On the heels of the Structured Finance Industry Group Las Vegas 2019 conference, here are our team’s takeaways on trends that were addressed in the sessions.
1. Technology: From the conference panels and the discussions we had with attendees at our booth, it’s clear that technology continues to be an important topic for capital market participants. Many of the panels focused on emerging technologies such as blockchain and its use in securitization transactions. Panelists spent a great deal of time discussing specific technology applications and their use in structured finance transactions.
Many presentations also mentioned the application of artificial intelligence in capital markets transactions. We believe that technology will continue to improve the way we support structured finance transactions. We will continue to make strategic investments in technology to help serve our clients and their transactions.
2. Life after LIBOR: It seemed unclear what will come after the wind-down of the London Inter-Bank Offered Rate (LIBOR). Practical considerations include:
- Will the replacement benchmark rate (Secured Overnight Financing Rate or SOFR) be widely used in the capital markets?
- What is the agreement language? Some current deals address the transition from LIBOR for future resets against SOFR. Legacy deals could represent a final reset that can create a rate mismatch with the underlying assets—who will cover the shortfall? There is also uncertainty as to how and from whom adequate instructions/indemnity will flow to the trustee for rate resets and debt service calculations. Looking at the whole picture, we see a recipe for confusion.
- How much oversight and control will the Federal Reserve have over SOFR or another benchmark rate? And will the oversight impair, stabilize, or disrupt the market?
- How likely is this change to cause disruption and introduce potential litigation among market participants (i.e., investors, insurers, issuers, sponsors, trustees and agents)? In our opinion, very likely.
3. Esoteric Assets: Sessions on esoteric assets included discussions on commercial property–assessed clean energy (CPACE) and residential property–assessed clean energy (RPACE).
- CPACE is still a solid asset class but not growing as fast as expected because commercial real estate retrofits outnumber new construction.
- RPACE class is down due to regulatory compliance and general administrative burden.
However, the continued movement to green energy projects should keep volume in these assets growing at a modest rate.
Also on the topic of esoteric assets, whole-business asset-backed securities are getting attention from many investors and asset managers. Will this increased attention lead to growth in this asset class? Time will tell.
We look forward to the next SFIG Vegas conference.