases and financial leases for credit enhancement purposes. Since 2017, De Lage Landen securitised different portions of its equipment lease portfolio to raise up to US$5 billion in financing. In 2018, it securitised its portfolio of leases of copiers, printers, networking, and office equipment in a US$1 billion deal. In 2019, in another deal worth US$1.24 billion, it securitised an entirely different portfolio of construction, industrial and transportation equipment leases.

Securitisation as a financial engineering tool

The most commonly recognised answers to the question of whether it would be sensible to raise financing through a securitisation are related to increasing attractiveness, lowering cost, reducing dependence on bank credit and improving key accounting ratios of the originator. Over the years, these benefits have made securitisation an increasingly popular option for asset owners to raise financing. In this connection, more creative and innovative ways have been applied to enable and also incentivise asset owners to make use of non-traditional assets to raise funds. With the introduction of the five types of non-traditional assets suitable for securitisation in this article, one unified message is conveyed: anything can be securitised, if a steady and predictable income stream is naturally occurring or can be created. In this day and age where investors are seeking more bespoke products beyond the traditional range of investment opportunities, securitisation might just be looking at the perfect timing to slowly become the financial engineering tool of the future. Asset owners should be actively pursuing ways to securitise in order to gain first-mover advantage.