Finding finance in an unpredictable era

As millions of children worldwide awaited their presents on Christmas Eve 2016, regulators dropped a gift down the chimneys of securitised lenders. Under a Dodd-Frank Act rule which took effect on 24 December 2016, these issuers are now required to retain, for their own books, a portion of the securities they issue. Lenders that offer finance through asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) – which are seen as part of the “shadow banking” system by regulators – must now ensure that they “eat their own cooking”.

The implementation of this rule – dubbed the risk-retention requirement – has occasioned countless billable hours, white papers, discussions and sleepless nights. However, this is just a small part of Dodd-Frank, which at 360,000 words in length has resulted in thousands of new compliance requirements and restrictions. What’s more, other regulatory frameworks, notably the Volcker Rule (which governs certain investments by banks) and Basel III (which governs capital adequacy and risk-weightings of assets), are still being implemented. For bank and non-bank financial institutions alike, the sheer number of new rules, as well as their associated implementation and complexity, have proven challenging.

Political upheaval complicates lending

As if this were not enough, financiers also face growing political uncertainty. In 2017, general elections will be held in Germany, France and the Netherlands. These upheavals will only compound the effects of the political turmoil already generated in 2016 by a controversial election in the United States, as well as referenda in the United Kingdom and Italy. It’s notable that the new US President has already, at times, expressed a desire to repeal unspecified portions of the Dodd-Frank Act. Across the globe, financial institutions must prepare for changes in rules, their reinterpretation, and changes in emphasis when they are implemented. 

The natural result of this regulatory and political uncertainty has been a volatile financing environment. Though many of our clients see this as an opportunity, it also presents challenges. More than ever, for any type of alternative financing, it has become difficult to answer the following questions: Who will lend? At what terms? And with what degree of certainty?

Bespoke solutions offer way forward

At the Citco group of companies, we have an array of solutions to help our clients navigate this unpredictable financing landscape. Citco Capital Solutions (CCS) maintains close relationships with a global network of financing sources, and provides knowledgeable, unbiased advice. And Citco Financial Products (CFP) provides financing and foreign exchange solutions to Citco’s hedge fund investor clients via its securitisation vehicle Amathea Funding (senior notes issued are rated Aa1 via Moody’s). Amathea Funding’s diversity and continuity of funding, and zero-loss history, are unrivalled.

This means that the Citco group of companies can develop tailored financing solutions for alternatives managers. For instance, CCS was recently approached by the wealth-management affiliate of a commercial bank, which wanted to finance its portfolio of illiquid fund investments. Imposition of the Volcker Rule had rendered its previous solution obsolete. After conducting due diligence, CCS engineered an appropriate structure and identified a lender. What’s more, the client increased its existing borrowing relationship with CFP. 

It seems likely this year that, as managers seek safe passage through the uncertain seas of financial regulation and cope with unpredictable political and economic storms, this kind of bespoke solution will only become more important.

8th March 2017

Our contacts

Shiraz Allidina

Shiraz Allidina

Director, Citco Capital Solutions Inc.

T+1 415 228 0400
LSan Francisco

Michael Peterson

Michael Peterson

Head of Capital Markets, Citco Capital Solutions Inc.

T+1 212 401 9600
LNew York