Winner: Project Seed

Project Seed represents the first balance sheet synthetic securitisation referencing corporate exposures executed on an unfunded basis in Portugal. But novobanco’s ability to successfully execute such a transaction – amid challenging market conditions – is also a testament to the progress the bank has made during its restructuring journey.

Created in 2014 from the resolution of Banco Espírito Santo, novobanco had since 2017 been under a restructuring process supervised by the European Commission, which ended in February 2023. The ambitious restructuring plan included key areas, such as asset quality improvement, cost reduction, operational efficiency and strategic realignment. So much so that during 2022, the bank was able to build an impressive 300bp of CET 1 capital – aided by a de-risking strategy, including the disposal of non-core assets and risk weighted assets optimisation.

Executed in 4Q22, Project Seed references a €1bn granular portfolio of SME, corporate and public administration loans originated by novobanco in Portugal. The transaction is structured in a tranched cover format, with a junior and a senior tranche retained unhedged by the originator and a mezzanine tranche guaranteed by RenaissanceRe. The mezzanine tranche amortises on a pro-rata basis, with triggers to sequential, and features a regulatory compliant time call and a static portfolio with no replenishment periods.

Project Seed was executed in complex circumstances in terms of both macroeconomic and political perspectives, given it closed at a time of volatile sentiment for credit risk and towards the end of a significant restructuring process for novobanco. Mehdi Benleulmi, svp and underwriter at RenaissanceRe, credits the success of the transaction to the high levels of transparency and collaboration between the parties to the deal.

“In such a collaborative environment, novobanco provided high-quality data on the assets that comprise the portfolio. This allowed us to better inform our view of the risk, which in turn enabled us to price it more efficiently through stress testing the portfolio,” he explains.

Nuno Duarte, head of Treasury and Financial Department at novobanco, adds: “We were new to the market and therefore needed to understand RenaissanceRe’s feedback/rationale, so we tried to make negotiations as transparent as possible. It was a delicate balance: we understood that providing the data that RenaissanceRe required was a key point to improve pricing and to reach our contemplated cost of release of capital.”

Duarte concedes that SRT can be challenging – in terms of technology, expertise and execution capacity – especially for first-time issuers. However, he says the board understood what was at stake and the benefits such a transaction would bring, and supported the teams involved in this long process. The SRT was an alternative solution to manage credit risk and capital for novobanco, as bond market access (Tier 2) and market conditions at that time were not favourable and were prohibitively expensive.

Benleulmi notes that reinsurance capital is particularly suited to these kinds of opportunities. “Project Seed demonstrates the utility of unfunded sources of capital. Under the straightforward construction of a single contract, we were able to match our capital to the underlying transaction risk profile.”

The transaction also exemplifies RenaissanceRe’s purpose statement. “In Project Seed, we believe we achieved our purpose of protecting communities and enabling prosperity by providing capital to the real economy,” Benleulmi observes.

Marsh & McLennan Companies (MMC) was retained by novobanco as sole advisor and arranger of the transaction. Jaime Lizarraga, partner at Oliver Wyman, notes that the MMC proposition draws upon the combined competences and deep expertise of both Marsh and Oliver Wyman to deliver a market-leading and comprehensive advisory, arranger, structuring and market placement service in the securitisation and risk transfer space. Lizarraga adds that the close and continuous interaction with the regulator was key to deliver a smooth transaction in the required time frame.

Marcus Miller, md from Marsh, comments that the recognition for Project Seed represents another milestone for MMC, following the landmark ING DiBa AG residential mortgage SRT transaction – dubbed Project Simba – back in 2018.

“Marsh and Oliver Wyman transferred the knowledge that was necessary and supported us with the structuring, technology and in the optimisation exercise,” Duarte confirms.

Novobanco expects to be a regular issuer on the credit markets going forward, demonstrating the bank’s strategic decision to leverage synthetic securitisation as an integral part of its capital management strategy for the foreseeable future. “We now have SRT in our capital management toolbox. So, whenever needed, we can tap the market for balance sheet optimisation purposes and can take advantage of a broader investor base in this market segment,” Duarte observes.

This transaction marks another milestone in the recent successes of novobanco, positioning the bank for the next stage of its development and reinforcing its position as a strong and independent domestic bank.

Honourable mention: GARC Corp-5 
GARC Corp-5 represents the largest portfolio ever securitised in Italy, as well as the second largest in Europe in 2022. The transaction allowed Intesa Sanpaolo to transfer the first-loss risk arising from a €7.5bn portfolio of corporate and large corporate loans granted to circa 4,500 borrowers. It involved the placement of a large (€500m) junior tranche in a challenging economic scenario, resulting in a €2.7bn RWA saving for the bank.

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