WORDS OF WISDOM

from Twenty-Twenty Vision: Securitisation in the new decade

by Australian Securitisation Forum ASJ

EMERGING TRENDS

THE COVID-19 POSTSCRIPT

We asked participants how the impact of COVID-19 compared to the GFC and uncovered some fundamental differences including the recognition that the asset quality in the market today is far better than in the GFC.

The primary factor giving confidence right now was the swiftness of the government’s response to the crisis which has allowed the market to continue operating. However, there is concern for the sustainability of the sector should the stimulus be removed and should the economy slow at a greater rate than expected.

“Can the securitisers continue to operate their business with the funding costs and capital costs increasing? Some originators are a lot better capitalised, they've been here for a very long time, they're prepared. Those original securitisers will be here in the future and others that are not well capitalised won't.” Investor “In terms of liquidity and government response, we’ve not had the freeze up that you had during the GFC. The government took the right lessons away and has deployed helicopter money into the economy to prevent access to funding from drying up. In that respect, things are better than they were then.” FinTech

"Relative to the GFC COVID-19 is much worse, the damage that is being done by COVID on the economy is not nearly visible yet. Although we are not seeing the hardships to the extent that we expected, it is being supported by an unsustainable measure and if that measure is withdrawn there is a real risk that we might be surprised by how much damage it has done.” FinTech

Participants in the securitisation industry are exceedingly positive although equally conservative. The inherent conservatism leads to a realistic view on the challenges we are yet to face but the positive attitude of participants encourages the belief that the industry will survive and emerge stronger.

“I think we’ll get through it and we’ll see the structures are resilient so I think it will be a once in a hundred year thing. The investors will all fare pretty well and that augurs well for the ongoing sustainability of the whole industry.” FinTech

“It all varies by issuer and issue and the nature of the portfolio, but in general, the credit quality has performed quite well. Nonetheless we know there is a dark cloud on the horizon which is the impact of the virus on the economy, in particular the unemployment rate and also on the property value or the underlying asset value.” Investor

“I think in a funny way COVID will benefit of the industry because we've had this government stepping in supporting it. It highlights the strategic and structural importance of the industry which has given confidence to everybody to continue on and there were positive trends already pre-COVID.” FinTech

WORDS OF WISDOM

Securitisation professionals have a passion for the industry and come with a lot of experience. It seems apt therefore to finish off with a selection of their words of wisdom on a wide range of topics, in no particular order.

On people

“In our job as leaders we need to develop people – we need to recruit and attract and retain good quality people. That’s the starting point for us. If you can attract and retain good quality people the magic kind of happens for the rest. You get good strategy, you get good service levels, you get good execution on your processes, you get happy customers.” FinTech

On innovation

“The innovation is not in securitisation. I know this is counter intuitive. The innovation is actually in products and services. It’s around trying to use technology; you see stepping back from FinTech is a financial service company. The way credit has been assessed, the fundamentals. They have not changed from the time our ancestors were borrowing and paying back. Those fundamentals will never change. What is changing is the way the world experiences products and the world starts to expect products to be delivered.” FinTech On the role of the human

“There is a human element around it. Machine learning is quite important, we use machine learning in our bank statements analysis but there are times when you have to teach the machine to learn and the machine learns and repeats what it does. It will come to a point where it will learn by itself definitely. But humans have to have that touch about whether I can trust you and will you trust me.” FinTech

“I think if you’re a FinTech, you’ve got lots of things to think about. You’ve got to keep your originations up. You’ve got to keep your servicing history great, so you ultimately get rated. You've got to keep your distribution channels healthy and your connections, your warehouse funding line good. Not give away too much equity but get the right equity people who have connections as well.” Intermediary

On risk

“Well at the moment our biggest focus on risk is not on credit risk. It’s more an operational risk. Most of our investments, we spend a lot of our time looking at operational type of risks.” Investor On ambition

“I think, not to be ungenerous, there are a lot of FinTech issuers with an app and a dream. And within that app and a dream mentality there is a considerable divergence of quality of credit model and rigour of credit model behind that. The only way you find that out is to be under the hood of the issuer and ask a lot of questions." Investor

On the use of brokers

“I think that it is also community engagement and a long history of understanding the area they are operating in. I am always cautious with RMBS issuers and it would be the same with any other issuer, when they use brokers, because that begins to disintermediate them from the client.” Investor

On the quality of assets

“It is always the assets because, this company could be absolutely a 100% successful but if the assets in this particular pool are flawed, I am doomed. If I had found out on the other hand the company is less successful, but the assets are pristine, I am sweet.” Investor

“Can the earth support 20 billion people? Well the answer is pretty clearly no, and so therefore, if ongoing economic growth is reliant on population growth and increase in consumption and increasing wealth per capita, there’s a finite sort of horizon and I don’t know exactly when that’s going to be and how it’s going to play through.” NeoBank

On SME lending

“The old adage that capital always follows a path of least resistance speaks true particularly in the SME space. But that’s really been aided by the flourishing technology and different approaches to distribution. Also consumer acceptance of these different ways in which to engage with a potential financier.” Non-bank lender

On master trusts

“That’s the beauty of the master trust. Once investors understand the structure, when you come back with another trade, there’s actually nothing to go through again other than the assets. Has the profile of the pool changed and what’s your liability structure? So, effectively what’s the term of the notes you’re issuing?" Non-bank lender

On ethics

“Maintaining a transparent, ethical, honest, solid, proper relationship, doing the right things by investors and banks is massively important for a business.” Non-bank lender “Look, I think the biggest risk for the performance of the underlying collateral supporting securitisation transactions is unemployment. So, to the extent we see the unemployment rate increase is a result of weakening economic conditions, domestically and globally, external shocks from China, Coronavirus, etcetera, you know, I think we will see a deterioration in the performance of the underlying collateral. I don’t think it’s going to be severe, so that’s one point. Another point is the more frequent and more severe occurrences of natural disasters. That’s something to bear in mind too, but aside from those couple of things, I don’t think there’s anything that overly concerns me.” Warehouse

On unsecured lending

“If a guy wants to open a gelato shop and back himself to serve 200 gelatos a day in winter, we think that’s a risky bet. So, if he absolutely wants to back himself, we’ll go; “Okay mate, but we’d like some residential security for that.” That apparently is the wrong thing to do. So, what the new breed of lender is saying that they’re doing is lending unsecured. So, does that sound risky to you? It sounds risky to me.” Warehouse

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