Broadening SRT market defies spread compression

Sayed Kadiri

Editor

Credit spreads are close to all time tights — high yield, courtesy of CDX HY, recently hit its tightest level since January 2007 — but the significant risk transfer (SRT) market is one of the few pockets of credit where pricing is wide of pre-covid levels.

Gilles Marchesin, founder and chief executive officer of Chorus Capital, says that not only are premiums generally higher in recent SRTs, investors can also benefit from more defensive structures and portfolios. He uses the example of two SRTs that Chorus closed with the same bank, one in June and the other in early 2020.

“The spread on the new SRT is 50 basis points wider than the pre-covid transaction,” he says, “but the tranche is about 15% thicker and the portfolio is lower risk as we kicked out a number of single names and sub-sectors. We are getting paid more for a portfolio we think is of higher quality.”

“We are getting paid more for a portfolio we think is of higher quality”

Gilles Marchesin, CMBS trader | Chorus Capital

By contrast, new US CLO triple As are pricing at 119bp in July, according to Creditflux data, which is almost 10bp tighter than January and February 2020. Senior European CLO tranches are pricing at 95.8bp in July, which is just wide of pre-pandemic levels.

Chorus has historically invested predominantly in SRTs backed by large-cap corporate loan portfolios and London-based Marchesin says the firm has increased its focus on these deals in the past 18 months.

A wide range of SRTs have emerged this year, including transactions linked to commercial real estate and project finance.

“The scope of the SRT market is increasing,” says Marchesin. “Banks have looked at their loan portfolios... and have been looking to find sections of their balance sheet they could apply the SRT technology to.”

The number of banks using SRTs is also increasing. In March, Texas Capital Bank closed a $275 million deal which it claims is the first SRT from a US regional bank.

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Global credit funds & CLO's

August 2021 | Issue 237

Published in London & New York.