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Secret structured credit product becomes talk of the town as US opens up
by Tom Davidson
What was once an opaque corner of structured credit has been in the spotlight, as the booming SRT market draws attention from growing numbers of banks and investors.
Significant/synthetic risk transfers (SRTs) allow banks to buy protection on their loan portfolios to release regulatory capital or manage risk. Previously a predominantly European strategy, they have recently expanded into the US.
Once a bank has identified a portfolio of assets, third-party investors synthetically take on the first-loss risk. The assets therefore stay on the bank balance sheet, but it gains significant regulatory capital relief.
Data on deal volumes in the fully private and mainly bilateral SRT market is hard to come by, but market participants estimate there to be between USD 250bn to USD 300bn of SRTs.
Some recent examples of fundraising shine light on the growing interest from LPs. At the end of April AXA IM Alts announced it had been awarded a USD 400m investment mandate by the Arizona State Retirement System for an SRT strategy. Cheyne Capital has also been in the news as it re-entered the SRT market, targeting USD 2bn for the strategy.
Deborah Shire, deputy head of AXA IM Alts, said: “A lot of our clients want to increase their private debt allocations, but also want to diversify their holdings. SRT is complementary to other private credit, and now has a long track record. We started investing in SRTs in the early 2000s, and across more than 100 investments only one didn’t return all the capital.”
Demand from US LPs is expected to grow as local banks get involved in the market and reach out to their existing partners, mirroring the process seen in Europe. Demand from European pension funds jumped after Nordea marketed a deal a decade ago. Local LPs approached directly about that SRT liked what they saw, and the rest is history.
Initiating an SRT programme can be time‑consuming
Frank Benhamou
Portfolio manager
Cheyne
The returns investors should expect from SRT trades are hard to pin down. As well as being private, structures are bespoke.
“Structured credit products such as CLOs have undergone a significant standardisation in both structure and portfolio composition. However, the SRT market remains notably diverse, with substantial variation observed between each transaction,” said Frank Benhamou, a portfolio manager at Cheyne.
“While some banks focus on SRTs linked to investment-grade portfolios, others target high-yield assets. Moreover, disparities exist in terms of structures, choice of asset classes, portfolio parameters, tranche sizes and other factors. Consequently, coupon rates can exhibit significant variability, ranging anywhere from 7% to 12% above the base rate.”
The European SRT market is booming, with activity spreading from the largest banks to regional players, with many investors pointing out the entry of Greek banks on the scene.
But US banks are the real talking point. Although occasional users of SRTs in the past, they were entirely out of the market from 2022 until late 2023 after the Fed put a hold on transactions. That pause is now over, and expectations are running high. Som-lok Leung, executive director of credit managers’ body the IACPM, said: “Many people are focused on the finalisation of the Basel Endgame, as demand from US banks is primarily driven by a need for capital relief. At the same time, though, banks are also interested in using SRTs for credit risk mitigation. In our last survey of our members, SRT was the second most important market tool for credit risk management.”
Benhamou cautions investors not to get overexcited. “It’s essential to recognise that initiating an SRT programme can be a time-consuming process for banks. There will be steady and consistent growth in the US over time... However, it would be unrealistic to expect a surge in SRT activity.”
