Rapidly growing small banks push for ‘ramp-up’ feature in SRT deals

While the feature could cut costs for small banks by allowing them to lock in favourable pricing, some investors are sceptical about the structures.

Rapidly growing mid-tier banks are looking to issue deals with a so-called ‘ramp-up’ feature — sometimes referred to as a forward flow SRT — that allows the bank to achieve capital relief on assets as they originate loans.

Just a handful of deals have incorporated this structure over the past few years. However, advisors and investors say they expect the feature to become more common as an increasing number of small banks issue SRT deals.

“It’s a natural growth of the market, where you see smaller banks in new regions doing SRT,” said one investor in the market.

Bank Millennium, a growing Polish bank backed by Portuguese bank Millennium BCP, completed an SRT transaction in late 2024 that included the option to upsize the underlying portfolio of loans to corporates and small- and medium-sized enterprises, according to a press release. The European Bank for Reconstruction and Development provided credit protection of up to EUR 66m equivalent in Polish zloty on the mezzanine tranche of the transaction.

Ramp-ups are also being used by large banks. One global bank is currently marketing such a deal aiming to gain capital relief for a specialist section of its business, according to two sources familiar with the situation.

Under a conventional SRT deal, a bank sells tranches to investors that reference the credit risk from a pool of assets, such as corporate loans. The pool may be replenished for an agreed period, before the deal begins to amortise.

Ramp-up structures allow the issuing bank to upsize the deal after a pre-set period, increasing the size of the assets’ credit risk being shifted to investors, and the amount of capital relief the bank receives.

“We’ve had a number of people asking about it and we think that’s a part of the market that’s very much in its infancy,” said a third advisor. “It’s a product that’s the next natural progression for the SRT market.”

For issuing banks, ‘ramp-up’ features are a handy means of locking in pricing at near-record tight spreads. The structures are bespoke, with banks and investors negotiating the length of the period in which the deal can be upsized.

Users of the ramp-up structure cite cost savings for banks. They will not need to return to the market — a costly process for institutions that lack the track record of repeat issuers such as tier-1 banks.

Including the option to upsize deals works best for small- and mid-tier banks that “are trying to grow the asset base of the bank without having to raise new capital”, said a third investor, pointing to Bank Millennium as an example.

“[It’s] a relatively specialised subsidiary of BCP with books growing very quickly. This is a way for them to avoid having to go back to the parent [company] for further capital or go back to the market on a regular basis,” said a third SRT investor.

However, some investors baulk at the idea of writing deals with ramp-up features, as the longer duration may not comfortably fit into their funds’ investment horizons. “Six months? Fine. 12 months? It’s a stretch. Beyond that, it won’t fit into a fund structure,” said a fourth investor.

Three further investors said that ramp-up structures only work if banks agree to tight criteria around the types of credit risk that can be included in the deal. “We call it risk sharing for a reason: the bank has originated the loans on their balance sheet and, after that, they hedge [through SRT]. We don’t want the bank to originate any kind of rubbish because you know you’re passing it on [to investors],” said a fifth investor.