SCI CRT Awards: North American Issuer of the Year

Category: Capital Relief Trades ABS

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Winner: BMO Capital Markets

BMO has for some time been one of the leading SRT issuers in the world and by far the most established in North America. This year the bank added further innovation to its offering with the establishment of two new platforms providing investors with access to additional asset classes, making it the clear winner of SCI’s 2021 North American Issuer of the Year award.

BMO completed its first SRT in 2016 and remains the only Canadian bank to have issued SRT transactions. It has now completed 12 transactions, with a total protected notional of nearly US$16bn and notes placed with 19 investors totalling US$1.6bn.

This year, the bank added to its existing successful Muskoka and Algonquin platforms two new SRT issuance programmes – Boreal and Sauble. As a result, BMO’s offering now includes loans from all of the bank’s lending divisions across multiple asset classes, including large corporates, SMEs, commercial real estate and leveraged lending.

Boreal is backed by pools of Canadian commercial real estate loan exposures from BMO’s Personal & Commercial Banking division. The programme’s first deal, the C$1.2bn Boreal 2021-1, was launched in June 2021 and met with strong investor interest.

Sauble is backed by leveraged lending revolving credit facility exposures from BMO’s Capital Markets division and structured as a flow arrangement focused on new originations. The US$700m inaugural Sauble transaction, completed in December 2020, was successfully upsized to US$1bn in June 2021, and BMO completed the US$500m Sauble II with another investor the same month.

Michael Beg, svp and head, real estate finance at BMO, whose group was the sponsor for Boreal 2021-1, recalls the motivation for the deal is a long-standing one. “Historically this business had always been funded internally. For some time though, we’ve looked at market-based options to accelerate the growth, while remaining within our overall business mix target,” he says. “That’s why we’ve developed, with our Capital Markets colleagues, alternative risk sharing options, such as traditional CMBS, and now the Boreal platform. These options are good risk management tools that enhance the bank’s overall return.”

Beg continues: “Boreal allowed us to transfer existing exposure and it gave us the flexibility to re-lend out the capital. It allows us to be more consistent in terms of supporting growth in the real estate marketplace because there are potentially times when growth can outpace our risk appetite. This is another funding option for us and is a great differentiator in the marketplace.”

Jean-Francois Leclerc, md and head, risk & capital solutions at BMO Capital Markets, adds: “The objective for Sauble on the leveraged lending portfolio is very similar. At the end of the day, everything we do as an issuer is centred on the client. Meaning that we want to support our clients, even if their need is perhaps greater than our risk appetite, and finding partners for sharing the risk on the origination is a way of doing this. It enables us to provide a bigger offering to our client base while staying within our risk appetite.”

Leclerc suggests the proof of that concept has become even clearer this year. “Launching two new programmes where we’ve had three successful transactions is a good testament to the bank’s risk management practices as it provides an external validation from investors. That stems from how we manage our business, how we originate loans and how we manage them once they are on the balance sheet,” he says.

“I think it’s helpful institutionally that we have this kind of secondary market validation for what we do,” Beg concurs. “When you’re funding only internally, your benchmark and your data points are similarly only internal.”

Honourable mention: Freddie Mac

Irrespective of the macro and micro factors that impact the US credit risk transfer market, Freddie Mac seems to just keep on going. It is that consistency, combined with the GSE’s drive to continue evolving CRT deals that ensures its honourable mention as North American Issuer of the Year.

Over the awards period 1 October 2020 to 30 September 2021, Freddie Mac issued 10 STACR and 12 ACIS deals. The GSE’s CRT programme, including both STACR and ACIS, achieved record H1 issuance of US$9.9bn, protecting US$418.9bn of unpaid principal balance of mortgage loans.

July’s STACR 2021-DNA5’s B1 and B2 tranches were the largest yet seen and the former drew a record 39 investors; while its B3H coupon was SOFR plus 0%. September’s STACR 2021-HQA3 took that a step further and removed the coupon from its B3H tranche completely and included a five-year call option.

Meanwhile, Freddie Mac has also embarked on its latest innovation – a tender offer programme to buy back STACR notes to reduce indebtedness, targeting eight deals issued between 2014 and 2017 which provided no capital relief or credit benefit to Freddie Mac. The original offer with a floor of US$650m in aggregate original principal amount saw final execution of more than US$1.6bn.