Winner: SLG2

Credit Suisse’s SLG2 transaction is SCI’s Innovation of the Year for pushing the envelope in the SRT market in not one, but three ways. Most notably, the deal features a captive insurance vehicle that enables the participation of reinsurance companies that cannot enter into an insurance policy.

SLG2 is a dual-tranche SRT transaction, whereby Credit Suisse buys credit protection on a multi-currency portfolio of sponsored mid-market loans that will be ramped up over three years. The loans may be denominated in euros, Swiss francs and US dollars.

As the protection notional amount in respect of each loan is stated in the same currency as the loan, the underlying portfolio comprises of three sub-portfolios and the equity tranche of three vertical sub-tranches – each denominated in one of the three currencies, which are cross-collateralised and have cross-default mechanics. Such a structure is designed to avoid a currency mismatch between the hedge and the loans.

At the same time, the mezzanine tranche is denominated in euros only. This is thought to be the first time that an equity tranche has been denominated in three different currencies, with the mezzanine tranche denominated in just one currency.

Featuring several aspects to facilitate reinsurer involvement, the mezz was placed with a syndicate of insurance and reinsurance companies in unfunded format. “We used a transformer SPV to turn the CDS into an insurance contract, while behind the SPV there is a syndicate of insurers – including a captive vehicle – that effectively writes an insurance policy to the SPV and receives back-to-back protection from reinsurers,” explains Hannes Wilhelm, md at Credit Suisse.

He continues: “The aim was to expand the reinsurer investor base. It’s important to facilitate access for new investors, especially for those who had previously been prevented from becoming involved.”

Adding to the complexity of the transaction is that Credit Suisse, as protection buyer under Basel regulation, needs to have a direct claim to a rated company or a company collateralised by cash. The captive vehicle in SLG2 isn’t rated, so there needed to be a cut-through to the reinsurer behind the SPV.

Furthermore, the structure includes CLO features – such as a cash-trapping mechanism – to rebuild the equity tranche, should it be eroded beyond a certain threshold by losses. “Cash trapping acts as further protection for the mezz (and, by extension, the senior) tranche. If the equity tranche falls below a certain threshold, instead of paying coupons directly to the equity investor, the cash is paid to the collateral accounts, increasing therefore the thickness of the equity tranche,” says Dimitris Chalikopoulos, credit structurer - director at Credit Suisse.

While the deal’s ramp-up phase is pro rata, the amortisation phase can switch from pro rata to sequential upon certain forward- and backward-looking triggers. “The ramp-up process allows us to grow the portfolio linearly over time. At close, the facility had a 10% utilisation, but increases pro rata as loans are added to the portfolio. This increases the efficiency of the transaction because we can hedge as we originate,” observes Chalikopoulos.

He adds: “Investors also appreciate it because we’re adding new credit. As the ramp-up phase spans across a longer period of time, underwriting criteria are adapted to changes in the economic environment, reducing cyclicality risk in the portfolio.”

SLG2 closed in November 2022 at approximately €100m and can grow up to €1bn. Equity investors have veto rights until the portfolio reaches a certain size.

Honourable mention: Regulator-investor roundtables (IACPM)
In recognition of the International Association of Credit Portfolio Managers (IACPM) finding new ways to effectively advocate for a healthy capital relief trades market. While the IACPM has organised regulator workshops and roundtables before, over the past year, the association has enhanced its advocacy efforts by bringing regulators directly in contact with a representative group of SRT investors to discuss topics of interest. These roundtables fill a need by regulators for such interactions and the IACPM is well-placed to organise them, given its members include a large cross-section of both banks and investors active in the CRT space.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.