Specialised Lending Structures and Tranching Considerations

Summary

The document introduces specialised lending as corporate lending repaid primarily from income produced by a financed asset. Its example is a mall held through a special-purpose vehicle, where rental income services the debt. It asks whether these transactions are typically divided into senior and junior tranches, and how that structure compares with securitisation, because the answer affects the choice of quantitative model.

The response compares such deals with asset-backed securities and points to enhanced equipment trust certificates as a related structure for further study. It reports a practitioner’s view that specialised lending deals often are not tranched: assets may already be highly leveraged or stressed, and a senior/subordinated split may not meaningfully separate risk. This is an experience-based observation, qualified by exceptions, rather than a general empirical finding. The document offers no detailed modeling framework or broad evidence about the prevalence of tranching across asset types.

Key ideas

• Specialised lending is described as corporate lending whose repayment depends mainly on income from the financed asset.
• A special-purpose vehicle may borrow against an asset such as a mall and repay debt from its rent.
• The response likens some specialised lending structures to asset-backed securities and suggests related structures for comparison.
• The practitioner response says these deals are often not tranched, citing leverage and limited risk separation as considerations.
• The tranching observation is qualified practitioner experience, not comprehensive evidence or a quantitative modeling method.

Tags

# Modelling Specialised Lending deals


# Modelling Specialised Lending deals












This question by itself is less a quant question but it has impact on the quantitative model to use.

In 2006 CEBS gudilines we find a definition similar to this: Specialised Lending (SP) is a sub-class of corporate lending. The primary source of repayment is the income generated by the asset.

We can think of a huge mall being built. An SPV is set-up, loans are issued and the rent of the mall pays the debt.

What I am not sure about: in practice, are such deals usually tranched? Such that there is a senior tranche (less interest, less risk) and junior tranches? If yes then how does this differ to securitization? Does it?

Is there a good reference where I can read about the tranching of SP?

As said before this has impact on the quant model. Thank you!

## Answer by Kch (score 1)

https://quant.stackexchange.com/a/60060

This sounds to be more in the category of ABS in a less traditional sense. These are common currently. You may want to do further research on enhanced equipment trust certificates (EETCs) and although this may not directly be relevant for your assets in mind, it is very similar.

On tranches, it is my experience as a debt banker they tend not to be because the assets are highly levered and are often (but not always!) faced with some stress. Remember, a company would primarily enter into such an off-balance sheet arrangement if it believed its cost of capital was higher on first mortgage bonds on balance sheet. So, in practice you start looking at these assets and the senior certificates are low investment grade, one questions whether a sr/sub structure bifurcates the risk well.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.