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Loans Tied to SRTs Reach $1 Trillion on Record Pace of Sales

Volumes and projections for SRTs, also known as risk-sharing transactions or RSTs. (Source: Chorus Capital)

(Bloomberg) -- Loans tied to significant risk transfers have reached about $1 trillion as deals are running at the fastest pace on record for the fourth year in a row, according to data compiled by Chorus Capital Management.

Significant risk transfers, or SRTs, are becoming increasingly popular as they enable banks to hold onto loan assets and offload the risk by paying investment firms to share any potential future losses. This reduces the regulatory capital banks need, freeing up balance sheets, while investors get returns that are frequently in the low double-digits.

“The market is extremely busy at the moment and we expect this to continue as banks want to price transactions before the end of the year,” said Juan Grana, a managing director at Chorus Capital, which invest in SRTs. “We are even now starting to see early indications of potential deals for next year.” 

The size of SRTs outstanding is now around $70 billion, according to the London-based alternative asset manager. That’s up from around $50 billion a year ago, which was linked to about $700 billion of loans.

Recent action in the market includes JPMorgan Chase & Co. selling an SRT linked to a portfolio of about $3 billion in net asset value loans, and Banco Santander SA considering a transaction linked to a portfolio of about £1 billion ($1.3 billion) of loans out of its UK unit. 

Global issuance of SRTs reached about $16.6 billion in the first nine months of 2024. Issuance for the whole of 2024 is on pace to reach between $28 billion and $30 billion, Chorus Capital said, reiterating estimates set earlier this year. 

European banks represented 69% of volumes, while US and Canadian banks accounted for the rest, broadly in line with Chorus Capital’s long-term expectations.

There are plenty more deals in the works already. Spain’s Banco Sabadell SA is reaching out to potential investors to offload credit risk linked to a portfolio of about $1.3 billion of loans originated by its business in Miami, while Canadian Imperial Bank of Commerce is considering an SRT tied to a portfolio of $4.5 billion of corporate loans. 

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. If losses materialize, holders of the SRTs absorb the hit.

Large corporate loans continue to be the most popular type of asset used for SRTs, accounting for 57% of issuance volumes in the first nine months of this year, Chorus Capital said. Loans to small and mid-size enterprises accounted for only 11%.

(Updates with loan details in last paragraph.)

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