Estimated read time: 2 minutes 45 seconds
It would be fair to say that when it comes to securitisation, I have always been very upbeat about the huge potential of this technology and the integral role that it can play. This is not only in providing a cheaper form of credit for borrowers but also that the resultant investment for fixed income investors is hugely desirable given that they will be able to invest in a product that not only satisfies their risk/return appetite but also an instrument that already has built-in protections for fluctuating interest rates. Ultimately, securitisation provides a vital role of funnelling debt raised via the capital markets to areas of the real economy in an extremely efficient manner.
Last week I wrote a piece (CMBS & CRE CLO – Heroes of the Future) which made the case that despite the challenging economic environment, securitisation could prove itself to be the unlikely hero given many of its favourable attributes. With this piece very much in my mind, I was delighted to hear that Perenna (UK based specialist lender) has recently been granted a licence to offer to residential borrowers a mortgage product that offers a fixed interest rate for the life of that mortgage. This is a hugely desirable product for owners of residential property that do not want to be at the whim of interest rate fluctuations and one of the chief reasons why Perenna can offer this is the fact that ultimate finance for this product will be funds raised in the capital markets in the form of a covered bond issuance.
A covered bond issuance has many of the same attributes and features as a securitisation, although the products are technically distinct given that in the case of the former the underlying loans reside on the balance sheet of the lender as opposed to being transferred to a special purpose vehicle. Fundamentally though in both products the underlying collateral are mortgage loans and the resultant investment instrument are bonds tied to the performance of this collateral. Indeed, in some quarters given the similarities between the two products, then covered bonds have been known to fall under the securitisation umbrella. Semantics and technicalities aside, the news about Perenna is an important development, as first and foremost borrowers are being given the opportunity to obtain a mortgage on terms that would not be viable from traditional residential mortgage lenders, but secondly, this is real life example of how the versatility and application of securitisation technology (although not securitisation in a true sense) can be used to make a real difference.
As the economy and the markets continue to evolve and adapt to a new world of shifting macro-economic themes and the new risks and challenges that they present, I am confident that securitisation will continue to be an important tool in ensuring the more efficient deployment of capital and that despite the subdued nature of the financial press, I continue to be buoyed and excited by the role that securitisation can play in the new economy. Returning to the news about Perenna, then metaphorically speaking securitisation type technology has already demonstrated heroic qualities by making this residential mortgage product viable and with it a positive endorsement of my base case scenario that securitisation will prove to be a hero of the future.