(Bloomberg) — Market participants are growing increasingly concerned about the credit risk from significant risk transfers, a type of capital relief for banks, amid warnings from watchdogs that they could pose a risk to financial stability.
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A series of surveys show respondents have been negative or neutral since June on credit risk across multiple types of SRTs in the US and Europe, according to Structured Credit Investor, a financial information provider.
Global watchdogs have been monitoring the risk transfers because of the danger that the transactions, which are often bought by private credit funds, could make banks look stronger than they are. The Federal Reserve, Bank of England and European Central Bank have been discussing the market as part of a larger dialogue on the nexus of risk between traditional lenders and non-banks, according to a person with knowledge of the matter.
Banks use SRTs to offload part of the risk of credit losses from corporate and consumer loans, shifting that exposure to investors in return for regular payments. That frees up capital for the traditional lenders to lend in more profitable areas. Outstanding SRTs globally have reached around $70 billion, according to Chorus Capital Management, compared with around $50 billion a year ago.
The BOE’s Prudential Regulatory Authority is closely monitoring the risk transfers because of their growth but has yet to see anything troubling, the person with knowledge of the matter said. So far, losses have been modest and none of the UK transactions has seen banks taking a hit, they said, asking not to be identified discussing confidential matters.
Barclays Plc, for example, has only claimed about £250 million ($317 million) in credit losses on portfolios subject to risk transfer deals since 2016, the lender disclosed at the end of the second quarter.
Still, “such structures retain substantial risk within the banking system but with lower capital coverage,” the International Monetary Fund warned in a report last month.
Bloomberg Terminal users can click here for a detailed look at the synthetic risk transfers, a type of SRT, issued by lenders
New Investors
A surge in the number of new investors looking at the space is causing risk premiums to fall, meaning buyers are being paid less for taking on risk that some have less expertise in analyzing.
Spreads are now so tight that some private credit managers are opting to invest in collateralized loan obligation equity instead, according to a partner at one SRT investor. CLO equity holders receive cash flows that are left over after other investors in the structures are paid.
Huntington Bancshares Inc. issued an SRT earlier this year to optimize its balance sheet rather than reduce credit risk, Chief Financial Officer Zach Wasserman said in an interview.
“It was really just this goal of both accelerating lending and increasing capital during 2023 and 2024,” he said. Use of SRTs by the firm will be “tactical and opportunistic” going forward, he said, adding this year’s deal was done because it was “incredibly” efficient from a cost of capital perspective.
But that may not be the case for much longer, S&P Global Ratings said in a report this month.
“As SRT supply increases, transaction pricing may not remain as favorable to issuers as it has been so far this year,” according to the bond grader.
Week in Review
Bonds from America’s most creditworthy companies have rallied to levels unseen in a quarter-century in the wake of Donald Trump’s political comeback. Now, some market watchers say the euphoria is concealing trouble ahead.
Defaulted Chinese builder Sino-Ocean Group Holding and a key group of its offshore bondholders are locked in a standoff ahead of a vote on its restructuring plan next week.
Buyout firms have sparked controversy by borrowing money against their portfolios. Now, a corner of the banking industry is being tapped to help finance funds that do NAV lending, a sign of the growing maturity of this type of financial engineering.
Banks are getting ready to submit final offers to Brookfield Asset Management for a debt package of about €11 billion ($11.6 billion) to back the buyout of Spanish pharmaceutical producer Grifols SA.
Chinese tech conglomerate Alibaba Group Holding Ltd. is considering an offering of bonds totaling the equivalent of about $5 billion as soon as this month.
Investors are piling into US leveraged loan ETFs, betting that President-elect Donald Trump’s policies will potentially boost inflation and push the Federal Reserve to keep interest rates higher for longer.
Chemical maker TPC Group Inc. is looking for about $575 million of fresh financing less than two years after exiting bankruptcy.
High demand for Additional Tier 1 bonds is allowing banks to add in clauses that give them more flexibility over when and how they redeem the risky debt.
McDonald’s Corp. sold its first Swiss franc-denominated bond since 2016, with the deal coming in the wake of an E. coli outbreak and disappointing third-quarter results.
Fosun International Ltd. sold a $300 million note, the Chinese conglomerate’s first US-currency debt offering in over three years.
DirecTV intends to terminate its planned acquisition of Dish Network Corp. by Nov. 22 if bondholders don’t agree to a debt exchange.
Diamond Sports Group won court approval of a restructuring plan that hands control of the bankrupt sports broadcaster to lenders and blesses a multi-year agreement to stream games on Amazon.com Inc.’s Prime Video channels.
Wellpath Holdings Inc., one of the largest providers of health-care services to prisons and jails across the US, filed for bankruptcy.
A surge in private-credit funds and record local bond sales are helping Brazil’s biggest lenders snag investment-banking market share from US competitors.
On the Move
Citadel, the hedge fund founded by billionaire Ken Griffin, has hired Elliott Investment Management partner Nabeel Bhanji in one of the industry’s top defections this year.
Atlas SP Partners, the structured-credit unit of Apollo Global Management Inc., has named Carey Lathrop as its chief executive officer, three months after the exit of his predecessor Jay Kim.
HPS Investment Partners has hired Gopal Narsimhamurthy, former global head of fund ratings at Kroll Bond Rating Agency.
Blackstone Inc.’s credit and insurance unit has hired Jean King from Oak Hill Advisors as a managing director in its private credit team.
Eden Global Partners hired former Citigroup Inc. banker Alberto Pandolfi to help the New York-based merchant bank expand its investment and advisory business.
Wall Street bonuses are expected to climb across almost all sectors of the industry for the first time since 2021. Bankers who help companies sell debt may see the biggest gains, with payouts set to rise as much as 35% as deals pick up and capital markets rebound.
