Abs

Next Generation
for Esoteric ABS

APRIL 2016
A new business model for connecting borrowers, traditional

lenders, investors and administrators could fuel growth in
esoteric ABS.
CONTENTS
Overview
Technology Enables Growth;

Marketplace Lending
Partner with an Expert

Administrator; Conclusion
The traditional Asset-Backed Securities (ABS) market is well established, and

securitizations of credit card receivables and auto loans are common. Yet nearly a
decade of low rates, slow global economic growth and challenging equity markets
combined with the pervasive downturn in the emerging markets have kept investors
constantly searching for alternative risk and yield strategies.
To this end, investor appetite for esoteric ABS has increased, and an array of
guaranteed future cash flows are being securitized to meet the demand. Among them
are loans and leases on aircraft, railcars, timeshares and containers, as well as small
business loans, stranded assets, triple net leases, whole businesses, tax liens, single
family rentals and solar generation. Recently, wireless carriers have begun securitizing
their equipment installment plans as well.
Admittedly, there are some challenges associated with esoteric ABS. Sourcing new and
different types of assets that possess predictable credit and cash flow characteristics
is one. Another is the longer time it takes to market these securities to investors and
secure ratings from the agencies, which may not be familiar with the underlying assets.
Esoteric ABS are less liquid than traditional ABS. There are also valuation, legal,
regulatory and risk assessment issues associated with them. For example, there is a
lack of precedents in terms of legal recourse, investor demographics and resolution
mechanics for these unique structures and counterparties.
For some investors, however, the performance track record of this asset class
combined with the potential opportunity to earn higher yields justifies the risk. On the
supply side, advancements in technology are presenting new opportunities to create,
analyze, market, sell, securitize and process these complex assets efficiently.
COR PO R AT E T R UST
TECHNOLOGY ENABLES GROWTH

Since the 1990s, ABS market participants have deployed sophisticated technology to
structure deals and support all the processes in the transaction from trade capture
and risk management to back office confirmation, accounting and settlement.
These systems eliminate manual processes, automate workflow and improve
operational efficiency.
There are solutions that package data so ABS deals can be priced efficiently. Others
are devoted to position keeping and the calculation of closing prices and value at risk.
The technology is scalable to accommodate large positions and complex calculations,
and sufficiently flexible to support rapid innovation and new product development,
which is important for esoteric ABS.
Esoteric ABS structures are not

necessarily more complicated
than traditional ABS, but the
documentation may be complex and
pose unique operational dynamics
across counterparties.
Esoteric ABS structures are not necessarily more complicated than traditional ABS,
but the documentation may be complex and pose unique operational dynamics across
counterparties. Moreover, the risk profile varies considerably. For example, esoteric
ABS transactions such as solar and cell towers have a relatively low correlation to
macroeconomic conditions, offering the possibility to diversify, while others such as
container leasing have a high correlation.
These mainstream tools and technologies of the 1990s and early 2000s will remain
critical to traditional and esoteric ABS market participants. But now there is a keen
focus on how the technologies of the future can increase efficiency and lower cost and
risk even further. The next generation of tools now enable business users to analyze
and model data themselves. Ultimately, this will make it faster to value esoteric ABS
and assess the legal and regulatory requirements as well as the risk.
One example of a technology innovation that could enable growth in the esoteric
ABS market is marketplace lending.
MARKETPLACE LENDING
The Internet, mobile technology, big data and cloud technology are fundamentally
changing the way ABS are created, marketed, sold and processed. As traditional banks
retreated from consumer lending, peer-to-peer platforms stepped in to fill the gap
and satisfy pent up demand for credit by matching borrowers and lenders online and
securitizing the loans.
Marketplace lending platforms leverage big data and analytics technology. Their
consumer lending algorithms, for example, take into account factors ranging from
credit scores to social media activity. In fact the use of advanced analytics is often
cited as a strength because of its potential to reduce risk, whereas traditional
securitizations rely heavily on credit scores.
Borrowers benefit from marketplace lending because they can often gain access to
funds quickly and at lower interest rates than they can get from banks. Individual and
institutional investors benefit as well because they can lend money at various interest
rates based on proprietary credit scores assigned by each platform.
Proponents maintain that marketplace lending platforms increase efficiency,
reduce costs and shorten the time to market. The transactions promote regular
issuance and increase investor participation. Theoretically, the platforms should
improve transparency and provide some momentum for marketplace loan ABS to
become a mainstream investment product. This dynamic may have contributed to
the recent growth in the origination of ABS backed by unsecured personal loans
on these platforms.
The Internet, mobile technology,

