Transaction of the Year: Resonance 5

The winners and honourable mentions of the 2020 SCI Capital Relief Trades Awards were unveiled during a virtual ceremony yesterday. We will be publishing write-ups for each category over the coming days.

Top of the bill is Transaction of the Year, which was won by BNP Paribas’ Resonance Five. The significant risk transfer (SRT) trade stands out for its highly competitive pricing, innovative structuring and successful execution in the midst of the Covid crisis. Indeed, the deal’s execution process at the early stages of the SRT market’s rebound in May offers a blueprint for other SRT issuers eyeing post-Covid transactions.    

According to Bruno Bancal, deputy head of ABS markets at BNP Paribas: “The programme has performed well over time and the structure of the portfolio was conservative; it was a static pool and we excluded Covid hit industries from it, so pricing benefited accordingly. Pricing further benefited from the choice of anchor and through-the-cycle investors, as well as execution timing and the bidding process.”

The €8bn capital relief trade achieved north of €3bn RWA reduction for BNP Paribas and was shareholder value accretive. However, from a structuring perspective, the most salient feature was the splitting of the mezzanine piece into a funded €324m CLN and an unfunded €100m insurance policy.

BNP Paribas engaged long-time partners as anchor investors to secure the best possible execution. As lockdowns neared their end in May, discussions were equally approaching the finish line on several issues, most notably on the status of the portfolio and rating thresholds. In the end, the bank reassured investors by agreeing on a static pool with strict and minimum ratings for non-food retail, autos, transportation and the leisure industries.

During the execution stages, the deal was anchored and structured around two large strategic investors, before a free-floating amount was offered in a competitive bid with counterparties who had expressed a long-term interest in BNP Paribas’ capital management programmes.

The execution process, along with the scarcity of offers in the first half of the year proved to be the secret sauce pricing wise, as evidenced by a distinctly tight 7.49% coupon. The pricing is not only in line with pre-Covid levels for Resonance transactions, but is in fact the most tightly priced corporate capital relief trade of the year.

Innovation though was not limited to the funded tranche. The €100m unfunded policy references a €1.9bn portfolio and is governed by French law. It is BNP Paribas’ first such trade and was reinsured by RenaissanceRe.

However, it took two years of extensive discussions to conclude it, due to a few challenges. One of the main ones was the identification of an entity that would offer the protection in a manner that complies with French banking monopoly regulations and both parties also had to cope with legal constraints linked to insurance policies under French law.

The structure involves a Lloyds insurance entity incorporated in Belgium and 100% owned by Lloyds of London. RenaissanceRe Syndicate 1458 - a Lloyd’s syndicate - is the entity bearing the credit risk as the reinsurer of the Lloyd’s Insurer.

As the insured party, BNP Paribas benefits from Lloyd’s chain of security with a final recourse on the Lloyd’s central fund, rendering the credit protection particularly robust. The latter is a crucial point, considering that an insurance policy is unfunded by nature and, therefore, the insured party remains exposed to the default risk of the insurer.

Another challenge was obviously the Covid-induced lockdowns. During the structuring phase, the market was practically closed and the spread widening observed in spring was a deal stopper for the lender. Hence, it decided to delay closing until 3Q20.

Additionally, during the summer some structuring adjustments had to be made to achieve that competitive pricing. Besides keeping the pool static and reducing exposure to Covid affected industries, the due diligence was organised in such a manner that would allow RenaissanceRe to make a thorough assessment of the BNPP loan origination process.

Overall, according to the French lender: “This achievement has been made possible due to the perseverance of both parties throughout this process, their willingness to reach the same objective and ultimately in the final phase, their capacity to adapt to a totally different market environment. We think this sets an important precedent for future market activity.”

Honourable mention: Project Meno
Santander’s Project Meno was finalised in December 2019 and is the bank’s first unfunded capital relief transaction. The synthetic securitisation – which was syndicated to three re/insurers - references a €1.3bn portfolio of largely undrawn revolving credit facilities (RCFs) to large corporations and financial institutions.

The structure references the day one exposure at default (EAD) of each RCF instead of the notional. Any increase in the EAD associated with an RCF - such as drawings under the RCF - will occur outside of this securitisation transaction.

For complete coverage of SCI’s 2020 CRT Awards, click here.