Credit union leaders and investment experts are recommending subordinated debt offerings and asset-backed securities as key tools for stockpiling capital and fueling loan growth in the unstable months ahead.
During a capital markets symposium at the New York Stock Exchange on Tuesday, speakers offered credit unions advice on managing their balance sheets amid the banking crisis caused by the failures of
"Although credit unions have posted solid operating results and are clearly positioned to provide another century of service to our members, there has lamentably been turmoil in the financial services markets that require our industry to remain hyper-focused on the tenets of sound enterprise risk management," said Rodney Hood, board member and immediate past chairman of the National Credit Union Administration, which hosted the event.
The issuance of subordinated debt — which are higher-risk notes that are paid out last in the event that the organization issuing them declares bankruptcy — has been a valuable tool for ensuring institutions have adequate capital for deepening underwriting programs and expanding access to financial services. The NCUA
For Olden Lane, a Bridgewater, New Jersey-based financial services firm that specializes in helping credit unions during the issuance process, subordinated debt and asset-backed securities have helped clients stabilize balance sheets and weather sudden market shifts.
"[In this] recent period where we've seen the market whipsaw from extreme conditions during the pandemic to an entirely different set of conditions today, our clients are recognizing the utility in these tools to help them navigate these conditions and in fact make the most of them," said Dan Prezioso, partner at Olden Lane.
One such institution is the $4.1 billion-asset
Even for smaller, low-income designated credit unions, subordinated debt provides a critical opportunity to capture member deposits held in other financial institutions by offering competitive loan and dividend rates, said Frank Santucci, managing director of Stifel Investment Services.
For other larger institutions like Pentagon Federal Credit Union in McLean, Virginia, asset-backed securities supported by home equity loans and other income-generating holdings are instrumental for expansion efforts.
James Schenck, president and CEO of the $36 billion-asset PenFed, explained how pricing was a key measure for managing balance sheets, and held that asset-backed securities were a more equitable option for all involved when helping the credit union grow.
"The great thing about securitizations versus participations is there's amazing depth and breadth in the [asset-backed securities] market where you have pricing transparency that is good for the issuer and for the investor. … For us, securitization was the natural growth process in order to control the balance sheet to stay right about 100% percent loaned out," Schenck said. The credit union closed its
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Cathie Mahon, president and CEO of Inclusiv, which is an association of credit unions serving economically disenfranchised communities, said her organization sees these sources as "the vehicle by which CDFI credit unions and so many other lenders really have been able to grow their business and their balance sheets," she said.
