Securitization: party like it’s 1999
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Securitization: party like it’s 1999

Olly Copplestone cartoon for GC securitization anything goes 19Apr24.jpg

Innovation is rampant again in structured finance

There’s esoteric and there’s… radical, dude. This week, Sotheby’s, the famed art auction house now owned by telecoms entrepreneur Patrick Drahi, turned to securitization to raise $500m, backed by 89 loans it has made to rich customers, secured on art, jewellery and wine.

Meanwhile Nilly ― a company that invites private investors to contribute as little as $1,000 to buy shares in the name, image and likeness (NIL) rights of US college athletes ― plans to securitize the same rights to attract institutional money.

The versatile alchemy of securitization, which offers the hope of separating good cashflows from bad, enhancing them with all manner of bells and whistles, and using the statistically compelling magic of tranching to make them investment grade, is being applied to an ever widening gamut of assets and businesses.

Party in 1999 from Alamy 18Apr24 575x375

The conviction is spreading among investment banks and advisers that, whatever your corporate finance problem, securitization is the answer.

What could be next? Car racing? Drinking joints? Roadside eateries? Bread? Water?

A long memory is not always a blessing in capital markets. But those cursed with one may have found that checklist familiar. Yes, all those assets were securitized in the prehistoric age before the global financial crisis.

In those glory days, Wall Street got its securitizing claws into everything that looked like a loan or a lease. Boat loans, subprime auto, furniture store credit, manufactured housing and timeshare apartments were all standard asset classes, churned out by structuring and trading desks week in, week out.

While the US market was industrialised, Europe was the realm of art, where UK Ministry of Defence housing and ultra-complex student loans stretched even the cleverest modellers. Wizards wormed their way through the Italian legal code to securitize mortgages, performing and otherwise, and the Formula One securitization of 1998 took the technique into the realm of intellectual property.

Chargeurs packaged wool stocks, Ranks Hovis McDougall its brand value as a baker, there were innumerable pub and hospital securitizations and much of the UK water industry was locked up in structures that still exist.

The pace of change, with its tragic arc, was incredible. In no time, securitization bankers went from the despised geeks in the corner to the envied masters of the trading floor.

From JP Morgan’s invention of synthetic securitization in 1997 it was 10 years till the ruin of Northern Rock and the vast edifice of structured investment vehicles, or SIVs.

Structured finance has had a long, cold exile from the limelight since then. The market sprang back much more quickly in the US, but even there it is chastened. In Europe it has been in the deep freeze.

But the rash of funky new asset classes being tried out now suggests a change of mood. The shame has gone. Securitization has once more become a magic wand that can enchant potential issuers and turn unlikely assets into highly rated bonds ― sometimes durably.

It’s a sign o’ the times.

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