Tag: Securitization

From leveraging data to DATA LEVERAGE

Imagine being a bank, an asset manager, or an investment fund with a well-established franchise in the loan industry that wants to expand its activity by tapping into new markets, products or geography. You would have quite a large database covering your exciting activity in terms of both clients and loans.

But what about a new market you want to target? Do you need to start the activity with a blind eye and collect information from scratch putting your capital at stake and waiting for months or years before having a solid base of data that can help you succeed?

Is there an alternative way?

So far financial institutions have been very vigilant in optimizing the use of their capital: from regulatory capital for banks to equity capital for more unregulated entities the key target is to extract the highest return. The most common way to increase the return of available capital is through leverage: gaining access to extra resources allows to amplify ROE.

During this time the concept of leverage has been extended to other fields, among which data.  The expression “leveraging data” indicates the process to turn raw information into valuable actionable insights.

Leveraging available information is a good practice and companies should take advantage to make data-driven decisions at a strategic and operational level.

Is this all?

What if instead of just maximizing the use of available data, one could actually increase the amount of data available?

I am not talking about expanding the information available via data enrichment or the use of so-called alternative data (which have quite a hype at the moment) as they would only give more dimensions to look at but not increase the actual data available.

Neither am I talking about buying external datasets.

I guess it’s about time I get to the point…

Have you ever thought to apply the concept of leverage to data? Not in terms of leveraging available data but actually increasing the data available through an approach that literally mimics the concept of financial leverage: apply a multiplier on the data a financial institution has available.

The concept is very simple: every time a financial institution extends a loan to a counterparty (or buy a bond) it gets data about a single counterparty (sector, geography, rating/FICO score, financial ratios, income, etc.) plus we can track the performance of the transaction over time (delays, renegotiation, defaults, recoveries, etc.). To increase the datapoint available, the financial institution should increase the number of transaction loans lent, or…..

It can invest into a SECURITIZATION!

By buying a note (or just part of it) into a securitization, investors gain exposure to the whole underlying portfolio of loans. And portfolio positions range from THOUSANDS for the smaller SME loan pools to HUNDRED OF THOUSANDS for pools made of consumer loans.

How long and what would it take to originate the same volumes in terms of time, costs, capital, organization, and all the rest? A rhetorical question really as it is not only time-consuming but resource-intensive.

All clear then? But can I just invest €1 into a AAA senior note and get loads of data?

Unfortunately, it’s not so easy…

Notwithstanding the requirements of the Securitisation – Regulation 2017/2402 gives investors the right to receive loan-level information on each transaction, however, in most cases, there is not a button (or a magic wand) that allows an investor to retrieve data in a standardized format nor in a timely manner. Data are indeed typically made available quarterly via pdf reports (or excel in the best scenarios), making it very hard for investors to translate them into meaningful and actionable information.

So data leverage is just a (nice) theory but cannot be realized in the real world?

Actually, there are solutions now!

Nowadays there are technologies, like CARDO AI that facilitate data retrieval from multiple sources with a data health check, as well as standardize them.

This process requires just a couple of clicks and takes just a few seconds (don’t even try to compare it with your excels!).

Now that I showed you how to leverage the data (which might have become BIG DATA with the appropriate multiplicator), here you have some examples on how to use them:

– Data can be used by servicers to adjust investment decisions in dynamic transactions (e.g. those with a ramp-up or reinvestment period or with a higher turnover such as trade receivables) to optimize the risk-return profile of the pool.

– They can be used by risk management departments to assess the rating of a transaction (e.g. applying scenarios deriving from data of comparable pools) or assessing the possible impact connected to particular events that affect a sector (e.g. tourism during the pandemic) or geography (e.g. after an earthquake, a flood or a particularly cold winter).

– They can be used to drive decision-making on new investments, including comparing scenarios provided by the arrangers, assess the impact of a new transaction on the diversification of the overall portfolio, negotiate a price that is more in line with the risk profile of a particular pool of loans.

– In the future, data will likely be used to assess the ESG profile of a securitization’s collateral pool and compare it with that of other transactions

ESG INCORPORATION IN SECURITISED PRODUCTS: THE CHALLENGES AHEAD

PRI (Principles for Responsible Investment – the world’s leading advocate for sustainable investing, founded on a United Nations initiative) has recently published an interesting report on the incorporation of ESG in securitization products.

