Citi and Santander unveiled this week a first-of-its-kind securitization of trade finance receivables that will help them meet new Basel III capital standards. The program could also help other banks.
The $1 billion Trade MAPS 1 is the first securitization of import and export financing loans from multiple banks in foreign jurisdictions, according to Citi’s global head of trade John Ahearn, speaking with SI in a phone interview. The transaction is backed by dollar-denominated trade finance assets, or loan receivables. The receivables are separated from the banks through special purpose vehicles so that neither bank has material ownership in the assets, said Ahearn. These are structural designs to qualify the deal as a true sale, or an outright transfer of assets.
The transaction comes in light of the post-crisis Basel III banking accords that have tightened bank capital standards and imposed strict guidelines for the types of assets banks can hold without being penalized.
Banks buy and sell trade finance assets in a secondary market traditionally dominated by other banks. But Basel rules have disincentivized banks from holding too much of these securities on their balance sheets. Trade MAPS allows Citi and Santander to aggregate smaller groups of the assets and sell them in chunks to a wider and diverse group of investors.
Trade finance and trade assets are historically well-performing and have traditionally been kept on bank balance sheets, according to Standard & Poor’s and Fitch Ratings, which both rated the deal. There could be over $1 trillion in these assets sitting on banks’ balance sheets around the world. Until now, institutional investors have not had significant access to trade finance assets, a banker familiar with the deal said.
Citi and Santander hosted an early round of marketing meetings last summer to explain the deal to investors. “People thought it was a CLO, but CLOs price much higher, and we did not want that,” said Ahearn. There was also concern the assets were coming from dark pools, a market participant said. Investors use dark pools to anonymously trade large blocks of assets away from public exchanges. On top of that were legal questions and ratings challenges. “It was challenging because of the multiple jurisdictions. It took time to analyze the data,” said Cynthya Ortega, an analyst at Fitch.
The banks planned another round of roadshows for late November, one in the U.S. just before Thanksgiving, and one in Europe the week of Thanksgiving. By the November marketing meetings investors had read up and were well informed, said Ahearn.
Investors piled into Trade MAPS 1 from all corners of the market. The deal had 45 investors participate, according to someone involved in the sale. The distribution was also wide, Ahearn confirmed. “We were worried it would go into one minor subset of investors but it was widely spread out,” he said. He did not elaborate on what subset that might have been, but he did say investors included pension funds, insurance companies and asset managers.
This week’s deal priced tighter than expected at 83 basis points over one-month LIBOR, according to Citi officials. The three-year $874.4 million class A notes priced 70 bps over at one-month LIBOR. The most subordinate notes in the $16.6 million D tranche priced very wide at 500 basis points over the benchmark rate, according to Citi. The deal included four rated notes and an unrated equity tranche that was retained by Citi and Santander. The banks retained 5% equity, a market participant said. Morgan Stanley and Santander were joint bookrunners.
Ahearn is optimistic the program will grow. Seven uninvolved banks have already approached Citi and Santander about potentially joining in future transactions, which could become programmatic. The interested banks are global and are not just in the U.S. and Europe, but also in Latin America and Asia, he said.
“On the backdrop of Basel III and the Supplemental Leverage Ratio, if we wanted to continue to grow, we couldn’t continue to have these assets pile up on the balance sheet,” Ahearn said. [Trade MAPS] is perfectly in line with new Basel III regulations and helps with the SLR. Because it is a funded transaction, which is different than a synthetic deal, it is attractive for banks having trouble raising U.S. dollar liquidity. It helps on the Liquidity Coverage Ratio and gives some stable-term funding too.”