What has Bedford Row Capital been up to recently?
We’ve been busy. We have witnessed exponential growth in our business over the last four years. We experienced a rise in deal flows and at the same time, we have been expanding our footprint and presence on a global basis. Bedford Row Capital now has offices in London, Estonia, Zurich, Dubai and Singapore, with colleagues on the ground in direct contact with potential clients and sourcing new deal flows.
Our original business model hasn't fundamentally changed over the last four years — it has, however, adapted to the current market environment. We assist companies to arrange and originate asset-backed issues, backed by real economy assets, in a transparent and efficient way. All issues are publicly traded on a stock exchange, based on the issuer’s preference.
As I mentioned, our business focus hasn't changed, there are just more opportunities coming our way than we projected. Bloomberg consistently ranks us in the top 100 arrangers, one of the very few non-bank originators in the UK. In our four years of existence we have issued the first sukuk for a European-listed corporate and we did the first originate-to-distribute forward flow securitization for a fintech platform.
We see our business built on three pillars: 1) green bonds — here we have been involved in two very interesting opportunities. One is a commercial tyre recycling company in Poland and the other is a high-performance computing center in Sweden. 2) Short term insured securities, providing access to short dated instruments with positive — yes, positive — yields and 3) our Al Waseelah sukuk programme, giving Islamic investors a chance to buy assets to which they usually would not have access.
What makes your approach different from the mainstream banks?
In reality, there is not much of a difference in the general approach, as we follow the same industry methodology as all the investment bank desks for investment grade structured finance. The distinction is that we are arranging deals which have becoming increasingly pigeon-holed as “exotic”. Why?
The real economy generates return from assets like property, renewable energy, supply chain finance and mining, not only the European regulations for Simple, Transparent and Standardised securitization.
For banks, following STS certainly has capital requirements advantages, but then they neglect to service the yield-producing parts of the market connected with the real economy.
Our advantage is that we are streamlined and efficient in arranging and originating deals to assist companies with accessing the debt capital markets with normal fixed income securities. We are not spending the same amount of money on templates and legal documentation, as this is homogenised to a great extent.
How have you made your process more efficient than the mainstream banks?
Primarily, handling the transaction documentation itself. When I set this business up, I believed that it did not make sense to pay lawyers large amounts of money to produce standardised transaction documentation.
My intention was to disrupt the market by making use of the available technology to provide institutional standard, investment grade methodology and a consistent, efficient, asset-agnostic origination proposition.
That was the first significant leap forward. Additionally, we are using some state-of the-art third party technology for contract workflow automation from a niche player called Avokaado, as well as our own proprietary technology, Bondstream. This integrates transaction mechanics, servicing and the handling of documents in an efficient manner.
Furthermore, Bondstream provides us with an exclusive, all-in-one approach to integrate the role of the calculation agent with loan servicing, monitoring and settlement. This allows us to manage and monitor cashflows, report on the accounts and manage the legal obligations of the issuer within one core system.
Why are the mainstream banks not covering this business?
The money is not there for them to do normal business. Size matters. Banks focused on benchmark-sized deals as their apparatus became languorous. For them to be profitable, deals under, say, $1bn are just not economically viable.
The yields on STS and vanilla securitizations are also relatively low, hence the profitability for all involved parties is reduced, which can only be compensated for with standardised, benchmark-sized deals.
All of this helps push more types of deals into the alternative and exotic space — less margin for the banks, legal costs going up for the banks’ own counsel, and risk appetites changing for the senior management of the banks.
In uncertain times, the choice for bankers is between doing an exotic deal and a vanilla deal — and one’s job or bonus could be at risk. It is not hard to see why banks are doing less in this space.
Deals like trade or receivables finance securitizations, which had been done by numerous banks before the global financial crisis, are now seen as too perilous. More and more every year we meet experienced people at Global ABS who are “ex-somewhere” — who left a big bank because they had so little to do. I like these people and we can work with them.
