SCI CRT Awards Issue Oct 19

CRT News
Legacy SRT call possibility
| 20 September
Banks could potentially call legacy capital relief trades (CRTs) next year,
as higher senior risk weights for these deals kick in, following the end of a
one-year grandfathering period. Higher senior risk weights could render
the deals less efficient and justify calling and restructuring a transaction,
but whether calls are exercised or not will depend on what counts as a
regulatory change and the specificities of each trade.
Legacy capital relief trades that were completed before January 2019
have received a one year grandfathering period that ends on 31 December
2019. The revised Capital Requirements Regulation (CRR) stipulates
higher risk weights for the retained senior tranches, unless transaction
criteria match article 270 of the CRR.
According to the article, STS risk weights can only be provided to
synthetic securitisations that reference SME portfolios where the counterparty
is an SSA, such as the European Investment Fund or an institutional
investor who provides funded protection.
Additionally, new rules that specify escalating risk weights based on
the maturity of a tranche have the potential of further reducing the efficiency
of the transactions. The EBA’s guidance on tranche maturity, in
particular, artificially produces longer weighted average maturities for
funded deals (see SCI 23 August).
CRTs that were completed after January 2019 have addressed the
higher risk weights that the new regulations demand through the application
of structuring techniques, such as the dual tranche technique (SCI
26 January 2018). However, such tweaks may not solve the issue for all
legacy transactions given the specificities of each deal.
Consequently, banks could potentially call their risk transfer trades and
issue new ones. According to Jo Goulbourne Ranero, consultant at Allen
and Overy, “the new requirements for legacy deals could well facilitate the
exercise of regulatory calls but depending on their precise terms, such as
whether retained senior risk weights increase significantly, especially given
the absence of offsetting STS-related reductions in capital requirements.”
She continues: “There is a clear change of law and a potential impact
on the distribution of economic benefits derived from the transaction by
any of the parties in the transaction, as required for a valid regulatory call.
However, the regulatory calls are exercised at the originator’s discretion
and whether they will be triggered or not will depend on several factors
including investor or reputational concerns.”
Steve Gandy, md and head of private debt mobilisation, notes and
structuring at Santander Corporate and Investment Banking comments:
“The new regulations will reduce the efficiency of legacy deals so
regulatory calls could potentially be triggered. In that scenario we would
have to issue new transactions and sell additional tranches or opt for
SSA and/or unfunded insurer deals, if existing investors aren’t willing to
accept the lower returns that come with thicker tranches. The returns will
have to be reduced, otherwise we will be paying the same premium for a
lower amount of capital relief.”
Santander has already utilised the SSA option in its last Magdalena
deal (SCI 9 July), where the EIF stepped in to finance the senior mezzanine
tranche and, as a result, the Spanish lender introduced an additional
mezzanine tranche that provides additional capital relief and lowers the
cost of capital. However, if portfolio characteristics imply shorter maturities
for the senior retained tranches – and lower risk weights - then selling
additional tranches may be unnecessary.
Nevertheless, several issuers are more certain of a scenario that
doesn’t involve any triggering of regulatory calls. An issuer comments:
“I suspect most banks will attempt to sell additional mezzanine tranches
over and above the initial ones instead of exercising any regulatory calls. I
reckon that only legacy SRTs printed before 4Q17 may be called since the
revised securitisation framework was finalised then and therefore might
be deemed a change of regulation when considering a call trigger.”
Similarly, an md at a large European bank remarks: “We issued mezzanine
tranches on top of our equity so there was no need to call a deal.
We chose this option because the deals were performing well so we were
confident that we could get an attractive pricing.”
However, much will depend on what counts as a regulatory change
and that remains far from clear. According to a legal expert, “if you issued
a deal this year, when the revised CRR was already in force, then there
would arguably be no regulatory change when the revised risk weights
come into effect in 2020 because the change occurred in 2019 – it’s just
that part of that legislation had a forward start date.”
The legal expert continues: “If you issued pre-2019 when the legislation
was in draft form, then you might be able to argue that there is a
change. However, if the contractual wording has regard to what is in the
issuer’s contemplation at the time of issuance then there could be less of
an argument, if the provisions of the draft legislation on the issue date and
the final legislation are similar. Yet if they do differ one could say that the
issuer knew that there would be changes.”
Finally, banks will have to consider the specificities of each deal.
A structurer at a large European bank concludes: “If the change in the
Securitisation Regulation was not contemplated at the time a transaction
was executed, you still have to show that the change in regulations has an
adverse impact on the efficiency of the deals. However, the impact of the
new regulations on a grandfathered deal will depend on the specificities
of each deal; some deals may actually benefit from the new regime.”
Stelios Papadopoulos
www.structuredcreditinvestor.com
SCI Capital Relief Trades Awards | October 2019
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