SCI forum: What are the benefits of forward flow structures for the securitisation market?

This article was originally published in Structured Credit Investor, November 2021 and is reproduced with permission from the publisher.

Current dynamics in the banking sector are such that the opportunity for growth in non-bank lending in Europe is significant. In certain segments of the market, fintech lending platforms can be more agile and better-placed to deliver what the market wants.

Platforms with strong origination and underwriting capability can be an attractive partner through which banks and other funders can deploy capital and grow assets. We see a significant amount of liquidity available to finance platform lenders. The question of how to structure such funding is an important one – in particular, the merits of a forward flow arrangement versus warehouse financing.

Structurally, a key difference between forward flow funding and warehouse financing is that forward flow involves a sale of the assets which could be beneficial ownership transferred to the funder at the outset, while warehouse financing is more akin to an asset-backed loan. The allocation of risk in a forward flow arrangement differs from warehouse financing in that the ultimate credit risk sits with the funder, while the originator remains responsible for origination risk. A consequence of the forward flow funder assuming all credit risk is that the cost of such funding - and the return earned by the funder - can be higher than in a warehouse financing.

A key benefit of forward flow structures from an originator’s perspective is that the funder’s balance sheet is used to originate loans. This can allow an originator to establish itself, or a new product offering, in its market. Forward flow funding can facilitate an originator to prove its ability to originate, underwrite and service product, which can broaden the range of funding options available to the originator as the business grows. Given that the forward flow funder typically acquires the entire beneficial interest in all assets that meet the applicable eligibility criteria, risk retention requirements typically do not apply to forward flow structures. This can be a major benefit from the perspective of the originator as it will not be required to provide additional subordinated funding to the structure.

Forward flow can provide a range of different funder types with an opportunity to gain exposure to, and diversify into, new markets or products. The funder holds the assets on their balance sheet and, through reporting and other mechanisms, will have full visibility on the performance of the particular asset class.

From a documentation and structure perspective, forward flow arrangements – although they can be more bespoke – are typically less complex than warehouse financing, which can be another benefit for funders and originators who are minded to swiftly execute a funding transaction.

For the right originator-funder partnership forward flow structures can have many benefits. More broadly, forward flow can also have a positive impact in terms of supporting the delivery of new mortgage and other products to the market.