Modelling Specialised Lending deals

Question

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 1

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.