The cost of living crisis. It's become part of our vocabulary and shows little sign of easing. We've got the highest inflation rate in a generation, and with rocketing energy costs (even considering the latest government interventions), it's looking like a hard winter ahead. Against a turbulent geopolitical backdrop, consumers continue to feel the pinch. As the crisis bites, we'll see more and more people slipping into the red.
The upshot for investors?
Portfolios will come under increased pressure over the next two or three years, with lenders and investors then looking at ways to mitigate the added risk to their investments. Key to this will be the strength of the servicing arrangements for their underlying loans.
A perfect storm
Prevailing economic conditions will pile pressure on lenders and servicers as they attempt to navigate unchartered waters. Margins will continue to be squeezed with increasing funding costs for lenders and higher operational costs for servicers. Against this 'perfect storm' of external pressures, the likelihood of servicer failures is higher than ever.
The standby advantage
Lenders must have robust and realistic standby arrangements in place when facing mounting external pressures and volatile market forces. Why?
To ensure continuity of servicing for underlying loans
To preserve their ratings, reputation and future success
To provide resilience against bankruptcy and underperformance
To meet their obligations to vulnerable customers
A multi-layer approach
An experienced standby servicer will supply multiple layers of protection, including:
Robust procedures for the transfer of servicing
Comprehensive data mapping of the portfolio
Implementation of tested systems to receive data securely
Detailed servicer reports of key portfolio data
This approach ensures the continuity of cash flows and quality of servicing. Robust standby arrangements also benefit issuers looking to securitise portfolios with rating agencies considering all parties' operational strengths in transactions, including backup servicers.
What to look for in a standby servicer?
Experience is key. It's essential to do your research. A vendor with a proven record servicing similar assets is a bonus, and the financial stability of the standby servicer is crucial.
Managing the dip
In these volatile times, a vendor that's weathered earlier recessions brings extra stability. Surprisingly, a recognised servicer rating isn't a legal requirement for standby servicing providers. Choosing a partner who's taken that extra step and proactively obtained a rating can increase confidence and help safeguard the performance of your portfolio.
The need for speed
Agility in transfer is essential. Delays or disruptions to servicing can have a detrimental effect on the portfolio's performance and the customer's financial well-being. The speed with which the portfolio can be transferred to the standby service is critical. This depends on the standby servicer's level of investment with the lender.
Customer-centric for client success
A servicer with proven empathy and a customer-first approach is crucial. We're likely to see more customers classed as 'vulnerable' due to their inability to pay their debts. An experienced servicer will implement realistic customer repayment plans, maintaining consistent cash flow and protecting investors' funds.
Step out of the cold…
Third-party standby service arrangements are typically described as either cold or warm depending on the service level they provide. Cold standbys are slower to migrate portfolios and can be utilised where the risk of invocation is considered to be very low, or the speedy transfer of the underlying assets to the standby servicer is not required.
…And into the warm
Warm cover is the recommended approach for today's asset owners. It's proactive and planned, providing high levels of clarity, contingency and confidence.
A warm servicing arrangement supports operational resilience, business reputation and asset cash flows. Features should include:
Adequate preparatory work upfront
A full portfolio review
Regular portfolio monitoring
Contingency transfer planning
Coordination of servicing systems
Agility of response
A short transition period (typically 60 – 90 days)
Preparation is key
Asset owners must be proactive and prepare for challenging times ahead. It's no longer a question of if portfolio performance will be affected but for how long and how severely.
Want to know more?
Read more about our standby servicing and portfolio adminitration solutions here.