Structured Credit Investor

New dawn

Category: ABS

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Trustees continue to address ongoing issues in the European securitisation market, but also see new opportunities developing. James Linacre investigates how the trustee role is changing and where it remains the same

The European securitisation market continues to develop and the trustee's role is evolving as it does so. While certain perennial challenges remain, new opportunities have also presented themselves.

Although the trustee's role is essentially the same as it has always been, lessons have been learnt and adaptations made. Trustees' experiences during and after the crisis have provided a significant level of expertise that the best in the business draw upon to make the right decisions.

"Trustees now benefit from the experience of a number of post-crisis years, during which we have worked on numerous complex restructurings, seen where structures have been strained once tested and have had a great deal of interaction with various transaction parties and investors post-close. We are able to apply this experience to the discussions surrounding documentation and structuring of new deals and in our approach to post-close issues," says Helen Tricard, head of transaction management and restructuring, BNP Paribas Securities Services.

She continues: "It remains the case that trustees will try to be commercial and proactive, while acting within the constraints of the documentation, time and costs. Sometimes the most 'commercial and proactive' course of action will be for the trustee to go to noteholders in a timely manner and an experienced trustee will often be able to make this call early on, in order to reach a solution as quickly as possible."

This experience and expertise will be important as the role of the trustee continues to change. Mark Jones, Citi Issuer Services product head, EMEA, believes that even more will be asked of trustees in the future.

"Our capital markets origination team's view is that fixed income is going to replace a lot of bank lending in the next 12 months. As a result, we could see large infrastructure projects historically financed by bank lending now being financed through project bonds," says Jones.

He continues: "Infrastructure project finance may bring with it a need for a monitoring role. As a result, trustees could be called upon to take a more active role with that product. But to do so, they will need to acquire the relevant resources and expertise."

The breadth of a trustee's resources is a large part of what makes them attractive in the current market, regardless of what future developments prove to be. Stefano Bondioli, Europe head of sales for debt market services, BNP Paribas Securities Services, highlights this as one of the key strengths clients look for.

"As well as differentiating on service quality, our trustee services have the advantage of forming part of a larger offering in the debt markets space, which is important to many of our clients who operate across several markets. Our clients can take advantage of services across the entire debt spectrum from conventional vanilla bonds through to structured debt, loan funds and CLOs, which sets us apart from many providers in this space," he says.

While trustees are getting many things right, they agree that there is more they could be doing as well. Tricard notes that BNP Paribas and other trust services have invested considerable time over the last few years in engaging with investors outside of the context of specific post-close issues, so as to strengthen relationships and develop a better insight into investor views on market developments.

"Given that investors are our clients, we want to ensure we have an insight into their views, even if these vary enormously from investor to investor. Talking to investors on an ongoing basis avoids the somewhat odd situation, whereby often trustees only have direct contact with their clients - the investors - in post-close situations, which is unlikely to be the best time to get the sort of general insight that is useful to a trustee in providing a good service and understanding what service investors are seeking from trustees," she says.

This approach appears to be popular with clients and Jones sees additional scope for the trustee role to be further redefined. In the securitisation space, this will be constrained by regulation, but he notes that there will be opportunities.

"In this changing landscape, trustees may seek or be required to adopt a more proactive role - which could, by way of example, extend to asset reporting and servicing. This remains a thought at this stage, but with an increasingly diversified funding base bringing with it new needs and requirements, trustees are likely to come under greater scrutiny and need to be prepared for change," he says.

A particular bright spot for the market has been the change in the European CLO market's fortunes over the last couple of years. The sector continues to grow, with SCI's new issuance database showing 17 European CLOs issued by the end of May this year (excluding retained deals), while the figure for the same period last year was 13 (see SCI's deal database).

However, it is not just the number or size of deals that is increasing. There is also a growing complexity to the market, as the post-crisis caution is relaxed a little.

"We are seeing transactions grow increasingly complex, partly in response to changes in the regulatory environment and partly as deals evolve away from the simplified structures which were in vogue in the aftermath of the financial crisis. Furthermore, we continue to observe the trend towards debt funds and loan funds, away from traditional bond issuances, alongside the re-opening of the European CLO markets," says Bondioli.

