One solution applicable to a wide range of industry use cases
Insurance companies and pension funds face a similar issue: the persistent low yield environment makes it very difficult to meet long-term guarantees or liabilities. These investors seek reliable, long-term investment opportunities with strong risk-adjusted returns and predictable cash flows. As such, the insurance and pension markets have in recent years seen an increasing allocation to long-term debt, with a deepening focus on private debt products.
CrossLend offers investors the possibility to view and invest in opportunities from a multitude of selected private debt originators – representing different regions and debt asset classes – via a single access point. Furthermore, our unified data model allows investors to easily and conveniently perform comparisons of originators. A standardised legal framework enables investors to perform replicable transactions, so they can efficiently scale and diversify their investments. The cost efficiencies for originators using the marketplace also mean that investors can access originators that are otherwise difficult to reach, as their origination does not fit into typical ABS structures.
Our unitranche pass-through notes are capable of incorporating forward flow agreements, meaning insurance premium payments and pension contributions may be invested in in a regular, ongoing manner, as per investor requirements.
Capital-constrained banks looking to maintain or increase their lending activity
Capital requirements, while beneficial for the overall safety of the banking system, do create certain challenges for banks who are looking to grow or even just maintain their lending activity. There are many different reasons why banks may be capital-constrained. For example, large banks with an extensive track record lending to specific categories of borrowers were previously allowed to calculate their capital requirements based on an internal ratings-based approach (IRBA). The new Basel rules (Basel IV) introduce a floor to this approach, scheduled in the coming years to ramp up to at least 72.5% of the capital requirements stipulated in the Credit Risk Standardised Approach (CRSA). These increased capital requirements naturally affect the ability of many banks to both originate new loans and hold existing loans on their books.
There are two possible solutions to this problem: such banks can either obtain significant capital injections, in order to overcome the shortfall, or they can source external investors and distribute originated assets through capital market transactions.
CrossLend’s marketplace offers banks a direct channel to institutional investors, enabling them to transfer their assets as they are originated. Notes issued by Crosslend’s SPV are capable of incorporating forward flow agreements, allowing banks to flexibly adjust their distribution capacity while still retaining their relationships with borrowers.
Regional banks with a cross-border investment strategy
We are seeing an increasing number of banks in Europe that couple a regional client focus with a cross-border investment strategy. They do so in order to tap into origination markets outside of their main business jurisdiction. Such banks are looking to increase their income by benefitting from a disparity of interest rates within the European market, however they do not necessarily have the capacity to establish operations in several different countries.
CrossLend’s marketplace gives banks the convenience of a single platform where they can view, analyse and compare a range of selected private debt originators from numerous countries, covering different asset classes. The analytical tools embedded in the marketplace are underpinned by a standardised data model, which not only enables meaningful comparisons of originators, but also assists investors with their reporting requirements once a transaction has gone live.
All of our transactions are designed to be – from a legal standpoint – as close to identical as possible. Hence, once an investor is familiar with our legal documentation and structure, future transactions should be easily understandable and therefore both replicable and scalable. Moreover, streamlined onboarding processes help to procure new and varied originators for our digital platform, providing investors with the ability to diversify their investments among originators.
Banks with a regional or industry concentration limit
Many banks have developed a certain regional or industry focus in their lending activity. While this results in significant expertise in their focus area(s), it also leads to increased concentration risks on the balance sheet. We have observed this to be most prominent in SME lending, commercial real estate financing and in project finance within the renewable energy sector.
The current solution employed by these banks involves entering into syndication transactions with other banks operating in the same segment. Such syndication transactions are costly and lengthy and present the risk of banks losing their customer relationships to the other parties involved in the transaction.
The CrossLend marketplace offers a flexible means for banks such as these to distribute loans to external investors, providing a standardised and streamlined process that allows them to keep customer relationships intact and avoids the need for syndication. As is common in syndication deals, in the CrossLend set-up, banks typically retain a substantial part of each loan on their own balance sheet, only distributing the portion that falls outside of their concentration limits. These transactions can be structured with one or multiple investors, with each investor taking a volume consistent with their risk appetite.