big data and cloud technology are
fundamentally changing the way
ABS are created, marketed, sold
and processed. As traditional banks
retreated from consumer lending,
peer-to-peer platforms stepped
in to fill the gap and satisfy pent
up demand for credit by matching
borrowers and lenders online and
securitizing the loans.
On the other hand, marketplace lending is not as mature as other asset classes,
so there is not much data to show how these loans perform over the long haul.
There is continued due-diligence required on how documentation is delivered to
the administrator. There is also a continued dialogue around the validity of credit
algorithms and their ability to better protect borrowers.
While marketplace lending is poised to grow, some legal and regulatory considerations
could challenge the securitization of this asset class. Notably, the U.S. Supreme Court
has been asked to review the Madden vs. Midland Funding, LLC ruling. This case
addresses the lawful interest rate a lender is allowed to charge, and what happens
when debt is assigned by a national bank to an entity that is not a national bank.
These issues will need to be resolved before marketplace lending is extended to
include esoteric ABS.
From a broader perspective,

marketplace lending illustrates how
the technology industry has gotten
closer to consumers and assets by
developing platforms that collapse
the complex layers of aggregation
and analysis.
PARTNER WITH AN EXPERT ADMINISTRATOR

From a broader perspective, marketplace lending illustrates how the technology
industry has gotten closer to consumers and assets by developing platforms that
collapse the complex layers of aggregation and analysis. Speed, simplicity and
efficiency are critical to origination. These platforms enable consumer asset and
personal data to be centralized and aggregated across customer sets, and then
harnessed and processed quickly and efficiently.
Connecting technology to the complex needs of issuers, investors and market
infrastructure is critical to the growth in esoteric ABS securitizations. It allows
for tighter integration between origination and administration. However, it is also
important for participants to work with an expert administrator that invests in stateof-the-art innovation centers worldwide and offers a broad suite of management and
services covering the entire investment lifecycle. It is important that the administrator
has a track record in both traditional and esoteric ABS, can scale globally, and has the
ability to handle workouts should a default occur.
CONCLUSION
Low rates and tighter spreads in traditional ABS and investment-grade asset classes
are attracting investors to esoteric ABS. Generally, investors worldwide are interested
in diversifying their risk exposures, and they perceive the level of risk in esoteric ABS
is acceptable given the potential for higher returns. Analysts expect the supply from
existing and new issuers to increase and the number of private transactions to expand
as the economy improves, employment increases and credit performance strengthens.
Moreover, advancements in technology will support the market in numerous ways.
Esoteric ABS structures are complex and diverse. By partnering with an administrator
that has the operational expertise, technology and resources to be efficient and
responsive in due diligence, execution and delivery, issuers are well positioned to reap
the potential benefits.
AUTHORS:
Sonal Patel, Client and Business Development, BNY Mellon Corporate Trust
Andrew Taylor, Group Manager, U.S. Product Management, BNY Mellon
Corporate Trust
Esoteric ABS structures are

complex and diverse. By partnering
with an administrator that has the
operational expertise, technology
and resources to be efficient
and responsive in due diligence,
execution and delivery, issuers are
well positioned to reap the potential
benefits.
BNY MELLON IS YOUR STRATEGIC PARTNER, PROVIDING YOU SOLUTIONS IN

A COMPLEX MARKETPLACE
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solutions is a core competency and priority. Our goal is to help clients realize
their full potential and power investment success by leveraging our
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Our technology is an enormous asset that differentiates us in the global
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We have the global access, flexibility and breadth of capabilities to accelerate
automation, improve productivity and enhance user experiences.
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03/2016

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Next Generation

for Esoteric ABS

A new business model for connecting borrowers, traditional

Technology Enables Growth;

Partner with an Expert

The traditional Asset-Backed Securities (ABS) market is well established, and

TECHNOLOGY ENABLES GROWTH

Esoteric ABS structures are not

The Internet, mobile technology,

From a broader perspective,

PARTNER WITH AN EXPERT ADMINISTRATOR

Esoteric ABS structures are

BNY MELLON IS YOUR STRATEGIC PARTNER, PROVIDING YOU SOLUTIONS IN

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