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SRT market falls short of 2020 hopes

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The significant risk transfer market is usually at its busiest in December, as issuers hope to gain balance sheet benefits by year-end. But 2020 has seen a pullback from investors who have blamed a lack of credit data brought about by Covid-19 payment moratoria.

Fewer SRT deals are being executed than the market expected heading into 2020, market sources confirmed, with some deals getting pushed back to next year due to worries over unreliable data coming out of the pandemic.

“People were expecting many more transactions to close in this year, and it is not looking like this will happen,” said Oliver Fürst, head of active credit management at Raiffeisen Bank International. “They are being withdrawn or shifted to next year.”

The sector had a record breaking year in 2019 and has recently been revitalised thanks to an increase in investor participation and familiarity with the product. But 2020 is set to disappoint.

The SRT market has seen an influx of insurance investors over the past year or two, offering unfunded credit protection to banks, alongside the traditional specialist credit hedge funds doing funded deals.

Insurance companies also like longer-dated deals than hedge funds, and this has supported the expansion of the SRT market out of its heartland of SME and corporate credit to other asset classes such as mortgages.

But during Covid-19, many traditional data points that investors rely on to assess risk in SRT deals have been absent.

“On the corporate side investors these days ask for fully disclosed line by line data," said Fürst. "Typically, you rely on blind portfolios, with no disclosure of customer names, and focus on historic performance data and internal ratings, but with moratoria, the payment behaviour of the last couple of months is partially diluted .”

Market participants are also sceptical that the upcoming ‘simple, transparent and standardised’ (STS) designation set to be extended to synthetics deals will give the market a big lift.

“The STS is coming from the cash securitization side, where you typically securitize homogeneous loans like credit cards, auto loans, residential mortgages, but in the synthetic space – in the SRT space – you have a focus on commercial exposure on corporate loans, and also midcaps, loans to larger corporations, project finance etc.,” said Fürst. “I can only talk about us, but for a banking group of this size, it is difficult to come up with homogenous, sufficiently big portfolios from one jurisdiction.”

For banking groups that are not international financial institutions, it is more difficult to originate homogeneous pools in these diverse asset classes.

This could restrict the benefits of synthetic STS benefits to larger SRT issuers, compared with smaller issuers who lend to a significant amount of small-to-medium sized enterprises.

“A portfolio of a billion is a starting point of an SRT transaction, otherwise it is too small,” said Fürst.

RBI recently executed a €3.3bn SRT transaction, one of the few issuers to tap into the market in 2020.

“In the middle of the first lockdown, we revisited our pipeline and decided to change our approach and take this portfolio of residential  mortgages to the market first,” said Fürst. “We had planned to do one SRT transaction at least this year.”

With the amendments to the Securitisation Regulation making their way through the European Parliament, the market is waiting on an announcement of the final shape of the regulation, which will determine the role SRT is to play in the eurozone’s economic recovery.