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Europe still leads US in SRT as banks diversify types of risk transferred
by Tom Davidson
Despite copious headlines about the arrival of US banks to the significant risk transfer (SRT) market, Europe continues to lead the charge, according to investors.
The SRT market enables banks to purchase protection on their loan portfolios to release capital and manage risk. It began in Europe and has been growing steadily there for decades. But the return of big US banks to the space last year caught the attention of LPs and managers, leading to a rush of expectations.
Despite those hopes, the growth of the US market remains slow, with issuance dominated by large trades between bulge-bracket banks and asset management titans like Ares.
According to one SRT investor, volumes in the US will be lower this year than in 2023, but Europe is making up for that. Some local regulators in Europe are asking banks to increase their capital charges ahead of Basel 3.1, and that is driving demand for SRTs.
The European SRT market is having another great year, with record volumes and a large number of trades, opening up opportunities for the giants as well as specialist investors, such as Chorus Capital or Seer Capital.
“The European market is healthy and growing steadily,” said Terry Lanson, a managing director at Seer Capital. “We’d like to see more interesting opportunities out of the US as well, but that market will take a little longer to develop.”
According to investors, European tranches are pricing in the high single digits, around 100bps tighter than last year.
The market is expecting a busy last quarter, Lanson said: “We’re as busy as we’ve ever been in Europe, and are working on 11 or 12 active transactions. Basel 3.1 is leading banks to diversify the type of risk they put into SRTs, and we like the new assets like consumer lending that are now available.”
As well as being a less mature market, the US also struggles with a different approach from regulators. One structural impact of that approach is that tranches in the US are much thicker than in Europe, normally covering 0-12.5%. That in turn reduces spreads, and investor demand.
Lanson believes that ultimately a US mezzanine market should and will develop, but adds that it will only happen once US banks deal with their backlog of large portfolios.
So far, large US banks have placed single thick tranches with large investors and capital allocators who have access to leverage and low cost capital.
