Market updates and sector developments

HM Treasury has published a draft statutory instrument that outlines the next steps in the process of replacing the onshored EU legislative regime for securitisation with its own rules under the broader ‘Smarter Regulatory Framework’ (SRF). The draft Securitisation (Amendment) Regulations 2024 (Amending SI) will repeal the EU Securitisation Regulation on 1 November, implying that the new regime – including the new FCA and PRA rules that were consulted on last year – will come into force at the same time.

A Clifford Chance briefing describes the Amending SI as largely a ‘clean-up’ instrument that fills in gaps the market was already aware of, such as due diligence rules for occupational pension schemes (OPS), while indicating “the direction of travel” for the securitisation rules as they will be under the SRF. The briefing observes that unusually, the Amending SI makes a few very specific provisions to FCA and PRA rules, suggesting that the publication of the final versions of these rules is imminent. Indeed, the FCA Board is due to meet tomorrow (25 April), so the final FCA and PRA rules could be published shortly thereafter.

Regarding the securitisation due diligence rules that will be applicable to OPS in the UK, Clifford Chance anticipates that the substance - if not the precise form - of the PRA and FCA rules on due diligence will match, given that HMT, PRA and FCA have all expressed a desire that the rules applicable to OPS and those applicable to PRA and FCA firms should be aligned. Overall, the briefing suggests that the authorities appear to have taken onboard key industry requests for the new framework, including the addition of transitional provisions.

In other news…

ASRS mandates AXA for SRT investment
AXA IM Alts has been awarded a US$400m SRT investment mandate by the Arizona State Retirement System (ASRS), a state agency providing pensions, disability plans and retiree health insurance for over 500,000 public servants. ASRS is a self-described “early mover” in the SRT field, with this mandate representing the latest move in its strategy to increase its allocation to alternative credit investments.

AXA IM Alts has made more than 100 SRT investments already, 80% of which were bilateral trades. The firm says it can leverage its “established access” to more than 70 issuer banks globally.

It seems the US could be the prime target for the strategy, with the announcement of the news acknowledging the jurisdiction’s growing relevance to the market. The announcement also observes that SRT can “provide true diversification within the private debt universe versus traditional direct lending, alongside stable valuations and cashflows, even during periods of market downturn”.

Between 2022-2023, ASRS reported a return of 8.2%. The majority of its asset allocation is in public equities, where it targets a 44% allocation with a low of 34% and high of 54%. This is followed by credit (target of 23%), real estate (target of 17%), private equity (target of 10%) and interest rate-sensitive assets (target of 6%).

AXA IM Alts currently manages around US$200bn worth of assets. Deborah Shire, deputy head of AXA IM Alts, comments: “We are seeing increasing appetite from global pension plans for diversifying credit strategies, which can deliver compelling risk-adjusted returns against current market conditions. As a provider of SRT investment solutions for our clients for the past 20 years, we have seen - and accompanied - the accelerated expansion of this market over the past few years, which doubled since 2016 and we expect it to grow by at least 50% for the years to come.”

Dutch warehouse securitisation debuts
Dutch asset finance business LFH Lease retained Alvarez & Marsal as sole advisor to deliver its inaugural warehouse securitisation of €265m, backed by financial and operating leases, including residual value assets. Combining a bankruptcy remote SPV with VAT lending, the transaction – dubbed Project Wheel – represents the first warehouse securitisation of its type in the Netherlands.

The motivation behind the securitisation was to facilitate the company’s strategic pivot from an originate-to-distribute (OTD) model to an on-balance sheet lender. LFH had previously operated an OTD model partnering with a Dutch bank under a forward flow agreement. Due to regulatory pressure, the bank discontinued this product, resulting in immediate pressure on LFH to pivot its business model.

LFH needed a sizeable institutional debt structure in place to avoid limitations on growth, given its track record in originations. Additionally, the company’s medium-term funding position depended on identifying asset risk drivers and mitigants, as well as prospective financing counterparties that could act as aligned partners in its crucial growth stage.

Funding was provided by a partnership between Barclays and SCIO Capital. Senior and mezzanine note classes were issued by the SPV, while the equity was retained by LFH. The transaction was structured with VAT funding to optimise the funding efficiency and minimise any cash drag.

Corinne Smith, Joe Quiruga