News Analysis

CRTs coming to America?




Capital relief trades (CRTs) have become an established feature of the European securitisation market, with multi-billion euro deals frequently issued to achieve regulatory capital relief (see SCI's capital relief trades database). Although these transactions have not yet been embraced by US banks, that is expected to change.
 
Rumours of US CRTs in the offing continue to circulate. Sources suggest there is substance to these whisperings.

"While capital relief trades are now fairly well established in Europe, there has been very limited use by US banks. Despite the lack of historical activity, we are aware of ongoing discussions at a number of banks and transactions with the potential to hit the market in the intermediate term," says Kaelyn Abrell, partner and portfolio manager, ArrowMark Partners.

Since the financial crisis, US banks have been focused on fixing up their balance sheets and disposing of problem loans. They have generally had more options open to them than European banks have in this regard and have been far more frequent users of the securitisation market, so they have not leaned on CRTs in the way that European banks have.

"The US banking sector is now well capitalised and banks are focused on improving shareholder returns. CRTs will start to become more appealing to US banks when they struggle to improve performance," says Abrell.

The way that the CRT market developed in the Europe was with the larger banks first and it would be reasonable to expect the same pattern in the US. Those largest banks have the most sophisticated financing and greatest in-house expertise. Similarly, US banks are likely to use the same kind of assets as have been used in Europe.

"US banks will use CRTs to improve profitability, drawing upon templates from existing issuers in developed markets. Large corporate loans and revolvers are an obvious example, as the market is well defined and easier for first-time issuers to navigate," says Abrell. Synthetics are much more useful for corporate lending than for lower risk assets such as mortgages.

Abrell adds: "Large US banks are already holding large corporate loans and revolvers on their balance sheets and we believe it makes the most sense for them to start with proven markets. Because US banks typically hold higher quality assets, the CRT structures will likely differ slightly from what is seen in Europe to account for the reduced loss profile."

The typical deal length in Europe is 5-8 years, with double-digit yields common. US CRT deals may be structured to offer lower spreads, but can still be expected to offer attractive reward for the risk. That should appeal to investors.

"We believe investors would embrace the opportunity to open up the US CRT market due to the increased diversification of transactions and access to new issuers. CRT deals have increasingly used US-based collateral, so there is demonstrated appetite for the collateral," says Abrell.

She continues: "The trend is interesting because loans to US borrowers tend to offer greater transparency due to the availability of third-party ratings. Increased financial transparency lends itself well to the CRT market."

With momentum building, there are hopes that a US CRT may debut this year. Abrell believes we are getting close to that point.

She says: "With the expansion of the asset class over the last couple of years, opening of the US CRT market now seems inevitable; it is a case of when, rather than if. We would be surprised if the US market did not experience material development over the next two years."

JL

08/01/2018 09:22:52



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