Speciality

Finance Series:
Private Revolving
Securitisations
MAY 2018
Private Revolving Securitisations
An emerging trend in respect of financing solutions for originators of speciality finance products
has been the use of asset-backed financing structures that sit between a full rated public
securitisation structure and more conventional bank facilities provided by lenders. Whilst a number
of different asset-backed financing structures have been implemented by speciality finance
originators, such structures often diverge in similar respects from full rated public securitisations.

The private asset-backed structures being implemented by speciality finance originators are typically described in the market as
“private revolving securitisations” and, in broad terms, involve funding by a small number of investors on a limited recourse basis to
a special purpose vehicle (SPV) established by an originator and secured on a portfolio of speciality finance assets to be acquired by
the SPV from the relevant originator throughout the life of the transaction. The investors will fund a percentage of assets (that are
determined to be eligible) through a variable funding note (VFN) (or loan equivalent) with the originator funding the remainder of
the portfolio through a junior note or loan.

In this note, we look at the renewed interest in private revolving securitisations, which, whilst eliminating some of the
complexity related to a full securitisation structure, at the same time offer potential originators access to funding lines not
previously available to them. Such structures also allow investors, who are willing to lend on an asset-backed basis, exposure to
a broader spectrum of asset classes that in many cases are being originated by lenders at an earlier stage of growth than would
be the case in respect of a full public securitisation.

Why?
Securitisations may be complex. There is a growing demand from speciality finance providers for a form of financing that uses
securitisation, but removes or modifies elements of a typical securitisation structure that, at an early stage in the originator’s life-
cycle, introduce unnecessary complexity and cost. Some of the key differences are drawn out on pages 6 and 7.

The yields demanded by traditional investors relative to the high fixed costs of a full public securitisation, in cases where the
Portfolio Value is less than £150m, may mean private issuance is a more economical route to gain traction with participants
usually more active in the public markets.

Whereas the use of private asset-backed warehouse facilities is a well-known financing technique, such warehouses are often
used as a precursor to a refinancing via a full rated and listed public securitisation. This is often the case in respect of established
securitisation asset-classes such as prime residential mortgages or credit cards. In the case of speciality finance originators, private
revolving securitisations may be implemented as a more permanent funding solution where such full securitisation exit may not
be required or indeed desired by the originator or the relevant investors.

Flexibility. Given the nature of originators likely to be interested in these structures, an ability to upsize, or indeed downsize
funding, subject to market conditions and changes in the relevant originator’s overall portfolio of assets is an attractive
differentiator. In comparison, public securitisations will often require mandatory redemption of funding as the securitised assets
pay down or according to an agreed repayment schedule.

2 Private Revolving Securitisations

 Simplified Structure

Originator Group Servicer (Originator)

Payments
under Speciality
Ownership
Finance Contracts
(Receivables)
Issuing SPV Originator Customers
Acquisition of
Receivables
Security Trustee

Senior Notes/VFN Conduit/Conduit Style Lender

Junior Note Originator

What are speciality finance products? A reminder...

Speciality finance can be described as financing that takes place outside of
the traditional banking system, often targeting smaller niche markets and
customers across the credit spectrum. It includes products such as:

• Auto finance • Point of Sale

• Bridging Loans • Invoice Financing
• Asset Finance • Second charge lending
• Marketplace lending/P2P

Key Features
Unrated – but with the originator/servicer able to make rating agency standard data available to facilitate a rating in future in
respect of the current structure, to embed ‘best practice’ in the originator should a public securitisation be the ultimate aim and
also to encourage investors to participate. The process of providing information on the assets to investors and related reporting
requirements may be new to the originator and a private transaction may therefore provide a flexible environment to perfect
reporting requirements and processes through discussion with a small number of investors.

Unlisted – but capable of listing. This will depend on the requirements of the investors and how liquid their investment is required to
be. Equally, the location of any listing may often not be one of the core markets, but perhaps one with a less onerous listing regime.

Preplaced – the transaction will be structured and written with certain investors and counterparties (such as trustees and swap
providers) engaged at the outset, enabling mutually agreeable terms and minimising costly execution risk.

Revolving – “Revolving” in the context of private revolving securitisations means that the revenue generated by speciality
finance assets in the portfolio that repay during a pre-determined period (the Revolving Period) may be used to finance the
origination of or purchase of new assets (as opposed to being used to repay the funding).

Speciality Finance granularity – Given the nature of speciality finance assets, these are often assets for which no developed
securitisation market exists and hence there is no established set of eligibility criteria or asset warranties to be given by an originator
in respect of the assets. A private revolving securitisation allows for eligibility criteria, underwriting criteria and asset representations
and undertakings to be negotiated on a more bespoke format, which (i) suits the relevant originator’s operational standards and (ii)
the investors desired credit profile.