On one side regulators are increasing transparency requirements on sustainable related information on investment products. On the other, client demands and risk management are driving demands for considering the long-term impact and sustainability of investment choices. As a result of these forces, investors and asset managers are widening and improving ESG policies, but few of those are tailored for securitization products.

ESG information wanted by investors

Source: PRI

For ESG incorporation in securitized products to be effective, a holistic, multi-pronged approach needs to be developed. Compared to other asset classes the securitization market shows some additional complexity though including:

Transaction structure: which implies a multi-level assessment of practices and policies including Sponsor and/or Issuer, Originator, Servicer, Deal structure, Loans, Collaterals or Guarantees. This is further complicated by the fact that parties can occupy multiple roles (e.g. servicer and originator) or involve private entities, which tend to be less transparent.

Adequate data: Practitioners consider the ESG information in current deal documentation, marketing materials, and underlying portfolio disclosures insufficient to comprehensively analyze most securitized products.

– No ESG reporting standards for servicers/originators: Relevant ESG information on collateral often lacks uniformity and is not comprehensive.

– A diverse pool of underlying assets: the complexity and diversity of underlying collateral (and the sectors covered) make it difficult to build proprietary ESG frameworks that can be used for assessment.

– A lack of coverage by third-party ESG information providers: ESG information providers have limited coverage of securitized products. This is not surprising given that responsible investments originally developed in equities and only recently expanded to debt capital markets. Moreover, the leveraged finance market includes a high proportion of privately owned and smallcap companies that tend to disclose less information

– Lack of a clear ESG premium: differently from the so-called greenium that typically applies to green bonds, securitization transactions do not show meaningful price differentiation when incorporating ESG criteria[1]

As a result, of the 2,000 signatories that reported on their investment activities to the PRI in 2020, only 215 indicated how they incorporate ESG factors into their securitized product investments.

ESG incorporation in securitized products is at a very early stage

Source: PRI

To find a solution to the complexity above and sustain more ESG driven securitizations, PRIs have identified data quality, availability, and consistency as the main solution: a combination of robust in-house and third-party data sources is likely to drive investor confidence in ESG incorporation across securitized credit markets.

For further information please refer to the following link: https://www.unpri.org/fixed-income/esg-incorporation-in-securitised-products-the-challenges-ahead/7462.article

[1]Based on European ESG CLOs that were issued between March 2018 and August 2020 versus traditional CLOs

CARDO AI supports BorsadelCredito.it with Banca Valsabbina and Azimut in a new securitization of € 200 million to support Italian SMEs

This transaction follows the previous securitization of € 100 million launched in September 2020, as part of the “Slancio Italia” project.

The new resources of € 200 million will be disbursed on BorsadelCredito.it through loans to SMEs with a maximum duration of 6 years, with 1 year of pre-amortization, and an amount ranging from € 50,000 to € 1,500,000 with a guarantee of up to 90% of the Italian Governmental Central Guarantee Fund (in Italian: Fondo Centrale di Garanzia) for SMEs.

This new securitization will help SMEs to cope and overcome the crisis linked to the spread of the pandemic. The operation, which sees the collaboration of BorsadelCredito.it – ​​the Italian fintech that supports SMEs in accessing credit – with the Valsabbina Bank – Brescian bank present with 70 branches in Lombardy, Veneto, Emilia-Romagna, Piedmont, and Trentino-Alto Adige – Azimut – one of the biggest asset managers in Italy – and CARDO AI – providing institutional investors with advanced technology for private markets to make better investment decisions, is aimed at supporting the real economy.

Compared to the operation of September 2020, the amount available to SMEs has increased from € 100 to € 200 million, thus guaranteeing Italian SMEs firepower for their growth strategies and better crises navigation.

The loans will have a maximum duration of 6 years, including one year of pre-amortization, an amount ranging from € 50,000 to € 1,500,000, and the guarantee of up to 90% of the Central Guarantee Fund (in Italian: Fondo Centrale di Garanzia) for SMEs. The companies applying for the loan will be evaluated within 24 hours based on the credit assessment conducted by BorsadelCredito.it through the use of proprietary artificial intelligence algorithms. The automatic process is then followed by verification of a credit analyst and subsequently the underwriting and disbursement of the loan within a few working days.

