SRT Market Update
Capital Relief Trades
Expect new issuers
SRT market update
A notable trend during the first half of the year has been the growth and surge in cash SRT transactions. While market sources report a combination of factors accounting for such uptick in true-sale trades, both originator and investor demand has been particularly strong in Italy.
Commenting on the uptick experienced in cash SRTs, one ABS/MBS trader points to favourable market conditions for issuers. He notes: “With the tightening witnessed in mezzanine spreads (current spreads are quickly catching up to the tights experienced in 2021), it becomes efficient for some issuers to place the full-cap stack.”
By way of example, last year Santander issued Kimi 12 from its Finnish auto ABS shelf. The deal comprised the A-F notes, with solely the senior class A tranche being publicly marketed. Comparatively for Kimi 13 – which priced on 23 May – Santander was offering the entire capital structure to investors (A-E notes). Unsurprisingly, the mezzanine was well bid, with the B and C notes reaching 5.0x and 5.7x coverage, driving spreads down to plus 100 bp and plus 140 bp, respectively (from initial price talk of 110a and H100s).
Reflecting on the motivations behind the increased supply in cash SRT trades on offer year-on-year (further examples of recent transactions include Miltonia Mortgage Finance, Santander Consumo 6, SC Germany Consumer 2024-1, and BBVA Consumer 2024-1), one SRT investor notes: “The market has somewhat tightened in line with the ABS market and therefore cash SRTs are probably viewed a bit through an ABS market lens. That certainly made issuance in the lower part of the capital stack very attractive for banks.”
Correspondingly, investor demand for such transactions has shown no signs of tempering. The investor adds: “The coverage numbers released by banks have certainly been positive and highlight strong appetite for those deals. However, one needs to temper that with the fact they are very skinny, narrow tranches.”
In Italy, such trend and appetite for cash SRTs has been particularly prominent in the past few months, with the pricing of deals such as Youni Italy 2024-1, Quarzo 2024 and Auto ABS Italian Stella Loans 2024. Lastly, the full capital structure of Brignole CO 2024 was placed on the market and, although the deal was aimed at achieving liquidity objectives, it was also designed to allow Creditis claim capital relief in the future if need be.
Looking at the factors leading to the upward trajectory in local cash SRTs, Pietro Bellone, partner at A&O Shearman, notes: “Up until this year, the cash SRT market had been tapped by a few financial institutions belonging to international banking groups and we have had on average two or three deals per year in the consumer/auto loans space. Other financial institutions – typically the larger Italian banks – would utilise synthetic securitisations as a capital management tool.”
He continues: “There is, I believe, a combination of various factors behind the surge in cash SRTs this year. Naturally, compared to synthetic securitisations there are lower costs involved, less operational features required, and it is easier for originators to retain the excess spread. Additionally, what we have observed in the last two years is strong market appetite for mezzanine notes. The difficulty for issuers however was generally the placement of the senior notes, given the spread requested by the market and the one offered by the originators. Now that this gap is tightening, there is no obvious reason not to do a cash SRT deal.”
Asked if the end of ECB purchase programme last year was an additional influential factor, Bellone says: “I feel this has caused many Italian banks to revise their funding strategy. Some banks tended to opt for retained securitisations or private funding, but now that market conditions have improved, it makes more financial sense to do a public deal. Given how mezzanine and senior notes are currently being absorbed by the market, then why not do a cash SRT deal.”
Looking ahead, Bellone further expects this market and issuance to grow. He states: “There is clearly a pipeline of deals and interestingly this should include also new issuers. Some financial institutions will look at this product specifically as they prepare for the Basel 4 reforms, while others may want to show that they can compete in the cash SRT market by attracting mezzanine and junior investors. Also some of these institutions are part of larger banking groups and therefore there is the obvious advantage of getting capital relief both at the individual and group level.”
He concludes: “We feel this market is destined to grow further very soon. And of course, all the new issuers will likely become frequent issuers.”
Vincent Nadeau
For more information on ABS/MBS primary issuance, see SCI’s International ABS Deal Tracker.
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SRT Market Update
Capital Relief Trades
H1 commentary and league tables
SRT market update
While reflecting on the first half of the year, many market participants have often used and repeated the expression ‘more of the same.’
Indeed and although the market has not experienced or faced any fundamental changes in the last six months, the general feeling is that its leading participants are doing all the ‘usual things’, but on an increased scale. Consequently, investors expect figures to show a 15% growth year-on-year for H1.
Evidently, the (re)entry of US banks provided a catalyst for growth for the SRT market as a whole. Nevertheless, issuance has not yet reached a scale that many were hoping for or expecting. One of the determining factors behind this suppressed supply has been the regulatory uncertainty, with sources still noting: “No one still knows what Basel 3 endgame will look like.” One investor adds: “6 months ago we were expecting a flood of issuance and the rise in investor appetite to be matched by a rise in supply. So far, those massive JP Morgan have not yet been replicated. I think the US will remain fairly uncertain, and I feel you're going to need to have a pretty secure platform to continue to issue up until that certainty is resolved.”
