Download presentation
Presentation is loading. Please wait.
1
An introduction to Secured Finance
Andy Burgess
2
Agenda What is secured finance? How does it work? How can I use it? 1
2 How does it work? 3 How can I use it?
3
Weaker credit environment
Where can I generate higher returns or more income? Where is risk-taking rewarded? More interest rate risk More credit risk More idiosyncratic risk Increases loss if yields rise Weaker credit environment illiquid in stress 100% reliant upon manager skill Not interest rate sensitive Investment grade risk Attractive asset class L STATIC
4
What are secured finance securities
What are secured finance securities? Both liquid and illiquid instruments have similar characteristics Secured on ring-fenced assets / cash flows Bankruptcy remote from originator Typically floating rate note Complex to analyse, different skill-set But…underlying assets are familiar (house) Risk is to underlying individual borrowers
5
Why does this opportunity exist? Bank appetite to lend has fallen
Regulation has reduced bank lending Banks looking to share ‘good’ risks, not dump bad loans Opportunities to work alongside banks Increasing direct opportunities L Quarterly. Updated by FIG product specialists
6
Residential and consumer Commercial real estate
What are the different areas of secured finance? Asset-backed lending across a wide range of opportunities Residential mortgage backed securities (RMBS): Prime Buy-to-let/Non-conforming Credit card loans Auto loans Residential and consumer Residential mortgage warehouse Residential bridge lending Auto/credit card warehouse Commercial real estate Secured corporate Liquid/public Commercial real estate loans: Office Retail Hotel Corporate loan warehouse SME warehouse Collateralised loan obligations (CLO) Whole business securitisations (WBS) Commercial mortgage backed securities (CMBS) Illiquid/ private Often the same underlying assets L0090
7
How are asset-backed securities structured
How are asset-backed securities structured? Residential mortgage backed security Pool of mortgages back a bond that pays interest and regular principal payments Various ‘tranches’ of bonds, senior is safer, but lower return Structure can apply to credit card payments, auto loans etc Collateral pool (e.g. mortgage loans) Losses Senior loan Junior loan/ equity Priority of payments Interest and principal from mortgages Interest from mortgages Principal from mortgages L0090
8
Loan-to-value (LTV) is one guide to protection
Many different ways to improve safety Step 1: recourse and excess assets If borrowers fail to pay back their mortgages: Recourse to borrowers (not in US) Re-possesses the house and sells it Loan-to-value (LTV) is important metric Lower LTV = higher protection More generally, either: Value of asset > debt Amount of loans > debt Often called ‘Over-collateralisation’ or ‘OC’ Loan-to-value (LTV) is one guide to protection Source: Insight, for illustrative purposes only.
9
Additional protection significant and counter-cyclical
Many different ways to improve safety Step 2: structural protection and diversification AAA Extra protection within the bond terms: More subordinated investors take losses first Excess spread: mortgage - bond coupon = expected loss * X Coupon step-up if principal bond repayments slow Asset triggers – income diverts from junior note holders AA A BBB BB Equity Additional protection significant and counter-cyclical Source: Insight, for illustrative purposes only.
10
Investment process overview The Insight approach
Portfolio management Loan underwriting Asset valuation Bond structuring Quantitative modelling Mortgage underwriting expertise Leveraged finance specialism Commercial property valuation Whole loan appraisal Large fixed income team In house ratings models Market leading loan level forecasting Investment bank structuring experience L0080 – UPDATED MONTHLY THIS SLIDE IS STATIC
11
Takes longer, but terms are negotiable
Public versus private secured finance markets Underlying assets are the same, what is different? Public markets Bond with prescribed terms (or ‘covenants’) Public information Active secondary market Private markets Bi-lateral agreement – more control, longer lead time Private information Limited secondary market Takes longer, but terms are negotiable
12
How much illiquidity premium do I need
How much illiquidity premium do I need? More than just worrying about things going wrong Illiquidity premium
13
Attractive risk-adjusted returns Corporate spreads versus secured debt
Diversified secured finance strategy Representative secured finance universe Investment grade corporate bonds +200 to 250bp Investment grade High yield Source: Insight. Data as at 31 March The spreads shown are for illustrative purposes only and are not indicative of the strategy spreads. European corporate bonds used to reflect corporate bonds. L0090 – quarterly/adhoc update from FIG
14
How can I use this asset class? Growth or income?
Diversifying asset class Longer-term growth asset Expected return compensates for analytical complexity and illiquidity Not as sensitive to rising rates Income approach Contractual asset Cheaper than corporate bonds Get paid for sacrificing liquidity if you don’t need it Income rises with higher cash rates Can meet either a return or income requirement
15
Important disclosures
This is a marketing document intended for professional clients only and should not be made available to or relied upon by retail clients. Unless otherwise stated, the source of information is Insight Investment. Any forecasts or opinions are Insight Investment’s own at the date of this document (or as otherwise specified) and may change. Material in this publication is for general information only and is not advice, proper advice (in accordance with the UK Pensions Act 1995), investment advice or recommendation of any purchase or sale of any security. It should not be regarded as a guarantee of future performance. The value of investments and any income from them will fluctuate and is not guaranteed (this may partly be due to exchange rate changes) and investors may not get back the amount invested. Past performance is not a guide to future performance. This document must not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or otherwise not permitted. This document should not be amended or forwarded to a third party without consent from Insight Investment. Telephone calls may be recorded. For clients and prospects of Insight Investment Management (Global) Limited: Issued by Insight Investment Management (Global) Limited. Registered in England and Wales. Registered office 160 Queen Victoria Street, London EC4V 4LA; registered number For clients and prospects of Insight Investment Funds Management Limited: Issued by Insight Investment Funds Management Limited. Registered in England and Wales. Registered office 160 Queen Victoria Street, London EC4V 4LA; registered number For clients and prospects of Pareto Investment Management Limited: Issued by Pareto Investment Management Limited. Registered in England and Wales. Registered office 160 Queen Victoria Street, London EC4V 4LA; registered number Insight Investment Management (Global) Limited, Insight Investment Funds Management Limited and Pareto Investment Management Limited are authorised and regulated by the Financial Conduct Authority in the UK. Insight Investment Management (Global) Limited and Pareto Investment Management Limited are authorised to operate across Europe in accordance with the provisions of the European passport under Directive 2004/39 on markets in financial instruments. For clients and prospects based in Singapore: This material is for Institutional Investors only. This documentation has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, it and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Shares may not be circulated or distributed, nor may Shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) or (ii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. For clients and prospects based in Australia: This material is for wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. Insight Investment Management (Global) Limited is exempt from the requirement to hold an Australian financial services license under the Australian Securities and Investments Commission Corporations Act 2001 in respect of the financial services it provides. Insight Investment Management (Global) Limited is authorised and regulated by the Financial Conduct Authority under UK laws, which differ from Australian laws. © 2017 Insight Investment. All rights reserved.
Similar presentations
© 2025 SlidePlayer.com. Inc.
All rights reserved.