Contents

Capital Relief Trades

Irish SRT

SRT Market Update

Allied Irish Bank’s (AIB) SRT transaction is making headway. In its first half results back in August, AIB disclosed it was “progressing RWA management measures such as a significant risk transfer (SRT) transaction” with a deal expected to close 2H24.

Sources suggest it will reference a pool of corporate loans, with a small retained first loss and a 10% tranche detachment. There are currently around seven investors bidding on the deal, although the final number is expected to be smaller. The spread is projected to be in the 6-8% range.

In other news

MBank is also looking to issue a repeat transaction in Poland. It has previously issued deals for corporate, CRE, and consumer loans. Also in Poland, Bank Millennium is looking to close a trade in December.

Joe Quiruga

Capital Relief Trades

Latest SRTx fixings released

SRT market projections include spreads firming up and incrementally worsening credit risk outlook.

While we enter the final quarter of the year, September was characterised by central banks and the significant easing priced in by markets. Such vision and prediction for a more aggressive rate-cutting cycle by major central banks has led to a bull steepening of yield curves. After the 50 bps rate cut by the Fed in the US, markets have been pricing in a more gradual Fed cutting cycle. Similarly in Europe, the ECB delivered a 25bps rate cut, in line with market expectations and the inflation slowdown, reducing its deposit rate to 3.5%. However, the Bank of England resisted the trend and kept its policy rate unchanged at 5% last month, with members voting 8-1 in favour of holding rates, broadly in line with market forecasts. However the broader macro backdrop remains unusual, notably with the intensification of geopolitical tensions. In this tempestuous context of geopolitics, recession risk, continuous repricing of central bank expectations, and idiosyncratic corporate downgrade events, there are many uncertainties that will affect short-term returns.

Regarding the SRT market, investors continue to report strong growth fundamentals, largely based on a strong and heavy second-half pipeline. Spreads for new issue ranged from 800 to 1000 bps over the past couple months, marginally tighter than recent prints. Recent transactions have notably included collateral pools concentrated in the levered finance and mid-corporate spectrum. However and following traditional SRT issuance calendar and momentum, we should expect a higher proportion of large corporate, investment grade-heavy deals to come to market towards the end of the year.

SRTx Spread Indexes, in kind with structured finance and the broader corporate markets, have slightly firmed month-on-month. As a result, figures have tightened across the board (Large corporate: EU -2.7% US -4.6%; SME: EU -3,1%, US -1.2%).

The SRTx Spread Indexes now stand at 975, 636, 1,993 and 1,025 for the SRTx CORP EU, SRTx CORP US, SRTx SME EU and SRTx SME US categories respectively, as of the 4 October valuation date.

While last month’s fixings highlighted a clear re-adjustment following momentary market volatility at the beginning of the summer, the volatility outlook denotes little change. In Europe (Large corporate: -14.3%; SME: -14.3%) sentiment is projecting relative steadiness. However figures in the US (Large corporate: -3.8%; SME: 0.0%) still sit above the 50 benchmark, suggesting and anticipating slightly elevated market volatility.

The SRTx Volatility Index values now stand at 50, 63, 50 and 63 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 show very little change in the liquidity sentiment month-on-month. However the mixed figures possibly suggest or reflect the general view that investors want more paper, yet there isn’t enough to go around (Large corporate: EU +1.3% US -2.8%; SME: EU +1.3%, US -12.5%).

The SRTx Liquidity Indexes stand at 46, 44, 46 and 44 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 reflect an incrementally worsening sentiment. Analysing it from a performance standpoint, broader figures point to an incremental deterioration in credit risk and credit performance delinquencies (notably in the commercial space). The latest fixings suggest that rather than being widespread, such sentiment is creeping in (Large corporate: EU +14.3% US +30.0%; SME: EU +14.3%, US +30.0%).

