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MPG sees increasing investor interest in bifurcated loan structures

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Institutional credit investors’ interest in loan structures offering differentiated risk/return profiles has increased significantly over the last six months, according to Managing Partners Group (MPG), the international asset management group.

Malta is particularly well placed to meet this demand because of the legal infrastructure it offers, delegates will be told today at the Opportunities within the Securitisation Sector Conference at the Malta Stock Exchange today.
 
An A/B loan structure offers a lower rate of interest but priority on repayments to the A class holders of the debt while second priority and a higher rate of interest is given to B class holders. Typically, the spread between the two rates of interest can be up to 8 per cent.
 
Richard Ambery (pictured), General Counsel at MPG, says that yield-hungry, risk-tolerant investors, traditionally heavily weighted in listed stocks or private equity, are looking to move away from these crowded spaces.
 
“These investors realise they can get a relatively attractive rate of return on junior asset-backed securities secured over assets originated by businesses, noticeably at the moment in the alternative lending, esoteric property and renewable energy sectors,” says Ambery. “Their counterparts at the senior end of the spectrum, such as insurance companies and other financial institutions, appreciate the opportunity to lend with a substantial capital cushion to absorb potential losses below them at finer rates.
 
“As such, the investor universe has become polarised and unitranche credit deals offering a return somewhere in the middle often fail to meet the appetite of any one group of investors.”
 
Ambery says that although there is strong demand from issuers and investors for A/B loan transactions, US and European regulations attaching draconian capital charges to investments in ‘tranched’ securitisations, where the borrower or original lender has insufficient ‘skin in the game’, can make them extremely onerous to structure.
 
“This is where Maltese securitisation cell companies come into their own, when both senior and junior loan-backed securities can be issued by segregated cells of the same issuer operating as a platform for a number of similar transactions,” says Ambery. “And the approach to market and documentation can be standardised across all of them.  Malta is unique among onshore jurisdictions with its legislation for securitisation vehicles with cells, each bankruptcy remote from the others.”
 
The Malta Stock Exchange received regulatory approval in September to launch its Institutional Financial Securities Market, which will list asset-backed securities, convertibles and derivative and insurance-linked notes.
 
MPG opened an office in Malta in 2015 to include within its business a securitisation platform for the issuance of asset-backed securities by its asset management and third party buy-side clients. A key factor in this decision was Malta’s securitisation laws, which strive to be the most highly developed of any onshore jurisdiction .

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