Private risk sharing volumes hit €1trn

Private risk sharing exceeded €1trn of cumulated volumes across over 500 transactions between 2016 and 2023, according to IACPM’s latest annual synthetic securitisation survey. Last year alone saw around €200bn of new issuance from the 40 banks involved in the survey, with over €600bn of bank loans covered by €55bn of junior tranches.

In the EU, €300bn of bank loans were covered by €24bn of first loss and mezzanine tranches. A growing number of trades (50% versus 33% in the prior two years) qualify as STS to benefit from the more favourable capital treatment.

The increasing popularity of SRT came despite anxieties over possible rising default rates – and, in fact, optimism over the stability of loans insured seems to be the norm. Both credit investors and risk-averse pension funds invested heavily in portfolios attaching at 0%. As the market develops, it is piquing the interest of non-life (re)insurers.

The SRT market is developing in tandem with regulatory changes, with the 2022-2023 period seeing a growing share of SA banks enter the fray, in contrast to the IRB banks that have thus far dominated the sector. Which tranches are protected (and how) is also changing. Before 2022, IACPM suggests that deals were structured either as fully funded CLNs or fully collateralised tranches. However, unfunded mezz protection is growing in popularity.

Indeed, the 13 insurer respondents protected more than €1bn of SRT tranches last year and, as close to 90% of insurance protection is syndicated, each participant retained on average one-third of the insured tranche, with an average size of insurance protection of €25m after syndication. Unfunded protection is currently executed mostly on European loans pools (representing 55% in the EU and 30% in the UK), with a growing share of loans to SMEs and large corporates, followed by residential mortgages.

Meanwhile, the average risk-weight of securitised loans held steady at 63% versus the previous survey (SCI 11 July 2023). The proportion of loans referencing corporate and SME assets also remained stable at 80%, but this is shifting as more regional EU and North American banks come online, skewing the market towards retail loans and residential mortgages.

The share of sustainability-linked trades - through underlying assets, use-of-proceeds and incentives in the deal structure - is also gradually increasing, mainly in Europe, reaching 11% in 2023 up from 6% in 2022.

The total proportion of European and UK banks involved in the market has declined, numbering 80%-90% up to 2019 and around 60% in 2022-2023, due to the increased appetite of North American banks. The survey points out that the American market differs, with structuring differences arising from the maturity of the practice, capital being absorbed by underlying assets, regulatory standards and depth of local investors’ private markets.

This manifests in difference in tranche thickness on corporate loans, with North American deals seeing 0% to 12.5%, compared to 0% to 8%-9% on UK or European deals. The main risk transfer instruments also differ, with UK or European deals consisting of collateralised guarantees, CLNs with embedded guarantees and unfunded credit insurance. Meanwhile, North America mostly sees CLNs with embedded CDS.

In both regions, the market has been slowly moving away from SPVs - although this is a recent development for North America, after the Fed last year agreed to release capital on direct CLNs. While Europe has no regulator-imposed volume limits, in North America it is decided bank by bank (on direct CLNs only).

Based on the results of the survey, the increasing number of banks and securitised asset classes and investors’ appetite, IACPM estimates that by the end of 2024 around €75bn of aggregated capital will have been raised by private risk sharing - assuming the final Basel 3 regulations across different jurisdictions enable effective capital release. The association concludes that the “robustness and resilience” of the market will largely depend on the existence of standards such as STS and the “professionalism and stability” of large pool protection providers that act as long-term partners of banks.

Joe Quiruga