In place of the ABS industry conference in Barcelona this year, our latest webinar saw Senior Consultant and Non-Executive Director Sally Gilding join two expert corporate trustee lawyers - Catriona Lloyd from Dentons, and Morgan Krone from Allen & Overy to discuss how trustees can act as agents of change within the securitisation markets. In this article we have transcribed some of the key points raised by the panel, but you can still view the session in full and on-demand here.
Sally Gilding, Ocorian: In an increasingly uncertain and changing market, trustees are being asked to be more active in the amendment, review and restructuring of securitisation transactions. That is on top of a more onerous regulatory environment across the board. Our industry has a key role to play in the survival of these products, sectors and businesses during this crisis and in the financing and refinancing that we are going to need to get economies back on their feet (when the time comes).
Has COVID-19 resulted in an increase in activity in the securitisation market?
Morgan Krone, Allen & Overy: The impact will depend on the severity and duration of this crisis. We're certainly seeing an uptick in work and a lot of "after-sales" matters e.g. trustee, discretions and waivers and amendments. As we move into next month and as valuations begin to become clearer, we expect to start seeing some more significant restructurings and possibly defaults as lenders are able to plan their recovery exercises. We are not in a banking crisis, certainly not yet. There is still a lot of forward thinking as we start financing and refinancing the debt that is being issued - who are the winners and survivors going to be? What will be the trends? This crisis is clearly an acceleration of a number of big changes that we're already seeing.
Catriona Lloyd, Dentons: We've seen an uptick in liability management issues and instances where issuers are seeking waivers for covenant breaches or needing extensions for payment periods/maturities. I think the government support, both in the UK and Europe, has been very helpful in delaying the sort of liquidity crunch that we had during the financial crisis. Companies have government support to address the cashflow issues that they are having. In the autumn, we will see if banks are able to be as generous as they have been while being encouraged by the government support scheme. We are still seeing issuances happening, which is great.
Is the future of securitisation doomed, at least for the short-term?
Catriona Lloyd: I don't think securitisations are doomed. I think they are going to continue, and continue quite strongly. The future death of securitisation has been foretold by many and has not actually materialised. A few years after 2008, we had the biggest boom in securitisation products we've ever seen. In terms of the pipeline that I'm seeing, securitisations are definitely still happening.
Morgan Krone: The securitisation industry is in a good place at the moment. Much depends on how long the pandemic continues. We are seeing a number of products being resilient both in terms of their structuring and the quality of their underlying portfolios. At the moment covered bonds seem strong, so do CLOs. The CMBS market is holding up although clearly there is considerable challenges in the commercial property market, but many of those deals are single asset/single portfolio and they are well constructed. In respect of deferrals and holidays, we are not seeing a large effect in the RMBS or CMBS markets. The structural protections that are built into these deals are kicking-in, i.e. liquidity support, reserves, cash trapping, diversion of cash. However, if payment deferrals fall into actual delinquency and default, these deals are going to become increasingly distressed. Trustees have to be very alive to this developing situation.
How can trustees act as agents of change in the current situation?
Catriona Lloyd: A key strength of trustees in times of significant uncertainty is their experience of what can go wrong. A trustee's experience, what they've seen in the market and how they've handled it in the past, is one of the ways in which they can be an agent of change. They can be constructive and helpful commercially in approaching a problem in a way that issuers may not have seen before. Trustees were very quick and responsive to initiatives such as bondholder meetings as soon as it was apparent that government social distancing requirements would mean it would not be possible to get all parties together in a single room. They can facilitate virtual meetings, and as a point of English case law, meetings can happen virtually. The key is that these meeting platforms are secure, use reliable technology and that enough participants are in attendance to ensure that meetings are quorate.
Morgan Krone: As agents of change, we can and are already showing flexibility in existing deals and making them work in a completely different environment than contemplated under the documentation. Virtual bondholder meetings are a prime example, and we have already seen trustees exercising discretion and allowing vital bondholder meetings, waivers and liability management exercises to proceed on a virtual basis. This is an area clearly ripe for reform and will generate a far richer conversation between bondholders, lenders and their trustees and agents. We need to continue to put our products and services onto online platforms and make it easier for people to communicate and do business with us. Whether we're talking about escrow and custody, repacks or receivables financing, all of those areas are ripe for tech innovation for the benefit of investors.
What are the positives that have emerged from the current situation?
Morgan Krone: I think we have grounds for optimism. In my view, our industry will be one of the engines that gets us out of the situation, in terms of financing the post-COVID world. There is going to be a need to invest heavily in healthcare, pharmaceuticals and logistics, and we will need to continue to push into renewable energy as the oil and gas sector continues to be challenged.
Catriona Lloyd: I think all of us in the industry deserve a pat on the back for how we've responded to it. It is testament to how our industry is able to adapt to change. None of us expected to be working from our respective homes for a large portion of the year, but actually we've all stepped up to the plate. I think what it also has shown is how important it is to be in touch with each other. Our industry is relatively friendly, and everyone knows each other. We remember that actually we are a people's business, and just being in a remote environment shouldn't stop that.
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Our trustee and agency team has over 30 years' experience in managing debt capital markets transactions. With a personal, professional and flexible approach, our team applies solid industry experience and practical expertise to assist banks and originators in establishing securitisation structures, delivering a cost-effective solution tailored to your needs. Our collective team experience covers the full spectrum of securitisation structures including ABS, CLOs, RMBS, CMBS, ILS, ABCP, aircraft financing, and income receivables structures.
Originally published 27 May 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
