Winner: Sumeru IV

Alecta, PGGM and Standard Chartered have won the Innovation of the Year award in this year’s SCI Capital Relief Trades Awards for their Sumeru IV transaction. The synthetic securitisation references a global portfolio of corporate loans and is the first transaction to benefit from capital relief in Hong Kong.

Exposures to Asian markets have always been a major part of Standard Chartered’s CRT portfolios, given the bank’s footprint. Although the lender sought capital relief from the group’s regulator – the UK Prudential Regulation Authority (PRA) – throughout these years, the bank is now also focused on capital optimisation for its key subsidiaries. The decision by Hong Kong supervisors to implement the Basel framework when Standard Chartered first started exploring this transaction was a significant step in the right direction, but there were two areas that required further discussions.

First was SRT demonstration via self-assessment. Standard Chartered was able to address this by leveraging its existing platform, track record and extensive experience from the group’s programme.

Second, Hong Kong regulations did not recognise the SPV as the protection provider. But this was subsequently changed via the Banking Rules 2020, which are effective from 30 June 2021.

The Banking Rules rendered Sumeru IV’s innovative structure possible. A typical synthetic securitisation involves one CDS that enables the bank to claim capital relief. The resulting legal entity is also the ultimate owner of the credit risk and due to ringfencing of entities that hold the domestic or regional lending books, this generally means two things.

First, a transaction only references exposures from the lending book of that entity, which may not be large or diversified enough to support a soundly structured transaction by itself. This then leads to exposures from that lending book not being used in synthetic ABS deals.

Second, a transaction referencing multiple lending books can only receive capital relief at a group level, but not at a subsidiary level where some of the loans are held. Hence, Standard Chartered CRTs have historically been executed at the group level to hedge a highly diversified portfolio.

However, Sumeru IV features a dual CDS structure that enables Standard Chartered to extend the same benefits of the hedge to its Hong Kong subsidiary. In particular, the structure consists of two CDS contracts but just one special purpose vehicle.

The presence of only one SPV rather than two is explained by the fact that the reference pool is still just a single global portfolio. The structure has the flexibility to add other locations going forward if needed and it doesn’t pose additional risks for investors, since it’s materially the same as a single CDS structure.

Standard Chartered concludes: ‘’Due to the collaborative efforts and an innovative structure, Sumeru IV has not only achieved the desired outcome, but also became a market-leading model for other jurisdictions. Thus, we can proudly say that it is an innovative transaction with great success for the CRS market in Hong Kong and we are hopeful that there will be more CRS transactions benefitting from capital relief in Asian countries going forward.’’

Honourable mention: Elvetia 14 (Credit Suisse)
In recognition of the deal being the first triple-tranche offering – created to address investor appetite – with each tranche in a different format: CLN, bilateral insurance policy and insurance policy with a club of insurers. In addition, both the junior mezz and senior mezz were offered to insurers; the deal also involved a leveraged first loss piece.

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