The European market on the other hand has witnessed and benefited from a lot more noise at a political level around how important capital union is. Although this has not filtered through yet into actual legislation or even legislative proposals, sources suggest that such political momentum could be a game changer for the market.
Naturally such shift could trigger an ironing out of some of the issues in the European regulatory regime. This includes the capital treatment of securitisation positions for insurers (one of the main reasons as to why insurers do not use the asset side of their balance sheet in this market), which would introduce the ability to match lending opportunities with capital.
| European SRT issuer league table by number of deals - 2024 to end Q2 |
| Rank |
Issuer |
Synthetic |
Cash |
Total |
|
| 1 |
Santander |
4 |
3 |
7 |
|
| 2 |
Credit Agricole |
3 |
0 |
3 |
|
| 3= |
BNP Paribas |
2 |
0 |
2 |
|
| 3= |
Lloyds Bank |
2 |
0 |
2 |
|
Vincent Nadeau
News
Capital Relief Trades
Fundraising target exceeded
AXA IM Alts announces it has raised €2.3bn for its SRT strategy
The investment management firm, which boasts €184m AUM and has closed 110 deals since the launch of its strategy (the majority of which were bilateral trades), is looking to capitalise on the growing SRT market. The group credits its relationships with banks and the attractiveness of the asset class as key drivers.
Global head of client group Florence Dard commented that the funding round exceeded the group’s original target and the strategy has “attracted such a diverse pool of investors from a variety of geographies, [which] speaks to AXA IM Alts’ ability to provide its clients with unique access to some of the market’s most exciting opportunities.”
Deborah Shire, deputy head of AXA IM Alts, commented: “SRT is emerging as a prime investment, offering exposure to a variety of underlying asset classes originating from bank’s core portfolios, covering large-cap corporates all the way through to granular portfolios of SMEs, including investments in sub-lines and consumer deals.”
Meanwhile global head of alternate credit Christophe Fritsch said SRTs offer something “unique” as “volatility becomes an increasingly consistent theme for markets and diversification of income becomes critical”. They also lauded the asset class’ stable cash flows and risk-adjusted returns.
Earlier this year the alternate investment firm was also the subject of a $400m mandate from the Arizona State Retirement System (ASRS) (SCI, 30 April). The US pension fund has been participating in risk sharing investments since 2019, and told SCI at the time it was hoping to diversify its exposure with its partnership.
Joe Quiruga
News
Structuring/Primary market
Latest SRTx fixings released
SRT market sentiment highlights balanced trends and market conditions
The latest fixings for the SRTx (Significant Risk Transfer Index) have been released. While last month’s data points highlighted an incrementally better market sentiment overall, this month’s figures and calculations calculations generally came back wider than the previous month.
SRTx Spread Indexes have widened across the board, with the European (+8.4%) and US (+8.3%) corporate segment leading the way. Regarding the SME sector, figures show a modest windening (+5.0% in Europe and +1.3% in the US). Broader observations have suggested that illiquidity and the lowest credit on the spectrum, have softened in some areas.
The SRTx Spread Indexes now stand at 970, 700, 1,020 and 1,050 for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US categories respectively, as of the 7 June valuation date.
SRTx Volatility Index values remain centered above and below the 50 benchmark, with the latest fixings suggesting incremental volatility overall. In this context, all European segments widened (+21.0% corporate and +21.0% SMEs), while the US large corporate stayed unmoved (0.0%). The US SME segment tightened moderately (-16.7%). From a trading standpoint, the figures suggest that market sentiment has been trending sideways.
The SRTx Volatility Index values now stand at 57, 50, 57 and 42 for the SRTx CORP VOL EU, SRTx CORP VOL US, SRTx SME VOL EU and SRTx SME VOL US indexes respectively.
Regarding liquidity, the SRTx Liquidity Index values display a widening across the board: European (+12.5%) and US (+20.0%) corporate; European (+28.6%) and US (+4.2%) SMEs. Such data contrasts with last month’s trend, yet the overall sentiment suggests that liquidity is centering and stabilising around the 50 benchmark.
The SRTx Liquidity Indexes stand at 50, 45, 54 and 42 across SRTx CORP LIQ EU, SRTx CORP LIQ US, SRTx SME LIQ EU and SRTx SME LIQ US respectively.
Finally, The SRTx Credit Risk Indexes denote mixed results once more. Regarding the US, both the corporate (-9.4%) and SME (-14.3%) widened. The European market fixings show opposite results, with both corporate (+14.3%) and SME (+8.3%) tightening (spreads softened 1bp-5bp when a French election was announced unexpectedly mid-June).