Private Revolving Securitisations 3

Challenges
Given the bespoke nature of private revolving securitisations and the ability to depart from public
securitisations in respect of some structural features, transactions may be subject to detailed negotiation
between investors and the originator (who is ultimately the borrower of the funding). Key points that
will need to be decided between investors and the originator include originator reporting requirements,
Revolving Period end triggers, operational flexibility with regard to the servicing of the assets, events of
default, eligibility criteria and warranty package in respect of the assets.

Some of these touch points will arise in more traditional conventional speciality finance facilities, though
the limited recourse to the originator present in a private revolving securitisation means they will receive
more detailed focus from investors.

Though private revolving securitisations may be more simple in structure (including capital structure)
than a full public securitisation, this does not mean that the various areas of regulation relevant to the
securitisation market can be disregarded. Indeed, a typical private revolving securitisation will include
features (such as tranching) that mean materially, if not all, the same regulatory considerations will apply,
that apply to a full public securitisation.

However, the commercial dynamic in a private revolving securitisation (including the small number of
investors) may provide a setting where discussions can occur about how optimally the transaction can be
structured to ensure compliance with relevant regulations. For example, as regards the implications of the
forthcoming Securitisation Regulation, investors may not require such private revolving securitisations to be
determined to be a simple, transparent and standardised (STS) transactions (and this may not be possible in
any event, noting the types of assets that are typically described as speciality finance), but the differing risk
retention and disclosure requirements brought about by the Securitisation Regulation would be relevant to
originators using this financing technique.

Therefore, care should be taken in structuring any private revolving securitisation, to be implemented prior
to the coming into effect of the Securitisation Regulation, to ensure it is implemented in a way that means
the grandfathering rules that apply in respect of the Securitisation Regulation are fulfilled (or else the
relevant originator is aware of (and comfortable with) the requirements of the Securitisation Regulation that
will apply to the transaction in due course).

4 Private Revolving Securitisations

Market Commentary
We are seeing increased interest in private revolving securitisation structures from both issuers and investors. Issuers can benefit
by diversifying and optimising their sources of funding, while investors typically focused on public ABS issuance can achieve
improved yields and greater transaction flow.

The similarities of a private revolving securitisation to both a public ABS transaction and a private “pre-public securitisation”
warehouse facility mean that notes can be issued to both conduit (or conduit-style) lenders and asset managers. However, asset
managers are generally more limited in the extent to which the facility provided to borrowers can be revolving: rather than
providing a commitment, below which the facility can be freely drawn and repaid throughout the life of the transaction (as is
typically the case in respect of conduit (or conduit-style) lenders) the asset manager’s commitment would be fully drawn as a note
at closing, with the borrower able to use excess cash during the revolving period to acquire new assets. The funding provided by
the asset managers would typically only be repaid on maturity or the transaction moving into a stressed scenario.

Many investors are comfortable with unrated structures, which means that a private securitisation can be issued for traditional
ABS asset classes and also non-traditional asset classes such as bridging loans.

By structuring a private securitisation in line with ABS principles, albeit with certain simplifications to improve efficiency as
outlined in this article, pricing of private securitisation notes can be anchored to ABS markets, subject to an adjustment for an
illiquidity premium. This enables issuers to benefit from spreads being at relatively low levels compared to the past few years.

We therefore see a private securitisation being an option that merits consideration by potential issuers in a range of scenarios:

• To fund a loan book below the c.£150m+ size required for a public transaction
• Where a subset of the loan book is more challenging to securitise publicly due to a requirement for more bespoke investor
analysis, e.g. limited performance history
• For assets where there is not yet a developed rating methodology
• To access capital from funders that can only lend in note format, which may not fit with existing bank facilities
EY has significant experience in raising private asset-backed financing and we would be pleased to speak to investors interested in
this space and issuers contemplating this type of financing structure.

Akhil Shah
Financial Services Corporate Finance, EY
T +44 (0) 20 7951 9346
AShah12@uk.ey.com

Private Revolving Securitisations 5

What are the differentiators as between a public securitisation and a private revolving securitisation?
In the below table, we look at some of the key differences between a full public securitisation and a private revolving securitisation.

