Analysis Featured

Structuring Securities for the Alternative Lending Space

asset-backed securities

One of the leading asset management firms with an European origin, BNP Paribas Asset Management is a subsidiary of the parent company BNP Paribas, which is a prominent banking and financial services group in Europe. The Group BNP Paribas came into formation in the year 2000 with the merging of two institutions, namely, Banque National de Paris (BNP) and French investment bank Paribas.

The structured securities division at BNP Paribas is headed by John Carey, a CFA charter holder with over two decades experience with the bank. The structured division of BNP Paribas Asset Management has grown to almost $40 billion in Assets Under Management (AUM). The division exclusively deals with institutional clients.

Commercial Mortgage-Backed & Asset Backed Securities (ABS) Are On the Rise

Jane Song, a portfolio manager at BNP Parabas specializing in short duration and structured securities, highlighted that clients are focused on augmenting their returns, especially in this low yield scenario. Thus, there is special emphasis on commercial mortgage-backed securities as well as asset-backed securities in the fixed income asset class. Residential credit is also in demand, especially the one’s having an implicit government guarantee behind the securities.
Other developments worth noting are market spreads are tightening, there is an underlying protection even during collateral deterioration, and the structuring of securities is now extremely vital. The 2009 crisis has led investors to focus on the risk evaluation of securities from all possible angles.

BNP Paribas’ Business Model

Song is also a CFA charter holder and deals in ABS and structured residential securities that are not guaranteed by the government.

The focus is on absolute returns through active portfolio management. The division is obsessed about managing risk and adding value to client portfolios. It uses multiple tools for risk assessment, and the focus is on identifying unique mortgage characteristics in a pool that will help them outperform their portfolio benchmarks.

Song also shares that post-2009 crisis, the credit card- and auto-backed deals have become standardized structurally. This helps thorough evaluation and comparison with other AAA rated products. According to Song, ABS investors follow a conservative approach; they want a regular issuer and a high level of liquidity along with wanting to see the relative value. Players like Citibank, Amex, and Capital One are amongst the largest issuers in the space.

Considering auto loans in particular, she concentrates on the pedigree and strength of the issuer. One concern she has regarding the auto market is the lengthening of the loan tenure to attract new borrowers. This increases supply in the market but also adds to the risk. As automobiles are depreciating assets, there is an incentive to walk away from a loan if the value of the asset falls below the value of the loan. This is what triggered the residential mortgage crisis, and Song is apprehensive about longer tenures. She believes consumer lending is another sector with great growth potential, although there is a headline risk associated with it and, in the case of unsecured loans, there’s no potential for recovery.

What Makes the Group Stand Out

BNP Paribas stands out for its global investment and asset management expertise owing to its worldwide presence. The core team has been together for over 10 years now and have been through several ups and downs in this business together including a 2009 financial crisis. They have an in-house team to analyze risk exposure and manage volatility.

The division has an institutional client base and deals largely with corporates, fund managers, pension funds, and central banks. Clients are mostly conservative and look for higher returns while focusing on asset-backed securities and government-guaranteed residential credit guaranteed.

Alternative Lending is the Future of Asset-Backed Securities

The division is not currently very active in the alternative lending market, though Jane believes the space is attractive for investors due to the spreads available. Players like SoFi are disciplined and have been able to integrate proper risk controls. A concern is that companies looking to grow aggressively might climb lower into credit quality thus increasing risk. Another issue is that as soon as the economy enters a recession, personal loans are the first to default. Moreover, there is no underlying collateral to be recovered.

BNP Paribas continuously endeavors to broaden its product base for return augmentation and to diversify its overall portfolio. Its managers are continually looking at the alternative lending space due to the attractive yields available. But there is a learning curve and the managers will only concentrate on established fintech lenders with a solid performance history.

Author:

Written by Heena Dhir.

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