SCI CRT Awards: North American Transaction of the Year

Category: Capital Relief Trades ABS

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Winner: TCB CRT 2021-1

The arrival of the first US regional bank in the capital relief trades sector had been anticipated and talked of for many months, so when Texas Capital Bank - a Dallas-based US$40bn lender founded in 1998 - arrived in the market in March 2021 the interest it elicited can hardly be overstated.

Now, finally, with this deal the US CRT market had arrived. It was a landmark event, and one that made a compelling and ultimately unignorable case to be SCI’s North American Transaction of the Year.

Texas Capital had been looking at ways to improve the capital efficiency of its mortgage warehouse lending book since about 2016, but all the options it explored had at least one critical flaw. But, in May 2020, it began to examine the capital relief trade mechanism and how it operated in Europe. Here, at last, was a structure that seemed to fit the bill from all possible perspectives.

It was in the course of these investigations that it was introduced to Citi, the bank which would go on to be its arranger, and Clifford Chance, which would be its legal counsel. Both of these firms had unrivalled technical experience of the CRT market.

Texas Capital now had powerful allies by its side, but there was much work to be done. Perhaps the most delicate part of the operation was to convince the regulators that they should grant the desired regulatory capital relief to the structure. The process was not made any easier by the fact that it had to deal with three different regulators - the OCC, the FDIC and the Federal Reserve.

“We have a very positive relationship with our regulators, and part of that is that we are transparent and proactive. So very early on we brought this project to their attention and kept them fully informed as we continued to improve our knowledge and preparation,” explains Madison Simm, president of mortgage finance at Texas Capital.

The OCC led the negotiations and shared its findings with the Fed and the FDIC. The regulators were most keen to see that Texas Capital had built the infrastructure and had the operational procedures to support the transaction on a dynamic basis after it had been priced.

Moreover, they wanted to know that this trade was not a one-off and that the issuer would not face a capital cliff once this three-year trade matures. But, for Texas Capital, the trade priced in March is only the first of what will be an ongoing programme.

The US$275m credit-linked note, which paid Libor plus 450bp and referenced a US$2.2bn mortgage warehouse loan portfolio, was sold to two investors. One was a large Street fund and the other an insurance company. Both had experience of CRT investment, but only in bonds sold by the GSEs.

“We intentionally sought diversification of our investors, including having large-scale investors, to accommodate potential future expansion. This was achieved in our transaction. The buyers had technical knowledge of the resi market, but we educated them on how our warehouse programme operates,” says Simm.

2Q21 represented the period in which the capital relief was realised and, given the enormous scale of residential mortgage lending in the first half of this year, the trade was immediately beneficial.

The US$275m first loss position carried a risk weighting of zero, while the remaining US$1.925bn of warehouse loans in the portfolio was risk weighted at 20%. Thus, the risk weighting on the entire pool of loans fell from 100% to 17.5%, reducing overall RWA by US$1.81bn.

This, in combination with two perpetual preferred offerings also sold in 1Q21, is estimated to have boosted the Tier One capital ratio by 73bp from 10.92% to 11.66% and the total risk-based capital ratio by 85bp from 12.76% to 13.61%.

“We were very happy with the result,” confirms Simm.

Texas Capital is now closely monitoring interest rate projections and the impact upon mortgage lending. Next time it is in the market, it is likely to seek longer duration.  

Honourable mention: Boreal 2021-1

The C$1.2bn Boreal 2021-1 synthetic securitisation executed in June 2021 was the first deal from BMO’s commercial real estate-focused Boreal platform. Strong investor demand meant the deal was upsized from an initial portfolio of C$700m.

It was a transaction of many firsts: the first Canadian commercial real estate synthetic transaction; the first Canadian dollar-denominated significant risk transfer deal; the first synthetic transaction to include construction loans; and the first externally rated transaction to include construction loans. In addition, it was the first hybrid transaction, with the unfunded guarantee from an insurer structured and executed by BMO.

While BMO is an old hand at significant risk transfer deals more broadly, Boreal 2021-1 was a first for its Canadian real estate finance group. Michael Beg, svp and head, real estate finance at BMO, comments: “This deal was something that was new for us, but we’re very pleased that we were able to reference both income property finance and construction in pretty much the exact same proportions to what we are doing in the physical market, which allows us to maintain portfolio diversification.”

He continues: “We now see synthetic securitisation as a tool in our tool kit on a go-forward basis. Future intentions are to use it when and as needed; when opportunity permits and the economics are favourable.”