Central banks across the globe are pumping liquidity into the financial markets. And most companies are in urgent need of a cash injection. Securitisation would be a superior way to connect them together in this challenging environment.

Hong Kong has extended the red travel alert to cover all overseas nations and placed arrivals from all foreign countries under home quarantine. Although central banks all over the world are pumping liquidity into the financial markets, such actions have failed miserably to arrest the free fall in the stock markets. So how can any business pull through such challenging times?  

Market conditions

Over the last one month, the Dow Jones Industrial Average has fallen close to 30%, whilst Germany’s DAX Index has fallen close to 37%. And the only reason why the Hang Seng Index has only fallen 15% since February is because it had already lost 12% since April last year.

There can be no doubt that most, if not all, companies are struggling at this moment and probably urgently need some sort of cash injection soon. But with the weak equity markets and the flight to safety in US Treasuries (10-year yield is now at about 0.65%), it is an uphill task for any company to try to raise any funds under these extreme market conditions.

The irony is that, given the global expansionary monetary policy, there must also be a lot of investment monies chasing after attractive investment opportunities. Eventually, investors will be seeking better returns within their risk tolerance and most companies, including the very best, will be competing for them and their investment monies.

But how can these investors be connected to the companies in need and how can a company differentiate itself from the competition in such an environment?

Private securitisation

Investors’ appetite for private securitisations have been on the rise lately and they offer a new model for connecting borrowers to investors. Securitisation should be understood as a refining process, much like oil refining, which turns “raw” assets into highly bespoke investment products tailor made specifically to meet investors’ needs.

This process begins with an outright disposal of assets into a single purpose company (SPC). And then, through financial engineering, the SPC can issue a broad range of investment products suited to a variety of investors and catering to their investment needs and criteria.

Through securitisation, it is possible to:

1.        Create an investment grade product from a non-investment grade asset owner. It will not be at all surprising to find that the credit rating of a securitised product is higher than that of the company.

2.        Turn an asset with no cash flows (such as precious metals and gem stones) into a fixed income product.

3.        Create a commodity or an equity investment exposure from a fixed income asset.

4.        And more.

The infinite possibilities offered by securitisation are limited only by the imagination of the creator.

Advantages

Being such a versatile financial engineering tool, a securitisation naturally has many advantages over a regular bond issuance. The following is a non-exhaustive list of some of these advantages:

1.        The ability to create an investment product that is less risky than the company, and therefore more attractive to an investor.

2.        The ability to provide tailor made investment exposures to make an investment product more attractive and potentially lower funding costs.

3.        Specific assets are being “ring fenced” to limit and confine risks in the investment product and enable the investor to focus on the performance of such assets.

4.        The debt is created by the SPC and hence will not directly burden the company.

5.        There is an outright asset disposal that could generate revenues for the company.

6.        New revenue streams could be created for the company.

A company should exploit these advantages to differentiate itself from its competition. The key to unlocking any investor’s purse is to meet his or her investment criteria and needs.

Conclusion

Securitisation has successfully attracted investors even for non-traditional securitisation assets like mortgages, student loans and credit card receivables. About a year ago, Taco Bell raised close to US$1.5 billion by securitising its restaurant revenues. Through this method, they not only successfully secured their funding, but also managed to lower their financing costs. And in 2017, Trafigura raised US$470 million by securitising its inventory of refined metal and crude oil, and “magically” turned assets with no cash flows into a fixed income product.

It is even more crucial now than ever before to effectively and efficiently utilise securitisation for fund raising in the face of daunting headwinds in the financial markets. Earlier this year, the Asia Pacific Structured Finance Association published a report promoting Hong Kong as a securitisation hub. This is the foreseeable future, do not miss the boat!