Working Capital Finance – A New Asset Class?

The raft of techniques to release working capital on a company’s balance sheet have proliferated and with it the innovative ways that banks and lenders can re-package those risks and sell them. This has led to some commentators to describe the space as a new asset class in its own right. However, the story of exciting new asset classes and complicated financially engineered products is not a new one to the financial sector. The 2008 subprime mortgage crisis stemmed from an originate-to-distribute (OTD) model of lending, where the originator, in this case, of a loan sells it to various third parties. This was a popular method of mortgage lending before the onset of the subprime mortgage crisis. In the aftermath of 2008 painful lessons were learned as evidence showed that originating banks did not expend resources in screening their borrowers and that coupled with leverage-induced risk-taking behavior significantly contributed to the subprime mortgage crisis.

In response to the GFC the EU revised their Securitisation Regulation which was been in force since 1st January 2019. The new regulation makes clear provisions for securitisation special purpose entities, due diligence, risk retention and transparency obligations, amongst many others. This is not solely for RMBS and CMBS, but covers all tranched and securitised products. Importantly at Pactum we structure our investments in accordance with the new regulation and working with the best possible deal team of structurers, lawyers and servicers, to ensure that our deals are simple, transparent and standardised.