Credit Suisse completed two significant risk transfer transactions during 2Q20 that differ significantly from the typical capital relief trades executed during the height of the coronavirus crisis and were placed with different investor bases. The bank is SCI’s CRT Arranger of the Year in light of its proven placing power, structuring capabilities and motivation to bring the SRT market forward.
The first of Credit Suisse’s Q2 issuances was Elvetia 12, a funded transaction that references a Sfr1.8bn predominantly blind portfolio of SME and mid-cap loans, with a maximum concentration of 1%. The 0%-7.25% equity tranche was placed with two institutional investors, which benefit from 20% side-by-side risk retention.
Certain industry sectors most affected by the Covid-19 fallout were excluded from the reference portfolio and the structure features a 2.5-year replenishment period, based on pre-agreed criteria. “We took a cautious and conservative approach to the structure and portfolio, including eligibility criteria to avoid contaminating the portfolio with Covid stresses,” confirms Hannes Wilhelm, md at Credit Suisse. “We didn’t approach as many investors as usual during the marketing phase – only those that we knew would be interested, despite the Covid stress in the market. We were surprised by the positive feedback, which enabled us to lower the price and close without any difficulties.”
The original plan was to bring a shorter deal and retain the equity tranche, but the ultimate investors were happy with the first loss and a longer term. “They are longstanding investors in the Elvetia programme, so have experience with our book and are comfortable with the risk,” Wilhelm notes.
He suggests that demand was also driven by the lack of SME deals being offered at the time, given that large corporate CRTs were more straightforward to execute. “A number of investors don’t have the credit expertise to undertake bottom-up analysis of large corporates and therefore rely more on statistical analysis, preferring granular pools.”
The second of Credit Suisse’s Q2 issuances was an unfunded dynamic hedge facility that enables the bank to draw down protection on an undisclosed portfolio of income-producing real estate when needed. Essentially, the bank has a recurring option to purchase protection, such that the size of the portfolio and the protection can be adjusted to meet its capital requirements every quarter.
This is achieved by pro-rata amortisation, with a trigger to sequential amortisation in the case of a default. “If there is a default, it is difficult to scale up or down: if scaled down, the default could become too big relative to the size of protection. To solve this, upon a default, the transaction switches to sequential amortisation, with the existing pool and the unused portion of the facility continuing on the original terms,” Wilhelm explains.
The portfolio can be ramped up to a maximum of Sfr2bn, at which point it will provide roughly Sfr87m of protection. The risk premium payable by Credit Suisse is based on the prevailing tranche size in the respective quarter, subject to a minimum facility commitment fee.
Protection is in the form of a financial guarantee provided by RenaissanceRe, which took exposure to the mezzanine tranche (0.2%-4.55%). The transaction priced in the mid-single digits.
The fact that these transactions were executed during a difficult period at economic levels demonstrates that there is a true partnership between Credit Suisse and its investors, according to Wilhelm.
Honourable mention: BNP Paribas
BNP Paribas placed nine significant risk transfer transactions totalling over €6bn-equivalent with external investors in 2019-2020, in both cash and synthetic formats across multiple jurisdictions.
In particular, the bank expanded its pioneering cash SRT programme - featuring the ‘use it or lose it’ excess spread mechanism - thereby helping to turn cash SRT into a publicly marketed ABS product and allowing the pricing outcome to be optimised. BNPP Personal Finance was the first issuer to bring such a true sale SRT ABS and the mechanism was adopted by many others thereafter.
Meanwhile, a highlight of its activity in the synthetic space was Resonance 5, which enabled BNP Paribas to hedge a second loss tranche – split into funded and unfunded protection on a pari passu basis – referencing an €8bn portfolio of global corporate loans. As well as reinforcing the reputation of the programme with key institutional investors, the transaction achieved an RWA reduction of over €3bn and was shareholder value accretive for the bank. Indeed, actively using securitisation technology to optimise the group balance sheet is a strategic objective for BNP Paribas.
But arguably what sets the bank apart is its vision for the SRT market, which is to bring the product to the core ABS universe. As such, it has built a strong flow and financing securitisation franchise and leading league table position, enabling it to leverage its knowledge and investor relationships when placing SRT transactions.
For complete coverage of SCI’s 2020 CRT Awards, click here.-