Already a leading investor in the private asset-backed securities market, Structured Finance Advisors (SFA) will be launching a new financing vehicle in the coming year, aimed at significantly increasing the company's buying power and broaden its investment parameters, said Bruce Maier, vice president.
A portion of the fund will be offered to market participants outside SFA's existing client group. "Though our current clients will also participate, it will be offered out to other institutions. We're very excited because it will be the first time that we will be working with companies outside of our group," President Joe Lorusso said.
Innovation is the key word for SFA, a Farmington, Conn.-based investment company.
Since the firm started in 1993, it has dabbled in non-traditional asset classes and has developed creative financing strategies for its clients.
"We look at both efficient and inefficient asset classes. We spend time on inefficient asset classes and play a major role in their structuring," Lorusso said."We get involved very early on in the process. We work very closely with the companies, the underwriters and the rating agencies to formulate a structure for the inefficient asset classes. Many times we basically formulate the structure even before it goes to market. So we are a forerunner in that. Clients look to us for information and advice on how to structure the new asset classes."
SFA, which is primarily involved in private placement deals and some Rule 144As, has a varied portfolio that includes a mix of traditional asset classes such as equipment leasing and non-traditional ones such as franchise loans and the various asset classes falling under intellectual property .
The company's edge is its expertise in the non-traditional classes and its reputation as a premier buyer in the asset-backed market, said Lorusso. "Clients rely on us for our analytical abilities," he said. "It's a market that you cannot buy into just on spread reading alone because it requires a vast amount of homework and experience in the market, and those are what we offer."
"We're open to expanding our market share in deffered annuities and mutual fund receivables, and maintaining a continued presence in the time share, franchising and intellectual properties sectors," Maier said. "We're always looking for innovative asset classes. That's been one of our strengths."
Flexibility in All Market Tranches
SFA, which has 12 institutions in its client roster, has invested a little over $3 billion since its inception, and accumulates about $400 million to $500 million in assets every year. They invest their client's assets in A-rated and above tranches. But to enable them to buy into the lower tranches, they also manage three other funds.
SFA has the Asset-Backed Subordinated Fund (ABSF), or the mezzanine fund that buys into the triple-B and double-B tranches while their equity fund, called Structured Equity LLC, invests in the double-B, single-B or non-rated tranches.
Then there's a warehouse fund that they use to accumulate assets until the value of the portfolio would be large enough to securitize. "The warehouse line accumulates the individual receivables. When we hit a big enough number, we securitize these assets, then our own entities will purchase those securitization notes," Lorusso said.
"An example would be a company that does car loans. We give them a $25 million warehouse line. They, in turn, will put individual car loans into the warehouse fund according to the underwriting parameters that we have agreed on. When the pool reaches $25 million, we will then securitize it, and it will be rated securitization. Maybe we will do $20 million in the single-A tranche that would go into our clients' fund, and $5 million in the triple-B that will go into the ABSF fund. This brings the warehouse line down to zero again," Lorusso explained.
"This strategy enables us to participate in all facets of the asset-backed transaction, allowing us the flexibility to buy into the riskier tranches and also giving us more leverage," Maier added.
A Confident Market Player
The company's efforts to expand through its new funding scheme reflect confidence in the niche market it targets.
"There will always be companies who represent asset classes that the public market has not recognized or companies who do $25 million to $50 million dollar transactions which are too small for the public market. So the niche that we play in is fairly steady," Lorusso said.
The strength of the economy creates the demand for new consumer-based products. This would result in more opportunities to securitize portfolios other than auto, home-equity and credit cards, said Maier. "The market expands to accomodate different types of products including time share, franchise and other areas where there are more and more new businesses that need financing, creating more opportunities in the origination side and the asset-backed market."