How to use note securitization as a deal mechanism?

While many associate securitizations with ‘sub-prime’ mortgages, in APAC note securitization is a typical and flexible mechanism to pool capital between unaligned investors.?

Note securitization

Private credit investors use an orphan SPV to issue notes to parties who wish to sit at different points on the capital stack. A conservative lender might purchase senior notes, while a special sits manager might invest in mezz or junior tranches etc.

Conceptually lenders could have established a partnership (acquire a partnership interest) or corporate structure (acquired shares), however debt benefits from an equity cushion and permits highly tailored risk sharing.

Note trustee

Note trustee is typically appointed by the issuer to facilitate communication between the stakeholders and to hold collateral. Daily activities vary and can involve substantial or minimal fiduciary duties.

Services include: facilitating communications between issuer and noteholders (consents, amendment, waivers etc), monitoring of collateral packages, waterfall calcs/payments, entry/exit of lenders and additions/releases of security etc.

Collateral monitor

Compared with US deals, APAC note securitization transactions involve more complex collateral packages and often cover: (i) borrower SPV shares, (ii) bank accounts, (iii) guarantees, and (iv) other assets including AR cashflows or listed shares.

As APAC private credit lenders continue to identify new lending opportunities, note trustees need to continue to innovate their note and collateral admin platforms to deliver real time insights for ever larger and complex deals.