An increasing number of banks are striving to build a strong presence in one specific market – both in terms of geography and loan type – leveraging their market expertise and coverage of distribution channels to cater to the specialised needs of their clients. This expertise and client focus is often rewarded with high customer demand and growing origination. We have found this trend to be particularly observable in the auto loans sector.
Banks operating with a focus on specific markets both want and need to meet customer demand in order to retain their competitive edge, but growing origination leads to pressure on the balance sheet. In our experience, these are typically mid-tier banks with private ownership, so raising equity is a costly exercise which is not in the interest of the owners.
At present, the solution most commonly utilised involves offloading some of the origination through traditional channels, such as ABS transactions. This requires a ramp-up time of between six and twelve months, during which loans need to be originated that will meet the credit criteria of the ratings agencies evaluating the ABS transaction. In addition to the costs incurred for legal and structuring advice, the ramp-up period itself needs to be funded. The bank’s capital utilisation therefore increases during the ramp-up, but then suddenly drops when the ABS transaction is executed, only to increase again during the next ramp-up period, and so on.
CrossLend’s marketplace gives banks the ability to distribute a portion of their origination as loans are originated. Capital utilisation becomes more efficient, in turn, customer demand can be more flexibly managed and met, allowing banks to focus on their core strengths: customer and distribution partner relationships, as well as origination and servicing. In addition to margins from the lending business, banks can generate fee income from the servicing of the loans.
Banking groups with operations in multiple countries
Large banks operate across many different countries and asset classes, potentially even with different specialisations in each country. In order to manage the group’s overall balance sheet, such banks often seek ways to move assets efficiently across borders, from one balance sheet to another. In most cases however, for historical reasons, the banking systems in these different jurisdictions are not harmonised, making it difficult to easily transport such assets. These banks need a technical solution that they can plug into their existing systems to enable an ongoing and revolving exchange of assets.
CrossLend’s structure can be used by these banks for exactly this purpose. By transforming debt assets into tradable capital market instruments, CrossLend makes asset mobilisation seamless and efficient for large banking groups.
As traditional banks slow down their lending as a result of capital constraints and other obstacles, alternative players in the lending market – such as marketplace and non-bank lenders – are experiencing an increase in borrower demand. These new market entrants initially relied heavily on retail funding via peer-to-peer structures, but many have now reached the limit of funding available through this channel and have started sourcing institutional capital.
Sourcing institutional capital in a private market can be a time-consuming and complex task. On top of this, alternative lenders would be well-advised not to rely on only one funding partner, however, discussions with a multitude of investors with differing investment criteria and reporting requirements can turn into a never-ending side project. This leaves originators with less time to focus on the core activities of loan origination and servicing. While the alternative lending industry and the players within it have grown significantly, most lenders are still facing entry-barriers to real capital markets funding. ABS transactions often prove to be too costly, too large or simply not adaptable to the set-up of an originator without a balance sheet on which to warehouse loans.
CrossLend’s marketplace can provide more visibility to such alternative lenders – especially to institutional investors based outside of their local market. We have a replicable legal structure in place which can facilitate smaller transactions on a forward flow basis, allowing originators to distribute loans as they are originated. In comparison with ABS transactions, this forward flow structure provides new funding for originators, as opposed to simply providing their existing investors with an exit from their investments. Moreover, CrossLend’s analytical and benchmarking tools give originators a better view on their own origination data, allowing them to perform comparisons with other originators in the same or foreign markets.
More and more investment funds are discovering private debt as an attractive asset class for their investment strategy and are setting up new funds specifically targeting this segment of the European market. In doing so, they face the task of screening the entire market of European private debt originators. This can present a substantial challenge, as there are a multitude of asset classes within private debt and originators can have very different legal structures and loan tape formats. As the staff count of most investment funds does not allow for such an in-depth analysis of the entire market, this often leads to funds focussing on only a handful of larger originators. This means that a wide range of investors are in competition for a finite supply of loans offered by these lighthouse originators, leading to shrinking margins and, naturally, limited opportunities for diversification.
CrossLend’s marketplace will offer these investment funds a platform to view, analyse and compare multiple originators spanning various asset classes and countries. All of our transactions follow a similar legal and operational structure, so that once investors have become familiar with it in their first deal, this replicable structure can be relied upon in all following transactions.
Far-reaching benefits for originators and investors
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