The “Slancio Italia” project was launched at the beginning of the pandemic, in March 2020, and is managed by BorsadelCredito.it and financed by credit funds such as Azimut as part of the strategic agreement between the two companies established in May 2020 with the creation Azimut Capital Tech. Azimut also covers the fundamental role of the underwriter of the junior part through its private debt funds. Banca Valsabbina supported the two companies as the arranger of the transaction, Account Bank, as well as underwriter of the senior and mezzanine part, for a maximum commitment of € 180,000,000. CARDO AI, a fintech supporting institutional investors in modernizing their portfolio management with advanced technology and data science. In this particular operation, Cardo AI has acted as the data agent role, facilitating an end-to-end data management and ad-hoc reporting creation. Every institutional investor that has subscribed the notes of the securitization vehicle has received a dedicated access to the Cardo AI platform, enabling a complete transparency at the begging and throughout the lifetime of the operation.

Hogan Lovells Studio Legale provided legal assistance as transaction legal counsel, with a team led by Partner Corrado Fiscale. The Master Servicer will be Centotrenta Servicing S.p.A., while Banca Finanziaria Internazionale S.p.A. (in short Banca Finint) operates in the roles of Paying Agent, Issuing Agent, and Representative of the Noteholders (in short RoN).

Since the outbreak of the pandemic, businesses have not stopped needing liquidity. According to the most recent Istat data, in 2020 there was a decline in the turnover of service companies by 12.1%, the largest since 2001. “The loss of turnover affected almost all the sectors surveyed, particularly in the activities most affected by the restrictions related to the health emergency”, writes the statistical institute.

In this context, in 2020 Fintech came to the rescue of companies for 1.65 billion euros (ItaliaFintech data), with an increase of 450% compared to the 372 million again disbursed in 2019. Also the number of new Italian companies getting support by Fintechs, which rose from 1,092 in 2019 to 5,464 in 2020.

Gabriele Blei, CEO of the Azimut Group, comments: “This initiative is in line with our project of Banca Sintetica, which is an alternative to the traditional banking model to support the needs of small and medium-sized Italian enterprises through the use of fintech platforms with which to finance businesses effectively and quickly. Our goal is to deliver to Italian SMEs, loans of 1.2 billion euros over the next 5 years and to do so we can count on the support from our diverse range of alternative customer lending strategies both private and institutional. A project that allows us to create new performance opportunities for the capital of our customers, fueling the virtuous circle between private savings and businesses”.

“After the securitization carried out last year, we are happy to be a partner of this new operation, which doubles the resources made available to SMEs – said Marco Bonetti, Joint General Manager of Banca Valsabbina – Our institute will continue to look favorably on initiatives like this, which on one hand are an important element to support SMEs, which in particular in times of crisis such as the current one should be supported especially in terms of liquidity, and on the other hand confirm the importance and value of the cooperation between the traditional banking system and fintech, a sector in which Borsadelcredito.it is positioned as one of the most attractive” Bonetti concluded.

“We believe that the path of collaboration is the main way to truly innovate the finance world and make it more efficient and more functional to needs, including emerging ones, of the real economy – comments Ivan Pellegrini, CEO of BorsadelCredito.it – In a delicate period like what Italy is facing, we felt the need to make our skills available to provide resources to all those healthy SMEs that are having moments of difficulty but want to restart and look to the future. This is why we are pleased to have partners such as Banca Valsabbina and Azimut, with whom we have created a solid and structural alliance: for us, it is an evolution, we are no longer just providers of loans to the real economy, but technological enablers for traditional finance”.

“Data is now the world’s most valuable asset. We see every day how it empowers smarter and safer investment decisions and how it can bring unparalleled transparency and intelligence by replacing antiquated manual processes and streamlining the reporting workflow – comments Altin Kadareja, CEO of Cardo AI.  – As data agents, we are thrilled to participate and support this securitization transaction granting investors easy access to the normalized loan-level data along with fully integrated analytics and reporting tools, where users can review composition, analyse performance, and project collateral and tranche cashflows.

“BorsadelCredito.it con Azimut e Banca Valsabbina in una nuova cartolarizzazione da 200 milioni.” Finance Community, financecommunity.it/borsadelcredito-it-con-azimut-e-banca-valsabbina-in-una-nuova-cartolarizzazione-da-200-milioni.

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