Private credit insight: the role of forward flow financing and wet funding

Forward flow financing transactions have emerged as a prominent structure over the last number of years, giving funders direct access to new assets without own origination.

In this article, the Structured Finance team in Ireland explore the fundamentals of forward flow financing, outlining its structure, commercial rationale and key legal considerations for both originators and funders.

The core transaction documents generally include a receivables sale agreement, a servicing agreement, and a master definitions or framework agreement.

Commercial rationale for forward flow financing

For originators: in addition to the obvious liquidity benefits, forward flow transactions can be a very useful tool for managing the balance sheet. As assets are sold on origination in whole to the third-party funder, they can be immediately derecognised from the originator’s balance sheet, allowing capacity for ongoing origination. In addition, wet funding of underlying obligations will assist the originator in reducing the costs of originating assets.

For funders: forward flow securitisation can be a way of gaining exposure to certain asset classes without the need to develop their own origination and underwriting capacity or to meet consumer lending requirements.

Key legal and structural considerations

Accounting treatment

The intended accounting treatment of the sold receivables is a fundamental consideration in structuring a forward flow financing transaction. Originators seeking to achieve balance sheet derecognition should consult their auditors regarding the relevant criteria under applicable accounting standards. Such criteria and interpretations should be accurately reflected within the transaction documentation. Key focus points will include:

• cash flows: identifying which party holds the right to payments from the receivables (typically transferred via true sale) or whether the assets are subject to a qualifying pass-through arrangement

• control: evaluating the level of control retained by the originator, such as continuing as servicer or restricting the funder's ability to sell on receivables or call for legal title transfer

• performance exposure: determining the extent to which the originator may benefit from future asset performance, for example, repurchase rights

Funding certainty

The core advantage of forward flow financing structures is access to reliable, ongoing funding. The structure may include specific funding mechanisms depending on the originator’s liquidity needs and the type of funder involved.

• Sale frequency: shortening the period between origination and sale (for example, daily sales) to enhance the originator’s liquidity position, especially for bank funders, although longer periods may suit other funders

• Managing originations: periodic allocation and minimum allocation targets can provide funders with assurance regarding the value of transferred receivables. Arrangements may also provide for:

  • Hard stop events: permanently terminating sales following breaches of material obligations by the originator

  • Timelines: varying asset origination timelines, from days (such as auto loans) to months (such as mortgages), may necessitate bespoke structured finance and forward flow financing solutions, potentially requiring funders to commit before asset origination

How Ogier can help

Our global Structured Finance team provides comprehensive legal and professional services specialising in securitisation, derivatives, repackaging and other complex financial transactions, including forward flow financing transactions. We have experience working as lead counsel on Irish law governed deals in addition to local counsel on English governed structures.

Our experienced team acts for a wide range of banks, issuers, underwriters, trustees, managers, sponsors, corporate service providers and other financial institutions, advising on all legal aspects of traditional and cutting-edge finance structures, as well as providing independent third-party administration services.

We advise on asset-backed securities (ABS), commercial mortgage-backed securitisations (CMBS), residential mortgage-backed securitisations (RMBS), collateralised loan obligations (CLOs), collateralised debt obligations (CDOs), collateralised fund obligations (CFOs), debt financing, high yield bond offerings, mezzanine financing and sovereign bonds.

We understand that our clients' needs often span multiple service areas, which is why our lawyers work closely with our corporate and fiduciary professionals at Ogier Global to provide an integrated service, ensuring that our clients receive seamless, coordinated advice. For more information, contact a member of our team using the details provided below.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice