Banks in Germany, Austria and Switzerland can use structured solutions to reduce credit risk from fronting transactions on their balance sheets while giving institutional investors regulated access to risk positions. Luxembourg compartments, which provide clear asset segregation and a high degree of transparency, are particularly well suited for this. “Compartments bridge the gap between banking licences and the capital markets – to the benefit of financial institutions, investors and borrowers alike”, says Daniel Knoblach, Board Member at Super Global Services SA.
In a classic fronting model, a bank appears as the formal lender but transfers the economic risk – and the associated return potential – to an external vehicle. Compartments within a Luxembourg securitisation structure enable the receivables and risks to be clearly and legally allocated to a ring-fenced sub-fund. “It is crucial that risk, responsibility and reporting remain cleanly separated and fully traceable at all times”, as Knoblach emphasises.
Free & non-binding
This structure opens up new opportunities for institutional investors to participate in bank-related credit risk without becoming lenders themselves. Investments are made via a structured, segregated vehicle with independent reporting, in the form of securities that can be held in a standard custody account. “For regulated investors in particular, transparency and a professional set-up are preconditions for assuming such risks in the first place”, explains Knoblach. At the same time, the model gives companies faster access to capital, complementing traditional bank lending and supporting liquidity.
Strict adherence to Luxembourg securitisation law underpins high compliance standards and clear governance. “Compartments offer an established, legally secure framework for implementing fronting structures in a controlled and compliant way”, says Knoblach.