The SRTx Credit Risk Indexes now stand at 57 for SRTx CORP RISK EU, 65 for SRTx CORP RISK US, 57 for SRTx SME RISK EU and 65 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

Capital Relief Trades

SCI CRT Awards: European Transaction of the Year

Winner: Fanes SRT 2023

Sparkasse’s debut SRT trade, Fanes SRT 2023, is SCI’s pick for the European Transaction of the Year category in this year’s CRT Awards. Not only is the deal the first-ever Italian STS synthetic securitisation involving only private investors, it also features a one-off amortisation mechanism for the mezzanine tranche, which can be activated should the issuer be authorised to use the IRB method in the future.

Cassa di Risparmio di Bolzano, also known by its German name Südtiroler Sparkasse, is one of the most important independent savings banks in Italy. The acquisition of a majority stake in CiviBank in June 2022 positions the group as the most important territorial institution in Italy’s north-east.

Fanes SRT represents the first synthetic securitisation ever completed by Sparkasse, together with Intesa Sanpaolo through its IMI Corporate & Investment Banking Division in the role of arranger and placement agent. Closed at the end of 4Q23, this landmark transaction references a granular static portfolio of approximately €1bn of Italian corporate and SME exposures.

The structure features a 0%-1% junior tranche, retained by the originator, and a 1%-9.25% mezzanine tranche, which was allocated to two private investors at competitive pricing in the low double-digit range. Despite a crowded market in the final two quarters of 2023, the bidding process for Fanes SRT was highly successful, underscoring the transaction's appeal.

Amortisation is on a pro-rata basis, subject to performance triggers, with a time call set to the WAL, estimated at around three years. This transaction, structured as a direct financial guarantee, enabled Sparkasse to reduce its RWA by approximately 80% at closing, thus boosting its CET1 ratio.

As the first-ever STS synthetic securitisation in Italy involving only private investors, Fanes SRT not only represents a significant achievement for Sparkasse, but also sets a new benchmark for the Italian SRT market. By obtaining the STS label, Sparkasse was able to maximise the cost-efficiency of the transaction.

Due to Italy’s credit rating (i.e. below credit quality step 2), the primary challenge in achieving the STS label for synthetic securitisations for Italian banks is the inability to use cash collateral deposited with the originator. This issue was partially solved for Italy's largest banks by a Consob waiver in July 2024, although it continues to pose challenges for smaller unrated institutions.

However, to comply with STS requirements, the originator can alternatively reinvest the cash collateral in 0% risk-weighted debt securities held by a third-party custodian, maturing no later than the next payment date. Sparkasse opted for this approach and, with the support of the arranger and the legal advisor, successfully implemented a legal structure that allows the protected tranche to benefit from a 0% risk weight through a right-of-use in favour of the originator, enabling the investment of cash collateral in eligible securities.

Fanes SRT also includes an important innovative feature. It is well known that under the SEC-SA approach, the credit enhancement needed to reach the floor on the risk weight of the senior tranche is higher than under the SEC-IRBA. If during the life of the transaction, Sparkasse were authorised to use internal models and therefore to apply the SEC-IRBA, it would need a lower detachment point on the mezzanine tranche to maximise the capital relief.

To maintain cost efficiency also in this scenario, Sparkasse and the arranger have developed a one-off additional amortisation mechanism for the mezzanine tranche, which can be activated at Sparkasse's discretion once authorised to use the IRB method. This mechanism is calibrated to achieve optimal credit enhancement under the SEC-IRBA while preserving the same level of RWA relief.

This transaction demonstrates that even smaller regional banks can successfully enter the SRT market. With the collaboration of IMI Corporate & Investment Banking Division, Sparkasse has shown that it is possible for smaller, less-experienced institutions to secure highly competitive pricing and incorporate numerous innovative features in their inaugural transactions. Furthermore, the success of the bidding process and the allocation of the mezzanine tranche to multiple investors have laid a strong foundation for the originator to execute many more successful transactions in the future.

Honourable Mention: Caravela SME 6 
In February 2024, Caravela SME 6 was executed by Banco Comercial Português (BCP) and Deutsche Bank (as arranger and placement agent). A €78.6m mezzanine tranche was placed with private investors.

