Securitisation taking flight

October, 19 2018 | 08:40 am Henrik Raber, Global Head of Credit Markets at Standard Chartered Bank (Courtesy of Standard Chartered)
Henrik Raber, Global Head of Credit Markets at Standard Chartered Bank (Courtesy of Standard Chartered)

Board a flight, stream a film, text a friend: these activities that we take for granted have something in common. Commercial assets such as planes, film rights and cell towers are increasingly being financed in the securitisation market. Securitisation creates liquidity by pooling together financial assets and marketing the repackaged assets to investors. This trend started in the U.S. and is growing.

Commercial assets, sometimes referred to as operating assets, are essential to operating a business. Examples include commercial jets leased to airlines, shipping containers leased to shipping lines and solar panels installed in solar farms. The list is long and in recent years has grown to include less tangible assets such as intellectual property like film rights, music rights, and pharmaceutical royalties. The latest asset class to enter the fray is wireless airwaves, as demonstrated by a landmark securitisation deal by U.S. mobile network operator Sprint Corp in 2016.

Securitisations backed by commercial assets are highly-rated and perform well through credit cycles. These deals see strong investor demand due to the higher yield they offer. These assets are essential to cashflow generation, making them suitable for securitisation. Their value is typically independent of their current owner or operator, and can be fairly assessed. As a result, the assets can be traded, sometimes even in liquid markets.

The motivating factors for commercial asset securitisation are balance sheet management and funding cost optimisation. In the case of Sprint’s securitisation, the best assets on its balance sheet were carved out and asset-backed financing was sought on better terms. Through a sale-leaseback transaction, the wireless spectrum licenses were sold to wholly-owned subsidiaries, and the latter then leased the wireless spectrums back to Sprint. The wireless spectrum and the lease acted as collaterals that backed the securitisation which priced at half the rate Sprint was paying on its corporate debt.

Similarly, commercial assets operators have found that sometimes the markets value commercial assets higher and can finance them cheaper. This is because such assets can be better utilised if shared. By co-locating cell towers for example, a leasing company-owned cell tower can host antennae leased to multiple telecom companies, earn higher lease revenues and help all lessees to densify network coverage. This rationalisation helped to launch the cell tower leasing business and led to securitisation backed by cell tower lease payments.

Transport assets such as aircraft, shipping vessels and containers can be more efficiently deployed among a larger base of users, providing related leasing companies with increased diversification, stronger credit profiles and access to a cheaper funding source.

The Asian, Middle Eastern and African capital markets are where we expect to see increasing commercial asset securitisation given the vast market potential in these regions.

At Standard Chartered, we are increasingly seeing the incorporation of commercial asset finance and securitisation into our clients’ funding sources. Two leading growth areas are aircraft leasing and infrastructure investment. Asia is increasingly driving the global growth of aircraft leasing. Five years ago, only one out of the top 10 global lessors was in Asia. Today, five among the top 10 are here. As aircraft leasing continues to expand, there will be an increasing need to add securitisation to the funding mix.

The writer is Henrik Raber, Global Head of Credit Markets at Standard Chartered Bank