Many qualified bankers have left the market, resulting in the loss of their knowledge of how to evaluate risks appropriately. The resulting loss of knowledge has resulted in a spiral of homogeneity, with banks concentrating on simpler and more plain vanilla transactions. With this focus on uniformity, the investor base has consequently shrunk, making banks more dependent on a smaller number of investors.
This leaves us at BRC looking at real economy asset deals, with the opportunity to take time to understand each credit in more depth, find experienced partners to work with and ultimately to provide clients and investors with deals on an attractive risk-adjusted return basis.
How has the coronavirus crisis affected your business and activities?
The Covid-19 outbreak has had no material effect on our business processes, as we have been set up from the beginning with an online-only business platform.
But the view of the market is now much more interesting — more and more investors are looking at short term transactions. We are in a low-yielding environment and investors are faced with a conundrum. To pick up additional yield, one needs to decide whether to accept a reduction in credit quality or to lengthen duration.
What we see is that investors are shying away from increasing duration, as the negative impact can be severe, and they prefer to be more flexible on the credit side.
Hence the short-term paper space (commercial paper or asset-backed CP) has become very interesting for investors, especially in an environment of heightened volatility and economic uncertainty.
I have a lot of conversations where investors are looking for new ways to enhance their potential yield in a risk-controlled manner. Looking at short term paper, even from unrated companies with a solid credit, starts to become appealing.
Add in insurance and this is now an unusual product to find in the market. Even in the euro and Swiss franc markets where rates are highly negative, these short-term instruments provide positive net returns. This applies equally to sukuk or conventional securities.
Investors seem convinced that low or negative yields are here to stay for the foreseeable future. Our clients at CP Funding and Al Waseelah provide access to these products, in the conventional or sukuk CP markets respectively, with a positive yield in all currencies.
Global trade is still happening, the movement of goods is still happening, and the pricing for the movement of goods has been relatively inelastic. Financing rates for moving rice, grain or cocoa, for example, have remained about the same. But for investors, the question is how to get exposure to that yield — that is where we come in.
Are there any standout deals you would like to highlight?
One transaction that has been particularly interesting is Kaeva plc, which is working on mining and extracting materials which go into electric batteries — minerals like cobalt and lithium. It is producing the materials needed for a green energy transition. What is exciting for us is that this is a billion-dollar deal — it is our first benchmark.
Another very interesting deal, for Paragon, is the innovative combination of supply chain financing and luxury goods, giving investors exposure to ultra high-end luxury watches. That clearly has a huge appeal to certain investors — passion investing is not just about art, wine or cars.
Finally, we have brought to market three green transactions in the past few months. One was for European Tyre Recycling, to finance the growth of its fully operational facility in Poland. Sustainable Capital has just come to market with a fascinating green energy and high-performance computing solution. And finally, Al Waseelah has brought a green sukuk. All very interesting transactions in their own right.
Across these three main pillars — green deals, short term and the Al Waseelah sukuk programme — we are feeling very excited about the future.
We’ve a couple of other transactions in the pipeline that will be released in the summer.
What are the opportunities like in the sukuk market?
Like everything else, it is basically about product supply, more than anything else. Which is odd to say, for what many people refer to as the world’s fastest growing asset class.
Historically, a lot of shariah money went into 'local' assets, leaving investors with too much concentration risk. The traditional issuing banks just don’t have the access to origination capability outside their own backyards.
Through the Al Waseelah programme, we are reviewing transactions from all over the world, perfectly straightforward, compliant transactions, which just need that extra layer of structuring work to make them sukuk-compliant.
As an example, it was never thought of that it would be possible to issue a sukuk with the underlying exposure being a non-Islamic company. But why not?
It worked for NQ Minerals, and that was the first sukuk issued for a European-listed corporate. It is just about connecting the dots, which at the end of the day is why I set up BRC in the first place.