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The rise of securitisation and the assets that are set to soar

The rise of securitisation and the assets that are set to soar

The motivation for the securitisation is to carve out the best assets on the balance sheet and seek asset-backed financing on better terms

Boarding a flight, streaming a film, texting a friend, purchasing at a fast food restaurant: These activities that we take for granted all have something in common behind the scenes.

Commercial assets such as planes, film rights, cell towers, and franchised consumer brands are increasingly being financed in the securitisation market. For the uninitiated, securitisation is the process of creating liquidity by pooling together various financial assets and then marketing the repackaged assets to investors. This trend started in the US and is growing elsewhere in the world.

Commercial assets, which are sometimes also referred to as operating assets, are critical and essential to operating a business. A few examples are commercial jets leased to airlines, shipping containers leased to shipping lines and solar panels installed in solar farms. The latest asset class to enter the fray is wireless airwaves, as demonstrated by a landmark securitisation deal by the US mobile network operator Sprint Corp in 2016.

All these commercial assets have something in common that lend themselves to be suitable for asset securitisation. They are essential to the cashflow generation to the businesses that deploy them. Their value is typically independent of their current owner or operator and thus can be fairly assessed. As a result of this, the assets can be traded, sometimes even in fairly liquid markets.

The fundamental motivating factors for commercial asset securitisation are balance sheet management and funding cost optimisation. Take the wireless spectrum sale-leaseback securitisation as an example. At the time of Sprint’s securitisation, the corporate rating was low. The motivation for the securitisation is to carve out the best assets on its balance sheet and seek asset-backed financing on better terms. Through a sale-leaseback transaction, the wireless spectrum licenses were then sold to wholly-owned subsidiaries. The issuer subsidiaries then leased the wireless spectrums back to Sprint. Both the wireless spectrum and the lease act as collaterals backing an investment grade-rated securitisation, which priced at half the rate Sprint was paying on its corporate debt.

Using a similar concept, operators of commercial assets have found that sometimes the markets value commercial assets at higher valuations and can finance them cheaper. One of the reasons for this arbitrage is that such commercial assets can be better utilised if shared.

For example, through co-location, a leasing company owned cell tower can host antennae leased to multiple telecom companies, earning higher lease revenues and helping all lessees to densify network coverage. This rationalisation helped to launch the cell tower leasing business and led to securitisation backed by cell tower lease payments.

Similarly, transport assets such as aircraft, shipping vessels and containers, and railcars, can be more efficiently deployed among a larger base of users.

Another compelling case for commercial asset securitisation is its ability to give credit to stable cashflow and look beyond shortcomings such as the operators’ small size and short operating history.

The Asian, Middle Eastern and African capital markets are where we expect to see increasing commercial asset securitisation given the vast market potential in these regions.

We are increasingly seeing the incorporation of commercial asset finance and securitisation into our clients’ funding sources. Two growth areas at the forefront of this trend are aircraft leasing and infrastructure investment. Asia is increasingly driving the global growth of aircraft leasing. Five years ago, only one out of the top 10 global lessors was in Asia, today it is five.

We believe that as the aircraft leasing sector continues to expand, there will be an increasing need to add securitisation to a funding model traditionally dominated by commercial banking.

Infrastructure developers in Asia, in sectors as wide-ranging as renewable energy and telecommunications, may find the experience in the US and other developed countries highly relevant.

Given the balance sheet constraints faced by governments and corporations, off-balance sheet commercial asset securitisation may just be the perfect solution.

Henrik Raber is global head of credit markets at Standard Chartered Bank


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