The transaction, which has a four-year term and a three-year replenishment period, references an €850m blind-pool portfolio of short-term credit facilities to SME and corporate BCP’s clients in Portugal. The credit protection is granted through a credit default swap backed by fully funded CLNs.

The transaction is the sixth securitisation under the Caravela programme, newly introducing reverse factoring facilities. The structure benefits from synthetic excess spread in use-it-or-lose-it format and is an STS-compliant securitisation.

BCP’s Caravela programme is one of the longest running active SME securitisation programmes in Europe, although formats and structures have varied through its history. BCP closed Portugal’s first SME securitisation under the name Promise Caravela in 2004.

Combining BCP's track record in Portuguese SME lending and securitisation market with Deutsche Bank's arranger and placement capabilities, Caravela SME 6 attracted very strong investor interest. With a spread of 8.70%, Caravela SME 6 is widely believed to be the corporate SRT transaction with the tightest pricing of any southern European originator in comparison to privately placed funded transactions over the prior 12-18 months.

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

Capital Relief Trades

SCI CRT Awards: North American Transaction of the Year

Winner: Granville USD

Upsized from US$5bn to US$9bn, Scotiabank’s Granville USD represented the largest-ever debut Canadian SRT - in terms of both portfolio size and notes sold – when it closed in July 2023. In recognition of this, and for optimising Basel 4 output floor constraints via several innovative risk mitigation techniques, the transaction is SCI’s North American Transaction of the Year.

Granville USD, also known as Project Balboa, was driven by a focus on developing SRT as an active capital management tool amid the increased focus from the Office of the Superintendent of Financial Institutions (OSFI) on prudential constraints in Canada. Arranged by BNP Paribas, the deal provides credit protection on a 0%-8% junior tranche and hedges its risk via the issuance of four series of notes – with a face value of US$720m – credit linked to a financial guarantee. A total of 13 investors participated in the deal, with some taking 0%-8%, some taking 0%-6% and others taking 6%-8%.

The reference portfolio comprises a revolving pool of drawn and undrawn Canadian and US corporate loans, with a 36-month replenishment period, and the average rating of the exposures is equivalent to approximately triple-B. The majority (85%) of the pool was disclosed.

The transaction achieved approximately a 70% RWA reduction and was executed with an expedited timeline, having launched and settled within five months, against a challenging backdrop following the collapse of Silicon Valley Bank and Credit Suisse. Among the risk mitigation techniques utilised to optimise Basel output floor constraints was the assignment of triple-A to single-A public ratings by Morningstar DBRS to the retained senior securitisation positions, as well as the sale of a senior mezzanine tranche to lower the overall hedging costs.

Granville successfully enabled Scotiabank to establish itself in the SRT market and laid the foundation, both internally and externally, for a programme of future transactions.

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

Asset-Backed Finance

Local network

Jonas Hybinette, co-founder and co-head of business development at RoundShield, answers SCI's questions

Q: RoundShield, a private investment firm specialising in asset-backed credit across Western European markets, recently closed its fifth European special opportunities fund (Fund V) with over US$1bn in commitments - surpassing its fundraising target by nearly US$150m. Why does the firm focus on Western Europe and how do you identify opportunities in these jurisdictions?
A: Driss Benkirane, our managing partner, and I worked in similar roles at large private equity and credit firms in the US for several years. When we looked at Western Europe, we saw a less competitive private credit market than in the US, mainly because banks have historically dominated Europe.

Post-2008 regulations like Basel 4 have pulled banks back, creating space for alternative capital providers like us. Europe's fragmentation - different legal systems, languages and cultures - adds complexity and creates opportunities for firms like ours that have invested in building local networks.

That's how we find deals and avoid the competition that often saturates larger markets. Our sweet spot is in transitional deals between €30m-€120m - generally too complex for the banks and below the minimum size threshold for the larger private debt firms, leaving us facing less competition.

