by Sinead Cruz, Shankar Ramakrishnan and Valentina Za
(Reuters) – European banks are increasingly turning to bespoke deals with investors such as hedge funds to reduce some of the risk on multi-billion euro loan portfolios and improve their financial strength, several sources involved said. told Reuters.
Banks overseen by the European Central Bank (ECB) completed a record 174 billion euros ($189 billion) last year, the regulator told Reuters.
These “significant risk transfer” (SRT) transactions are not new, but because they are typically bilateral and private, the data on them are not public and their terms are closely guarded.
By reducing some of the risk on their loans, banks can significantly reduce the amount of capital they need to cover potential losses, according to law firm Clifford Chance.
Unlike a traditional securitization, in which a bank’s assets are moved to a separate entity that then sells the securities to investors, SRTs are often “synthetic” and mimic sales.
Two market sources said a bank can typically shift the risk of loss to the extent of around 7% to 12% of the loan portfolio.
The attraction for the investor is less volatile returns than many publicly traded fixed income assets, and higher rewards in the form of coupons for the security it provides to the bank, depending on the quality of the loan pool.
“Investor interest has increased,” said Jason Marlow, managing director of Barclays’ corporate debt portfolio management team.
Marlow said banks that used SRTs once every three years in the past may now deploy them “once or several times” a year to free up credit lines, which can be used in an increasingly capital-constrained environment. Lending can be done.
With synthetic structures, a bank transfers risk through credit derivatives or guarantees, but retains the underlying risk.
To reduce the risk the bank will face if the investor is unable to make good on its part of the trade, cash collateral is posted to cover potential losses whose risk has been transferred, which is determined by market sources. Says regulatory relief key to getting bank capital
The ECB, which directly oversees the euro area’s most important banks, told Reuters the bulk of transactions in 2022 involved loans that are still performing, a change from 2021 when soured loans were the most common of such trades. made up more than a third.
‘knock at the door’
The first quarter of this year was “particularly busy”, said Olivier Renault, managing director of Pemberton Asset Management, which has sold the banks’ security on loan portfolios.
His firm is in talks with lenders on “50-plus” SRT plans and expects a strong pipeline for 2023 “as banks have fewer options to reduce their capital ratios”.
The ECB, which has not published data for SRT trades in 2022, does not generally name the banks involved, the number of proposed transactions nor the potential volume at any given time.
The Bank of England does not publish any data relating to SRT.
However, some banks do disclose them.
Germany’s Oldenburgische Landesbank AG said last week that it entered into its first SRT and raised its common equity Tier 1 ratio, a key measure of balance sheet strength, by 40 basis points. OLB, backed by Apollo Global Management, previously reported a CET1 ratio of 13.6% for 2022.
And in November, BayernLB placed a 1 billion euro synthetic securitization, referring to a portfolio containing corporate loans, through which it freed up about half a billion euros of risk-weighted assets for new transactions, its chief risk officer Markus Kramer said in a press release at the time
While banks were already using such deals before last month’s banking sector turmoil, the failure of two US lenders and the rescue of Credit Suisse have added to existing concerns about the impact of the economic downturn on loan portfolios. .
Robert Bradbury, head of Structured, said banks are watching that “market disruptions and particular risks are being closely scrutinized, and to continually fund and capitalize their businesses to grow, they are aware that They need to take action first. Credit to Alvarez & Marsal.
Lenders’ funding costs are also rising after Additional Tier 1 (AT1) bondholders were hit by the Swiss-engineered rescue acquisition of Credit Suisse by UBS.
Filippo Alloati, head of credit at Federated Harms, said the unseasonal rise in demand for SRT has led banks to believe a recession is “knocking at the door”.
Italy’s biggest bank, Intesa Sanpaolo, said last year it transferred credit risk through several deals on loans worth 15.7 billion euros, including one of Europe’s biggest in the fourth quarter at 7.5 billion euros.
In February, BNP Paribas and the International Finance Corporation (IFC) offered some insight into one such deal. IFC sold $50 million in guarantees to BNP on a $1 billion loan to emerging markets, he said, without disclosing the terms.
While Europe has been at the forefront of risk transfer, the stock of loans covered by SRT is small relative to European banks’ balance sheets. Data from Refinitiv Eikon shows that BNP Paribas alone will have total assets of 2.7 trillion euros at the end of 2022.
The ECB said on its website that banks wishing to enter into such deals should request regulatory approval at least three months before their expected closing date.
It also warns that SRTs are closely monitored, as failed deals can result in losses for the bank involved.
(Reporting by Sinead Cruz and Shankar Ramakrishnan; Additional reporting by Valentina Za and Pablo Mayo Cerqueiro; Editing by Elisa Martinuzzi and Alexander Smith)