Risk Transfer Deals Are on Path to Hit Record High, Chorus Says

(Bloomberg) -- The global market for significant risk transfers has reached a record level as European lenders use such instruments more to boost profitability ratios, according to Chorus Capital Management Ltd., a London-based alternative asset manager which invests in such deals.

Global issuance of SRTs, which provide default protection for loan portfolios, reached about $9.5 billion in the first half of 2024 compared with about $7.2 billion in the same period of both the previous two years, which were also a record, the firm said in a note Thursday. 

“The main long-term driver for issuance is banks’ ongoing need to optimize their capital allocation in order to improve their return on equity,” Chorus Capital said in a note. “We expect 2024 to be another record year.”

In an SRT, a bank earmarks a pool of loans on its balance sheet and buys credit default protection on the first 5% to 15% of the losses of that pool, often by selling a credit-linked note. If losses materialize, holders of the SRTs absorb the hit. This reduces regulatory capital banks need to set aside, freeing up balance sheets for more profitable investments, while investors get returns frequently in the low double-digits.

Global issuance of SRTs for the whole of 2024 is on pace to reach between $28 billion and $30 billion, based on a strong second-half pipeline, according Chorus Capital estimates. That compares with about $24 billion last year, the highest annual volume on record.

European banks represented 71% of first-half volumes, broadly in line with previous years, while US banks accounted for 25%.

Loan Pools

Among banks reaching SRT investors, BNP Paribas SA is assessing interest in a transaction that would be linked to a pool of corporate loans between €8 billion ($8.7 billion) and as much as €12 billion, Bloomberg News reported this week. 

Credit Agricole SA plans to tap investors to offload risk tied to a pool of up to about $10 billion of loans, according to people familiar the matter, while Deutsche Bank AG, Banco Santander SA, UniCredit SpA and Intesa Sanpaolo SpA are also planning or marketing such deals.

That in turn is prompting institutional investors to raise fresh cash to deploy in such transactions. 

Earlier this month, Chorus Capital completed raising about $2.5 billion for its Chorus Capital Credit Fund V. Also, AXA IM Alts raised a similar amount for its Partner Capital Solutions 9 Fund, the French asset managers said in a statement Wednesday. Cheyne Capital is planning a $2 billion synthetic risk transfer strategy, people familiar with the matter said in April.  

©2024 Bloomberg L.P.

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