JP Morgan is in talks with investors about a securitisation of revolving credit facilities associated with European leveraged finance packages, a deal it had originally intended to carry out in 2021 but postponed amid regulatory uncertainty that is now beginning to clear.
An investor with knowledge of the deal said the offering is roughly €200m and it would transfer credit risks associated with €2bn of credit lines. JP Morgan, which is arranging the deal itself, was aiming to take final orders for the deal as early as Friday. The bank declined to comment.
Such transactions, known as significant risk transfers or credit risk transfers, are designed to reduce risk-weighted assets and free up banks’ balance sheets for more lending. The SRT market has been growing rapidly in recent years thanks to greater regulatory certainty, particularly in Europe.
SRT deals typically reference loans to large corporations, small and medium-sized enterprises and consumers, but there have also been a handful of leveraged loan deals from large European investment banks in recent years. Deutsche Bank has issued them through its Loft programme since at least 2018 and Societe Generale is also an issuer.
The motivations for issuing leveraged revolver SRTs are subtly different from the drivers of typical SRTs, according to market sources.
"[With] most of those trades, the purpose for banks is not only or not really to ... get a regulatory capital benefit but as well to free up some capacity on their balance sheet,” said a second investor. “It’s a mixed objective.”
The audience for leveraged loan SRTs is also much more limited than for SRTs of other assets, and not only because the referenced loans are below investment grade.
A large part of the appeal of SRT is that it gives investors exposure to credits that are otherwise hard to find, such as SMEs and other corporations without a presence in the debt markets. This is not the case with leveraged loan borrowers, since investors can gain exposure to them through liquid securities such as CLOs or by holding leveraged loans directly.
Leveraged revolving credit facilities have some advantages over leveraged term loans, though. “RCFs have covenants and better recoveries compared to term loans,” said the second investor. “They are the highest quality within the lev loan space, but still we are dealing with Single Bs and Double Bs."
JP Morgan was ready to launch its transaction in 2021 but paused after regulators began questioning the structures, according to a third investor. SRT activity among US banks has been subdued since then, but there are signs it could take off again after a new regulatory framework is put in place later this year.
Issuance could also be spurred by the expansion of risk-based capital rules to banks with US$100bn or more in assets, which the US Federal Reserve’s vice-chair for supervision Michael Barr recommended in a speech on Monday. The policy would impose tougher capital requirements on regional banks about the size of Silicon Valley Bank, which collapsed in March.