The SRTx Credit Risk Indexes now stand at 57 for SRTx CORP RISK EU, 55 for SRTx CORP RISK US, 57 for SRTx SME RISK EU and 50 for SRTx SME RISK US.
SRTx coverage includes large corporate and SME reference pools across the EU and US economic regions. The index suite comprises a quantitative spread index - which is based on survey estimates for a representative transaction (the SRTx Benchmark Deal) that has specified terms for structure and portfolio composition - and three qualitative indexes, which measure market sentiment on pricing volatility, transaction liquidity and credit risk.
Specifically, the SRTx Volatility Indexes gauge market sentiment for the magnitude of fixed-spread pricing volatility over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating volatility moving higher.
The SRTx Liquidity Indexes gauge market sentiment for SRT execution conditions in terms of successfully completing a deal in the near term. Again, the index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that liquidity is worsening.
Finally, the SRTx Credit Risk Indexes gauge market sentiment on the direction of fundamental SRT reference pool credit risk over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that credit risk is worsening.
The objective of the index suite is to depict changes in market sentiment, the magnitude of such change and the dispersion of market opinion around volatility, liquidity and credit risk.
The indexes are surveyed on a monthly basis and recalculated on the last trading day of the month. SCI is the index licensor and the calculation agent is Mark Fontanilla & Co.
For further information on SRTx or to register your interest as a contributor to the index, click here.
Vincent Nadeau
Market Moves
Structured Finance
Job swaps weekly: Newmark snaps up industry veteran
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees Newmark hiring an experienced executive as md on its UK and EMEA debt and structured finance team. Elsewhere, i80 Group has hired a former Wells Fargo ABF and securitisation director, while law firm Cappelli RCCD has promoted a securitisation and structured finance specialist to partner.
Debt advisory veteran Steve Williamson has joined Newmark’s London office as md on its debt and structured finance UK and EMEA capital markets team. The team has also appointed Matthew Kang as a London-based associate.
The pair will work alongside Newmark UK president Michael Lehrman and Matthew Featherstone, head of debt and structured finance in the UK and Europe. They will also work with Charlie Foster, who is head of real estate investment banking for the UK and Europe at Newmark affiliate Cantor Fitzgerald.
Williamson was previously chair of debt and structured finance at CBRE, where he spent 13 years and led debt origination for the UK and EMEA. Prior to that he was head of UK debt origination for Deutsche Bank.
Kang leaves his position as associate director on the debt and structured finance team at CBRE after three years with the firm. He previously worked at KB Kookmin Bank.
Meanwhile, Jomart Tleujan, vp and head of debt capital markets at Grover, has left the firm to take up the role of director at i80 Group. The appointment is part of the US asset-based loan provider’s plans to triple the size of its London team as it looks to increase its activity in Europe. Tleujan leaves Grover after just under a year with the business, having previously spent two years at Fluro and eight years at Wells Fargo.
Italian law firm Cappelli RCCD has promoted London-based counsel Sofia De Cristofaro to partner. De Cristofaro focuses on banking and financial law, with particular expertise in structured finance, securitisation and asset acquisition. She joined the firm – then known as Studio Legale RCCD – in 2016, having previously worked at Paul Hastings, Ashurst and Dewey & LeBoeuf.
Travers Smith has hired a new structured finance specialist to its finance team. Ryan Ayrton joins the firm as an infrastructure debt partner in London, having previously held the same role at Watson Farley & Williams since 2022. Ayrton’s practice focuses on advising a range of structured finance transactions, particularly infrastructure financings and related M&A, as well as advising sponsors and funders.
Former TIAA Bank vice president and account executive Vicki Huynh has joined CBRE as senior vice president in its debt and structured finance division, based in its Seattle office. Huynh – who will work alongside Josh Berde – specialises in underwriting and structuring mortgage transactions for multifamily and commercial real estate. She left TIAA in March after six years with the business and previously worked at EverBank and GE Capital Real Estate.
BTIG has hired Seaport Global Holdings’ Flavio Paparella as md in its global emerging markets fixed income group, based in New York. The team, which also has offices in Singapore, London and Miami – focuses on Asia, Latin America and the central and eastern Europe, Middle East and Africa regions. It works alongside clients who trade sovereign, corporate and structured credit. Paparella leaves his role as md at Seaport after eight years with the firm, during which he developed the fixed income business in Latin America. He previously worked at RBC Capital Markets, American Express and Deutsche Bank.
And finally, Investcorp subsidiary and advisory firm Mercury Capital Advisory has hired Jeff Davis as a partner based in its New York office, focusing on North American private equity and private credit origination, client relationships, and project management. Davis leaves his role as partner and head of private credit at FirstPoint Equity after three years with the firm, having previously spent 16 years at Eaton Partners. Mercury’s credit division focuses on CLOs, broadly syndicated loans, structured credit, and mid-market direct lending.
Kenny Wastell, Claudia Lewis
structuredcreditinvestor.com
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