This article originally appeared in Australian Securitisation Journal and is reprinted here with permission from the publisher.
In an environment of evolving regulation and increasing focus on due diligence around data and reporting, and where the need for accuracy is paramount, outsourcing the trust-manager role should not be viewed as handing over the keys to the business. There are many implicit advantages to working with specialists.
Securitisation structures are inherently complicated so – in combination with the different trusts and warehouses, associated documentation, administrative tasks and modelling for investors that securitisation requires – it makes sense to consider in some detail how best to administer the funding side of the business.
Issuers can choose to keep the function in house, but outsourcing enables them to remove the heavy lifting, leverage expertise and scale, and focus on their core and businessdevelopment strategies. The strategic advantages and the fact that specialised providers have access to industrial-scale technology mean that more issuers – seasoned or new to market – are choosing the outsourced option.
The in-house solution tends to be spreadsheet-based. BNY Mellon (BNY)’s Sydney-based managing director and market head, Australia, Robert Wagstaff, says there is a growing sense from originators that technology-based solutions are more appealing. The challenge is getting comfortable with the notion that they need to give up some control over a portion of their business to access these.
“It is important for people to understand that we are not trying to take control away but are trying to remove the heavy lifting…”ROBERT WAGSTAFF
“It is important for people to understand that we are not trying to take control away but are trying to remove the heavy lifting,” Wagstaff tells ASJ. “The alternative is to install additional systems and employ IT staff, quantitative analysts and business specialists – the cost of which could well be more than the cost of an outsourced trust-manager solution.”
Annabel Powell, vice president and client executive at BNY in Sydney, adds: “It doesn’t have to be an all-or-nothing approach. We provide our clients with the opportunity to evaluate what capabilities they have in house to support the trust-management function, as well as looking at what they may benefit from by using an outsourced solution.”
BNY’s own trust-manager solution has been tested on more than 1,000 transactions to ensure it best supports the day-to-day management of the trust and associated reporting. This includes rigorous modelling processes using bond-scrip technology, with each transaction always modelled by two separate analysts on separate platforms and the waterfall run concurrently to ensure zero tolerance for error.
Spreadsheets are a very archaic way to report when a superior solution is available, says Stafford Hamilton, Sydneybased chief executive at Credabl – a newly established specialist lender providing loans to medical professionals. “The need for accuracy is paramount,” he continues. “The market is not very forgiving, particularly for young businesses, as inaccuracy looks like immaturity. A business like ours has to aim for 99.9 per cent accuracy.”
Ensuring the output is reliable, accurate and consistent is critical to warehouse and public securitisation transactions, Wagstaff adds. “Operating in Excel is clearly susceptible to human error. Our ASAP system, by contrast, uses a coding and bond-scripting mechanism to code transaction documents and thus eliminates entirely the potential for human error.”
Securitisation is complex so the tailoring of securitisation programmes, whether they be brand new or existing, is important, argues Gary Sly, executive director, structured capital markets at ANZ in Sydney.
“Simply duplicating existing structures without really thinking about bespoke needs is not appropriate,” he says. “This is not a one-size-fits-all solution, particularly in warehouses. The BNY execution team is hands on, building and testing bespoke models. All of this may seem very routine, but it is important in establishing accuracy of processes and ensuring the trust factor between parties is factored in.”
It is possible to create value additional to a technical solution by creating trusted partnerships, Powell adds. “Understanding the commercial drivers and objectives of originators – above and beyond what is stated in the transaction documents – is critical to the success of an outsourced solution. It is important to incorporate the personal element, and we have considerable experience partnering with organisations in this way.”
The Credabl business is in its infancy, at around 18 months old. Hamilton says working with large and well-known partners was crucial to improve the optics around the newcomer’s maturity. “The masthead is important because the quicker we could cross the divide of not being a new business, the more doors were opened.”
Outsourcing was not a cost-trimming exercise for Credabl. “We take the view that we gain credibility that a business of our age may not otherwise have by allocating financial resources to this aspect,” Hamilton explains. “A new business with only a year or two of seasoning can be a difficult pill for the market to swallow. But we can augment our maturity by leveraging off our partners who have that experience.”
Credabl has a warehouse facility and will likely access other forms of debt capital going forward. Hamilton suggests that the decision to outsource the trust-management function was relatively straightforward against this backdrop.
“We are interested in future ways to diversify our funding and the team that will manage this strategy is the same treasury team that takes care of the administrative functions pertaining to our portfolio. If we keep the administrative functions in house we can deploy our analytical muscle elsewhere,” he explains.
Hamilton says the company may consider accessing offshore markets or a wider range of funding structures. “We are undergoing programme development at the moment, part of which is to ease pressure inside the warehouse. This undertaking is being made far easier by the fact that the trustmanagement function does not have to be front of mind.”
Hamilton does not downplay the importance of this function to the optimal performance of the Credabl business. He says the firm would allocate internal resources if they were deemed the best use of time. “The main consideration is cost and the opportunity cost,” he insists. “The trust-management elements, when they are set up, are rigorous and repetitive. We would rather use our processing power and resources for creation.”
Market evolution is a notable driver of recent change to the trust-manager role. Expectations around future development mean an outsourced option bears closer consideration.
Sly says regulatory evolution has driven outsourcing strategies. He tells ASJ: “The major banks traditionally undertook the function through in-house subsidiaries. However, with the revision of APS 120 the Australian Prudential Regulation Authority stipulated that trust managers have to treat assets as if they are their own. This is clearly punitive from capital-allocation and reporting perspectives.”
Sly suggests that externalising the function provides a necessary external verification point in the contemporary environment. “It is vital to have checks and balances in place to provide the trust factor in and around data.”
“It doesn’t have to be an all-or-nothing approach. We provide our clients with the opportunity to evaluate what capabilities they have in house to support the trust-management function…”ANNABEL POWELL
Powell highlights the more mature state of the Australian securitisation landscape as another focus for accuracy of data. “We have seen a raft of market changes, including new entrants to the structured-finance market. These participants have been looking closely at how trust management is performed, reflecting the critical importance of this function. Originators now have a number of trust-management options available.”
The number of originators seeking funding from international markets has increased as origination volume grows and issuers continue to seek out funding diversity. This drives another level of complexity for businesses, Wagstaff adds, as offshore-market reporting requirements may vary by jurisdiction. The market as a whole is headed in the direction of global equivalence, and this requires reporting in global jurisdictions as well.
Wagstaff adds: “These requirements continue to evolve and it is important to have sufficient scale to be able to see what’s coming and to respond accordingly. Having deals that resemble other transactions from the jurisdiction of issuance as closely as possible – so in Europe considering the full requirement of regulation like STS [simple, transparent and standardised] – will ensure issuers tick the most boxes for investors.”
Sly says an Australian financial-services licence (AFSL) to issue securities is necessary but securing one is not always front of mind for smaller originators. “Typically, the focus for an AFSL has been in the context of public securitisations. However, the need for hedging arises in warehouses and many structures issue securities so, strictly, a licence is required.”
Hamilton points out that there are also personal-liability considerations, particularly for senior executives. “As a director of a business, I would prefer a competent professional to take responsibility for this. If I take this on as an individual without being as knowledgeable and there is fallout, it is on me.”
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