Q: What key factors contributed to Fund V's success?
A: A major factor was the strong support from our existing LP base, with over 80% of capital coming from repeat investors. Investors have recognised the ongoing opportunities in Europe and the advantages of private credit in this new interest rate environment. Our solid track record and experienced team - with nearly 25 years of market expertise - also contributed to investor confidence, especially in navigating Europe's complex legal and regulatory landscape.

Q: How do you plan to deploy this fund in asset-backed private credit investments?
A: We're focusing on key sectors like hospitality, student housing, residential, social and renewable energy infrastructure, specialty finance and, selectively, commercial real estate. Residential real estate (RRE) remains attractive due to a supply-demand imbalance exacerbated by the pandemic, inflation and delays in construction.

Given the current fiscal framework in most of our target jurisdictions, we also continue to see positive fundamentals in renewable energy and social infrastructure. Although the fund has a high level of capital structure flexibility, we prioritise senior-secured positions with attractive loan-to-value ratios to ensure downside protection.

Q: Fund V is classified under Article 8 of the EU's Sustainable Finance Disclosure Regulation. How do you integrate sustainability risks into your investment decisions?
A: Sustainability is central to our process, and we evaluate ESG factors when considering investments. We assess the borrower's sustainability policies and encourage improvements where possible. While we can't dictate changes like an equity owner, we still work to support ESG progress, and these considerations are always part of our final investment recommendations.

Q: What emerging ABF trends do you foresee flourishing in Europe?
A: We expect alternative credit opportunities to persist, as banks aren't likely to return to pre-2008 lending levels. With interest rates significantly higher than just a couple of years ago, many capital structures need restructuring, creating opportunities for alternative lenders like us to step in. In CRE, a large maturity wall over the next few years will drive demand for alternative financing.

Q: Does the European ABF market present a comparable opportunity to the US?
A: Europe and the US are different markets, but the European opportunity is extremely compelling. The US has a much more efficient capital market, but Europe's fragmented nature creates inefficiencies that present opportunities for us.

Many businesses in Europe still rely heavily on banks for financing, unlike in the US, where alternative capital providers are more widely known and utilised. It will likely take a generation for Europe to catch up, but that creates a vacuum for players like us, offering strong risk-adjusted returns, mainly when focusing on fully asset-backed, senior-secured investments.

Q: What are the biggest challenges you're currently facing and how are you addressing them?
A: One key challenge is knowing when asset values, particularly in real estate, have bottomed out. We mitigate this by focusing on conservative LTV ratios, ensuring we can recover capital even if values drop. Additionally, shifts in real estate usage - accelerated by the pandemic - require us to carefully assess which sectors and submarkets will offer the best opportunities as the market adjusts.

Q: How do you see the firm evolving over the next five to 10 years?
A: Europe, especially Western Europe, will remain the focus of our business. I don't foresee that changing.

Our core business comes from an asset-backed mindset and any new funds will continue to focus on the broader asset-backed universe. I don't see us moving into corporate cashflow-based lending, for instance.

We'll continue providing asset-backed capital, but I see us evolving by offering capital at different costs, catering to more mature assets. This should be a natural transition, allowing us to meet investor demand for higher current income without straying from our core strategy.

Marta Canini

Capital Relief Trades

SRT issuer profile: NatWest

Rob Lloyd, head of balance sheet management at NatWest Commercial and Institutional, answers SCI's questions

Q: How long have you been involved in SRT and what were the drivers behind your first trade?

A: SRT is not a new concept, the bank has been users of the product for some time. This year we are embarking on the tenth issuance of our Nightingale programme.

Q: Do you view SRT as a strategic portfolio optimisation tool?

A: Yes, it allows us to hedge our earnings, it’s good for returns and importantly facilitates the recycling of capital so the bank can continue to originate new loans.

Q: How about ESG concerns? Do you use it to finance SME and green loans, etc?

A: NatWest is well positioned in the UK SME and a leading lender to the UK renewables sector. We have executed several SRTs in this space, including deals on each asset class this year, which allows us to ensure we have available capital to continue to deploy into new origination within these sectors.

Q: Do you issue programmatically or as and when? And which asset classes/structures interest you most?

