Winner: PGGM
PGGM has closed 79 transactions since the inception of its credit risk-sharing (CRS) mandate in 2006, investing €16bn globally across diverse asset types and partnering with 19 global and regional banks through the GFC, Covid-19 pandemic and now during the current environment of inflationary pressures and geopolitical unrest. The firm is SCI’s pick for the Contribution to CRT award not only because it is one of the most experienced and largest end-investors in the risk transfer field, but also in recognition of its promotion of high transaction standards and a robust market, as well as its industry advocacy and engagement.
The CRS mandate fits within PGGM’s broader ambition to contribute to a sustainable financial system. By engaging in CRS transactions, the firm helps both the banking sector to manage credit risk efficiently and the financial sector to reduce systemic risk. At the same time, it generates attractive total returns through unique credit exposures not available in public markets.
PGGM is focused on building long-term risk-sharing relationships and, as such, rolls over transactions when they mature. The firm is often among the first private market investors for its risk-sharing partners. By staying close to a bank’s management of its loan book and by agreeing realistic constraints on eligibility and portfolio criteria, it has also managed to be there for its risk-sharing partners, in both good and bad times.
“We managed through the pandemic by knowing what kind of risks we are willing to take and how to deal with the unknown. We’ve increased stresses in certain areas and reduced our exposure to certain risks. We adjusted, but we ensured that we were able to continue working with our risk-sharing partners,” observes Mascha Canio, head of credit and insurance-linked investments at PGGM.
She continues: “Governments and central banks have been accommodative; we are yet to see any significant defaults, which means that the CRS market has not truly been tested. The instrument will demonstrate its true strengths when defaults begin rising. We anticipate CRS to remain a valuable instrument for banks, in terms of freeing up capital, and for investors to make a decent return in adverse market conditions.”
As a prudent long-term pension fund investor, PGGM has consistently applied its own high ‘pension fund standards’ to its CRS transactions based on understanding the underlying and a genuine sharing of credit risk between the bank and the investor. Indeed, the firm applies three key principles to its investments: adequate risk alignment of 20%; mitigation of counterparty credit risk to the bank by collateralising the funded notional; and having the right data to evaluate the credit risks of the loan portfolio and estimate expected losses throughout the economic cycle.
PGGM also influences the adoption of high-quality transaction standards through its co-investment agreement with Swedish pension fund Alecta, with the goal of helping the CRS market to grow further on a sound and sustainable basis. So far, the pair have closed 21 transactions together under the co-investment partnership.
Furthermore, PGGM strongly believes that financial return and social responsibility go hand-in-hand. Consequently, the firm incorporates ESG standards in its investment decision process as part of a responsible investment philosophy.
By focusing on the real economy as a whole, CRS can positively contribute to the transition to meet the Paris climate goals. Therefore, the firm looks beyond what is already green and supports the shift of all sectors and companies, in order to make the biggest impact.
Meanwhile, PGGM believes that the long-term viability and sustainability of the CRS market is only achievable if the long-term interests of banks are balanced with those of investors and regulators. Because of this conviction, the firm is a vocal advocate for harmonisation of practices, appropriate standards for healthy transactions and transparency.
For example, it began pioneering efforts to establish an STS framework for CRS in 2015 and participated in the High Level Forum on the Capital Markets Union. It continues to be active in supporting a sustainable and healthy CRS market in current active jurisdictions, as well as advocating CRS to regulators in potential new markets.
“We’ve been investing for a long time and take our role seriously in terms of trying to advance the CRS market in several ways, including by espousing high transaction standards and advocating for the STS synthetics regime. We believe CRS transactions are beneficial to the economy, if undertaken in a healthy and sustainable way,” explains Barend van Drooge, deputy head, credit and insurance-linked investments at PGGM.
So far, the firm has invested €1.6bn in nine STS-qualifying transactions, with a total underlying loan notional of €30bn.
Overall, van Drooge believes the market is heading in the right direction, but he says that greater certainty as to what the US regulator expects from issuers would be beneficial. “The US market represents huge potential that is yet to be tapped. We continue to engage with regulators in other jurisdictions – the more that open up, the deeper the CRS market will become. The standards set in Europe are having a positive impact on other jurisdictions and helping regulators to get comfortable with the instrument,” he concludes.
For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.