Private Securitization Deal of the Year — Project Boquerón
The environmental, social and governance area of finance has been one of the hottest this year, with sustainability branding stuck on every financial product imaginable, from commercial paper to subscription lines, leveraged loans and bank capital.
That makes it all the more important to identify the products and solutions which make a tangible difference rather than ‘greenwashing’ existing arrangements.
In this respect, the private, bilateral nature of the risk transfer market is the perfect playing field for investors and banks to work on the most boundary-pushing structures with the greatest capacity to drive real change in markets. Risk transfer deals reach into the heart of banks like no other product, directly contributing capital, the primary resource for any lending institution, into portfolios.
No investor in the space has done more to drive innovation than the team at Newmarket Capital, which invested in several pioneering structures when they were still under the Mariner Investment Group umbrella.
With Boquerón, however, the techniques of impact risk transfer took another leap forward. The basic outline of the €1.6bn deal will be familiar to most in the market — Newmarket takes a subordinated slice of risk in a portfolio, cutting the capital cost associated with the book for the bank in question.
Santander, one of the world’s largest project finance banks, did the deal, which references an international portfolio of project finance loans, including a hefty chunk of renewable energy. That, in itself, would have been sufficient for many institutions to go ahead and claim their ESG credentials — indeed, direct capital relief on a portfolio of renewable energy financings is arguably much more impactful than any of the green use-of-proceeds bonds issued by corporates, governments and banks for funding purposes. But it’s not particularly new in the risk transfer world — indeed, Newmarket pioneered the approach in 2013 with UniCredit on an all-renewables deal, more recently replicated by the 2019 RBS Project Grasshopper, with BAE Systems Pension Scheme, or the 2020 Intesa GARC Energy Renewables, with Glenmont Partners and Christofferson Robb.
Newmarket and Santander wanted to extend the impact element of this still further, however — and Newmarket was willing to offer the bank pricing incentives to do so, in two distinctive respects. The first relates to the replenishment of the portfolio. The deal has a one-year replenishment period, so Santander can rotate new loans in and achieve capital relief against them. If the bank succeeds in increasing the proportion of the deal notional referencing green assets through the replenishment process, the coupon steps down. The second respect is more unusual in SRT markets, and refers to the broader group activities of the bank. If Santander succeeds increasing its funding of renewable energy projects by a specified capacity in megawatts — not in dollars — it will receive a further coupon step-down, with the idea being that it is redeploying the capital relief received into an area which directly cuts carbon emissions. The target is not easy, either, set at a constant annual growth rate per year for three years, for a bank which is already one of the largest in this market.
None of these elements is individually unprecedented — the transaction itself conceptually builds on deals Newmarket did with Crédit Agricole and Société Générale, requiring deployment of the capital saved into new green lending. Echoes of the KPI structures becoming common in the vanilla sustainability-linked loan markets can be found in the requirement to boost the wattage of renewables lending. But together, the elements powerfully illustrate how risk transfer securitization can be one of the best tools for changing the behaviour of lending institutions. No other financing instrument has such a direct link to a bank’s core lending activities. Thanks to the nature of the risk transfer market, it allows the creation of bespoke, impact-driven structures to drive tangible change through capital markets activity. Risk transfer deals are complex, often individually negotiated, and almost never public — so it would be a stretch to call this a ‘template’ for the market. Newmarket, too, is unusual in the importance it places on impact investing. But as more and more investors start to build ESG into their processes, risk transfer will have to be on their agenda, because no other capital markets instrument has anything like the same potential to deliver real and positive change through financial markets.
In a world swarming with wannabe ESG products, jumping on the latest bandwagon, Boquerón is the real deal, a pioneering transaction pushing the market further forward, and that is why it is GlobalCapital’s Private Securitization Deal of the Year.