A: We will be programmatic issuer in both SME and large corporate. Issuance referencing other asset classes will be dependent on the levels of origination. We are largely structure agnostic and will be driven by bank need, but our current structure of choice is funded SRT.

Q: How about deciding on an appropriate portfolio/format to securitise?

A: The selection of pool is driven by bank priorities at any given time. Our current approach is to run multiple programs referencing specific asset classes.

Q: On synthetics, the stereotype is it works better for European banks than cash deals because it’s more relationship based. Do you agree with this?

A: The market has grown materially over the last couple of years, our approach will favour a handful of partners for repeat trades, but we will test price on a regular basis through a wider syndication.

Q: How do you ensure alignment of interest with internal and external stakeholders?

A: Internal stakeholders are focused on returns and see SRT as accretive to this metric and importantly the product allows them to continue to originate client business, externally we are clear on what makes sense for the bank’s cost of capital with investors. As the gap between real risk and what banks need to hold from a regulatory capital perspective widens, use of SRT increases.

Q: And how do you weigh cost of capital with investor pricing expectations?

A: The purpose of the trade is important when assessing economics, but overall, the bank has very clear lines on cost of capital.

Q: What’s your approach to mitigating execution risk?

A: We are building capability across multiple tools to optimise capital, on SRT specifically we are investing to enabling assets, making pool selection easier and improving our approach to investors. We will look to partner with investors with whom we have long standing relationships and have significant experience within the SRT market to reduce any concerns around execution.

Q: What has been the most significant recent development in SRT?

A: The growth in the market over the last couple of years has been exceptional.

Q: What current market trends are affecting your SRT platform?

A: We see the product as a long-term tool and balancing today’s favourable rates environment with what investors need for the future…

Q: Are you pricing wider than others?

A: We want to be regular issues over the next couple of years, our preference is to execute on a bilateral / small club basis given the complexity involved, but on more generic asset classes we will syndicate more widely to price check.

Q: What challenges are you currently facing?

A: Particularly regarding SRT, compared with peers in continental Europe, the UK regime is more restrictive. This means that a UK bank’s ability to leverage the benefits of synthetic securitisation are reduced. As many others, we are hopeful for positive change that would enable more varied structures and unfunded participation from our already established insurer relationships. Away from this, there remains uncertainty in the treatment of output-floor for UK securitisation – amongst other regulatory uncertainty.

Q: What else is happening? What does the Nightingale trade look like compared to the programme’s previous transactions?

A: Currently banks are benefiting through lower spread from the growth in the number of new investors in the SRT market, but we expect as supply of paper increases through the US we will see some normalisation. It is hard to compare individual trades, without knowing the details of the respective portfolio’s, structuring, detachment points and finally coupons, these trades are time consuming to execute given the number of variables.

Joe Quiruga

Structured Finance

Job swaps weekly: MidOcean boosts capital formation capabilities

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees MidOcean Partners strengthen its ranks with the appointment of Jon Fox as global head of capital formation. He brings several decades of leadership and alternative asset management experience that will help to expand the firm’s investor relationships globally.

Fox was formerly president of Värde, having joined that firm nearly 11 years ago and where he was also previously head of the New York office. Before that, he held senior roles at Fortress Investment Group and Lehman Brothers. His experience has crossed nearly every alternative asset class in both private markets and liquid strategies, and he has helped launch and grow investment businesses and funds in nearly every major region across the globe. 

Meanwhile, King & Spalding has recruited a new structured finance associate to its practice in New York. Luigi de Angelis joins the firm from Milbank in the US, having previously served as an associate in the structured finance practices of Chiomenti and Hogan Lovells in Rome.

And finally, Leonard Curtis has hired funding specialist Mike Dinnell to its business advisory and commercial finance team to bolster its support to SMEs across the UK. The structured finance specialist joins the firm with more than three decades of banking and debt advisory experience, having previously held senior roles at Allied Irish Bank, Lloyds and RBS. Dinnell joins the firm’s office in Liverpool from ThinCats, where he served as business development director.

Claudia Lewis, Corinne Smith