SCI CRT Awards Issue Oct 19

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Innovation of the Year INNOVATION OF THE YEAR WINNER: FCT JUPITER 2019 Societe Generale’s US$3.4bn FCT Jupiter 2019 transaction has won SCI’s Innovation of the Year Award for introducing a number of ground-breaking structural innovations in connection with the redeployment of released RWA. The deal not only frees up a dedicated capital envelope, whereby capital can be reallocated in favour of positive impact finance assets, but also debuts a pricing reduction feature incentivising the Bank to participate in new Positive Finance lending. The credit protection is structured as a funded financial guarantee and covers a low mezzanine tranche, which was privately placed with Mariner Investment Group’s International Infrastructure Finance Company Strategy (IIFC Strategy), while Societe Generale retains unhedged the thin first-loss tranche and the senior tranche. The credit protection is ‘mutualised’ across the obligors, enabling it to cover a wide scope of assets across Societe Generale’s business units. The portfolio references more than 250 diversified specialised lending assets from both project finance (energy, infrastructure, metals and mining) to asset finance (shipping, aircraft, real estate) and corporate assets in over 40 countries. The transaction features a “ THE TERMS OF THE TRANSACTION INTRODUCE A PRICING INCENTIVE FOR ADDITIONAL IMPACT ALLOCATION ” four-year replenishment period, during which amortisation of the underlying assets can be compensated for by the addition of new eligible assets of the same type. As well as being one of the largest synthetic risk transfer deals referencing infrastructure assets, Jupiter distinguishes itself through significant innovation in the impact investment arena via embedded conditionality requirements. Through a first-of-its-kind Positive Impact Capital Allocation factor, the Bank has committed to dedicate 25% of the risk-weighted asset reduction within three years to reduce the capital burden for new Positive Impact Finance lending. The Positive Impact Capital Allocation feature, whereby credit risk transfer effectively frees up a dedicated capital envelope, serves to “ JUPITER DISTINGUISHES ITSELF THROUGH SIGNIFICANT INNOVATION IN THE IMPACT INVESTMENT ARENA ” absorb and offset some of the RWA density of Societe Generale’s impact lending book. This, in turn, enables the Bank to proactively attribute a lower effective risk weight for borrowers whose projects correspond to certain positive impact transactions. Furthermore, the terms of the transaction introduce a pricing incentive for additional impact allocation. If Societe Generale redeploys 50% of the RWA release towards Positive Impact Capital Allocation factor by the end of the replenishment period, the coupon on the transaction will be reduced, thereby enhancing its capacity to originate Positive Impact Finance projects. By reallocating the released capital from the legacy loan book and dedicating it to enhance the capacity to lend to positive impact sectors, the parties aim to strongly advance the UN Sustainable Development Goals. This transaction helps Societe Generale increase lending headroom, while also enabling the Bank to pursue its commitments related to posit ive impact. It is hoped that the framework will also serve as a model for transactions in the future, both for the IIFC Strategy and other investors. The transaction is structured in compliance with the new Securitisation Regulations and significant risk transfer rules. HONOURABLE MENTION: SIMBA ING Bank’s capital relief trade for its German subsidiary ING DiBa was noteworthy for being the first unfunded significant risk transfer transaction executed between a European bank and an insurance counterparty (Arch Mortgage Insurance). Dubbed Simba, the deal references a €3bn subset of a German residential mortgage loan portfolio and was the first mortgage SRT to be approved by the ECB. The transaction helps ING future-proof its lending businesses by ensuring it has the flexibility to address changes in the regulatory and competitive landscape in the future, and by creating an additional balance sheet management tool that is being considered for other portfolios in the future. By transferring the economic risk on asset portfolios, the tool releases capacity for additional lending. 18 SCI Capital Relief Trades Awards | October 2019 www.structuredcreditinvestor.com
Investor of the Year INVESTOR OF THE YEAR WINNER: EUROPEAN INVESTMENT FUND The European Investment Fund (EIF) provides an unparalleled level of support to the capital relief trades market in Europe, bringing numerous synthetic securitisations across the line. The EIF is not only a key driver of innovation, participating in numerous benchmark transactions across jurisdiction and asset class, but it has also helped open up the risk transfer market to a broader range of participants. The multilateral development banks is SCI’s Investor of the Year. In terms of benchmark deals, one standout during the awards period was BCC Grupo Cajamar’s €972.1m significant risk transfer transaction, IM BCC Capital 1, which will provide over €1bn for new investment in SMEs in rural areas and agri-food companies. This was the first cash SRT issued by a standardised bank and the first risk-sharing transaction by a standardised bank that involved both the EIF and private investors. The EIF’s securitisation team notes: “It also featured a number of different players, including the EIF, EIB and ICO, which was unusual and it is not always easy to balance the different interests of all the different parties. It was a very important deal for a standardised bank and sets a template that can be imitated by other banks, particularly because it provided funding and capital relief.” Equally notable, the EIF closed the firstever synthetic trades in Poland – which, in a non-euro currency, helps to build market confidence in the use of synthetic securitisation across Europe. The fund executed guarantees on senior and mezzanine tranches for Alior Bank and one of the largest Polish banks, thereby enabling both to release regulatory capital and enhance their capacity to provide SME financing with improved terms. As well as trendsetting transactions, the EIF has helped to broaden the universe of participants involved in the capital relief arena. The team explains: “We have done such a good job that we have now expanded to the point that we are now needing to bring in external credit funds to spread the load, so to speak. As well as this, we are even talking “ IT ALSO FEATURED A NUMBER OF DIFFERENT PLAYERS, INCLUDING THE EIF, EIB AND ICO, WHICH WAS UNUSUAL AND IT IS NOT ALWAYS EASY TO BALANCE THE DIFFERENT INTERESTS OF ALL THE DIFFERENT PARTIES ” to insurers that are thinking about entering the risk transfer market.” As part of this process, the EIF will front the whole capital structure and transfer the first loss position – and sub-investment grade tranches – to the credit fund, while the originating bank will hold onto the senior notes. The EIF will still be very much involved with the transaction and the entire process will be very transparent, as per the EIF’s working principles. The team comments: “We are piloting three such transactions utilising a third-party credit fund, all backed by SME loan collateral from three different jurisdictions. They should be announced before the end of the year.” The team continues: “There are certain logistical challenges involved in taking on third parties, and we generally have to do reshuffles every so often. Incorporating thirdparty funding is part of the mandate under Basel 4.” Internally, the EIF has streamlined the deal timeline through the development of new technology, developed by the legal team. As such, the relevant documentation can now be put together in a matter of minutes through the use of templates, rather than writing everything from scratch. The EIF’s securitisation team explains: “Now we can put together 80% of the deal almost instantly, leaving just the 20% to do “ WE ARE PILOTING THREE SUCH TRANSACTIONS UTILISING A THIRD- PARTY CREDIT FUND, ALL BACKED BY SME LOAN COLLATERAL FROM THREE DIFFERENT JURISDICTIONS ” www.structuredcreditinvestor.com SCI Capital Relief Trades Awards | October 2019 19
Page 1 and 2: Securitisation innovation in focus
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Page 33 and 34: CRT News Legacy SRT call possibilit
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SCI CRT Awards Issue Oct 19

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