He notes the importance of adapting to these market trends as the evolution continues. However, one way in which the market has not evolved as participants might have hoped is the diversity of loans making up the pools, and this remains a challenge for the whole market.

"The CLO market continues to grow as appetite for European deals increases. We are seeing evidence of this in the form of US asset managers entering the European market, together with a growing number of warehousing transactions culminating in full blown CLOs," says Jones.

He continues: "However, the worrying concern remains the number of available loans of sufficient quality available to the market. Many deals are tapping the same pool of loans, so there is a concern about where new eligible loans might come from."

One source of new loans could be private equity and hedge funds, which are actively lending to SMEs. Jones notes that these entities are needed to help plug the gap left by banks and, although they may not be able to take up all of the slack alone, they do benefit from being smaller and more nimble than the traditional banks.

There are also a number of more familiar challenges facing trustees in particular. Among these is the long-running issue of noteholder communications, which trustees and others have long been grappling with.

"The issues with noteholder communications remain, as they have for many years; however, it continues to be the case that there is only so much trustees can do to address these. The solution needs to involve the clearing systems and be driven at an industry level, with investors applying pressure for change," says Tricard.

She adds: "In a complex and fast-moving default situation, the provisions surrounding the timing for noteholder decisions and the constraints of the communications systems have the potential to be very frustrating, as they could significantly limit the ability of the trustee to take action or get input from investors as fast as the developing situation requires."

Issues can arise when investors are unclear about the role of the trustee. Unfortunately, this appears to be the case far too regularly. While the trustee acts on behalf of all investors, it is those investors that need to bear the economic risk of asking a trustee to take a particular course of action, Tricard warns.

Jones says: "The level of understanding in the investor community with respect to the role of the corporate trustee remains a concern. Getting people's attention at conferences, such as Barcelona, continues to be challenging."

He continues: "There exists a perception that trustees have deep pockets and should assume more responsibility, which in reality is wide of the mark."

Tricard notes that BNP Paribas has "been involved in excellent initiatives from the ICMSA trustee sub-committee, such as standard meeting provision language incorporating provisions for electronic consent, pro forma account bank agreement and clarification around the provision of original documents", which should help with some of the issues trustees face.

The increased drive to introduce post-enforcement fee caps, which was seen a couple of years ago, has neither picked up steam nor entirely gone away. While trustees are wary of post-enforcement caps, pre-enforcement caps and expense limits remain common and there seems to have been an increased focus on provisions relating to negative interest that may be charged.

Looking ahead, Tricard expects to continue to see a steady flow of amendment work, although she notes that the balance has now tipped back to new deals. This marks a significant shift from the heavy weighting to post-close issues that dominated immediately post-crisis.

"We are in a new environment of negative or extremely low interest rates impacting transactions and, while this is provided for in new deals, we are seeing issues arising on older transactions where this was not envisaged in the documentation but where the account bank is holding large balances. We continue to see a trend towards narrowing and limiting the trustee's discretion and hardwiring negative consent language on specific matters into deal documents," she concludes.


Trustee award winners unveiled
BNP Paribas Securities Services has won SCI's 2015 corporate trust service provider award. In a repeat of the 2013 results, SCI's survey to gauge corporate trust customer satisfaction ranks US Bank Corporate Trust Services as runner-up, with Citi Agency & Trust rounding out the top three.

This year's survey attracted 42 respondents, over half of which were asset managers or issuers, while arrangers and structuring banks were also well represented. They rated BNP Paribas, BNY Mellon, Citi, Deutsche Bank and US Bank on client services, trustee services, agency services, documentation management, reporting and value. The survey also polled respondents on changes in the role of the trustee and which European jurisdictions present opportunities for new deals.

The survey reveals that BNP Paribas has been rated strongly across the board. In the client services section, the quality of BNP Paribas' relationship managers was highlighted, while in the agency services section it scored particularly well for payment timeliness. BNP Paribas also scored strongly for value.

US Bank also scored strongly, particularly for client services. Within the agency services section, it scored very highly for the extent of its depository network.

Citi also generally performed well, with respondents noting identifying documentation management as an area of strength. The quality of its published information also received high scores.

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