Winner: St Lawrence

It has been a busy period in the Canadian SRT market. For years, it has been dominated by Bank of Montreal, but in the last 12 months the remaining members of the Big Five have got in on the act. One transaction, however, stood out in our awards year: the debut from Canadian Imperial Bank of Commerce (CIBC), dubbed St Lawrence “Project Waterloo”. This is SCI’s North American Transaction of the Year.

The deal was brought to the market by arranger BNP Paribas in April 2023 and referenced a pool of US$4.5bn corporate loans for a face value of US$261m. It was structured as a credit-linked note incorporating an embedded financial guarantee, with an attachment point of 0.5% and a detachment point of 6.3%.

So far, so good, but the deal also included several features that, at first sight, could be considered somewhat aggressive. For one, the reference pool was blind, constituting investment grade and non-investment grade corporate loans with an average credit rating of low investment grade. Beyond these details, no other specifics were supplied. The reference pool was kept blind to preserve client confidentiality.

Waterloo also featured a three-year replenishment period, so that CIBC maintained some flexibility and was able to extract the full value of the deal.

Considering, however, that Waterloo had to compete with the inaugural SRT trade from Toronto Dominion (TD) - which was in the market at around the same time, but was anchored and had a fully disclosed pool - these features appear startlingly bold. But BNP Paribas was able to secure the full and unflinching support of 10 European and North American investors.

This commitment was put to the test immediately. On the day scheduled for allocations, Silicon Valley Bank (SVB) collapsed amid a firestorm of headlines and predictions of ensuing turmoil for a wide range of US lenders. Yet the deal was upsized by 50% from US$3bn to US$4.5bn and pricing tightened by 25bp from initial guidance.

In the end, the investors scarcely flinched in the face of these events. “For the inaugural deal, we had a relatively modest size in mind. To be able to upsize, and to have such depth of investor base, is testament to the strength of the underlying asset quality and the process we followed,” says Dave Yoon, vp, capital management, treasury.

Waterloo is not expected to be a one-off transaction. It is the starting point of what will be an ongoing programme. In addition to large corporates, the bank believes mid-market commercial loans could be a good fit for future deals, but it is also considering specialty banking assets.

There are two main reasons why CIBC decided to venture into the SRT space. First, the Canadian regulator, the Office of the Superintendent of Financial Institutions (OFSI), has taken a stern line with regard to capital adequacy. In June this year, it upped the Domestic Stability Buffer by another 50bp, taking it to 3.5%, and Canada is one of the first jurisdictions to implement the Basel 4 output floor, which came into effect in 2Q23.

But perhaps more importantly is the flexibility that an SRT programme brings to the bank that wants to grow its business. With the resumption of more normal business conditions after lockdown conditions were eased, capital began to be consumed once again. It was at this point that the treasury began to look at the regulatory capital market.

“We saw the opportunity to bolster capital generation and provide additional flexibility. We have a growth strategy but need to fund that efficiently, so this is about expanding our tool kit,” explains Yoon.

Though the bank began to mull the possibility of issuing in this market a couple of years ago, serious planning began only in the summer of 2022. So it took perhaps nine months from inception to issuance – underlining CIBC’s determination to move in a deliberate and measured manner.

There were multiple difficulties encountered en route in what was a novel transaction for the bank. But perhaps the most taxing was the need to co-ordinate the efforts of many different groups within the institution, all with different priorities, and get them all to face in the same direction.

It did not, however, encounter boardroom opposition. It sought, and attained, approval from senior management at the very earliest stages of the entire operation.

“We did all that work upfront, before any RFP. We had good buy-in from the senior management from the beginning,” says Yoon.

CIBC pitched to a handful of North American and European banks, but BNP Paribas’s experience as both an issuer and an arranger proved winning. The two banks have long-standing relationships in other business areas, of course.

“Waterloo” is the starting point for an SRT programme that will attain meaningful capital reduction for CIBC. As a blind portfolio, with replenishment, sold into some of the most turbulent market conditions seen for a couple of years, the debut deal also represents first-rate execution.

Honourable mention: Merchants Bank healthcare real estate deal (Atlas SP Partners, Merchants Bank of Indiana)
Merchants Bank of Indiana’s US$158m transaction references a US$1.13bn portfolio of healthcare real estate loans. Notably, the deal was executed at the end of March, at a time of maximum stress for US regional banks. In bridge-to-HUD financings, it also securitises a non-traditional asset class.

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