Full Public Securitisation Private Revolving Securitisation

Issuer SPV Typically an "orphan SPV" structure where the share Orphan SPV may be used but it is also common for the
capital of the issuer is held by a share trustee on issuing SPV to be part of the originator's group
discretionary trust

Type of structure Stand-alone or programmatic structures (such as Stand-alone with the ability to add additional investors
master trust) allowing for multiple issuances

Credit Ratings Publicly rated If no public rating, may be internally structured using
models based on rating agency guidance

Capital Structure May be complex with a number of classes and excess Senior funding provided by the investors up to an
spread potentially packaged into residual certificates agreed advance rate with remainder of funding
provided by originator (though a mezzanine tranche
may be included)
May include ability for senior tranche to be “re-
tranched” into senior and mezzanine tranches

Form of funding Listed and Cleared Notes and Residual Certificates Variable Funding Note (VFN) that is in registered
definitive form or RCF if senior funding is in loan form
Bond Trustee and Principal Paying Agents typically
required Issuer SPV may make payments directly to investors

Ability for Unusual. Investors typically fully drawn on closing Typically includes ability to increase investor
investors to without ability to increase funding (e.g. through a commitment limit (in some cases without investor
increase funding partly paid note structure) consent up to an agreed limit)
Partly paid note structures may be used

Revolving Period Typically Revolving Period only used for short term Typically included for all assets as designed to provide
and Repayment assets such as auto-finance contracts on-going funding for the originator
Profile
Committed run-off structure from close or after Investors will be committed for a period where
Revolving Period (to the extent included) funding provided can be repaid and subsequently
re-drawn
During Revolving Period eligible assets may be
acquired by the Issuer SPV from the originator on each Acquisition method used during Revolving Period may
Interest Payment Date or intra-period be adjusted to reflect originator systems

6 Private Revolving Securitisations

 Full Public Securitisation Private Revolving Securitisation
Servicing Operational risk to be managed in accordance with Operational risk to be managed in accordance with
Arrangements rating agency criteria discussions between investors and originator
Back up servicer and Back-up servicer facilitator Back-up servicer may be used
mechanics may be used
May include more bespoke covenant protection in
Standard covenants in respect of originator respect of originator role as servicer
role as servicer

Cash Cash manager may be originator or third party Cash manager typically third party
Management
Cash flow strictly controlled, payments waterfalls used Cash flow strictly controlled, payments waterfalls used
to apply cash on each Interest Payment Date
May include more flexibility for cash to be used
intra-period

Security Package Security over assets and issuer accounts Security over assets and issuer accounts
Security package relatively established for differing May include more bespoke security arrangements in
asset classes respect of the assets depending on the uniqueness of
the asset class

Warranty Warranty package relatively established for differing May include more bespoke asset warranties/eligibility
Package/ asset classes criteria in respect of the assets depending on the
Eligibility Criteria uniqueness of the asset class
in respect of the
assets

Modifications Strict criteria apply as to when and how modifications Often allows modifications to occur on a more flexible
can occur to a transaction post-close basis (given small number of investors)

Investor Standardised in accordance with regulatory More bespoke depending on the status of originator
Reporting requirements (e.g. level of historic performance data) and nature
of assets

Private Revolving Securitisations 7

Ashurst Speciality Finance
Speciality Finance

Lee Doyle Ewen Scott

Partner Partner
T +44 (0)20 7859 1837 T +44 (0)20 7859 1201
lee.doyle@ashurst.com ewen.scott@ashurst.com

Matthew Pentecost Briony Holcombe

Senior Associate Senior Associate
T +44 (0)20 7859 2552 T +44 (0)20 7859 1067
matthew.pentecost@ashurst.com briony.holcombe@ashurst.com

Securitisation Corporate

Tom Picton Rob Aird

Partner Partner
T +44 (0)20 7859 3253 T +44 (0)20 7859 1726
thomas.picton@ashurst.com rob.aird@ashurst.com

ABL

Don Brown Elizabeth Street-Thompson

Counsel Associate
T +44 (0)20 7859 3429 T +44 (0)20 7859 2602
don.brown@ashurst.com elizabeth.street-thompson@ashurst.com

8 Private Revolving Securitisations

Selected experience of our team
Speciality finance and forward flow

BUY TO LET LENDER

VEHICLE FINANCE COMPANY
Acting for the funder in relation to a forward flow
Acting for the lenders in relation to their funding of
agreement and associated equity investment in a
a car, motorbike and van finance company
buy to let mortgage lender

NORTON FINANCE MONEYBARN

Advising the lender on its funding to first and Advising Octopus Investments on its funding to
second mortgage lending provider Norton Finance motor finance company Moneybarn

securitisation

A European captive finance

The conduit funder
provider
on a rated warehouse of hire purchase receivables
on the establishment of its private securitisation
originated by a UK start up auto finance provider
platform to fund hire purchase and PCP receivables

A UK financial institution A European investment bank

on a private revolving securitisation in respect as lender in a private securitisation of non-auto
of its auto leasing and insurance premium UK hire purchase receivables for a household
financing businesses goods retailer

A European Investment Bank

A US hedge fund as equity investor
on a private revolving securitisation to
in a private securitisation funding peer to peer loans
fund mortgage originations provided to a UK
originated by a major European P2P lender
non-bank mortgage lender

Private Revolving Securitisations 9

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