According to sources familiar with the matter, Lloyds Banking Group (LYG.US) is marketing a significant risk transfer (SRT) transaction tied to approximately £500 million (about $681 million) in commercial real estate loans. The transaction is part of the lender's "Wetherby SRT" program, according to people involved.
SRT enables banks to obtain default insurance on loans by selling credit-linked notes to pension funds, sovereign wealth funds, and hedge funds. Through SRT transactions, banks can free up capital by purchasing debt insurance while retaining the underlying assets. Lenders use these deals to improve their solvency ratios and free up funds that would otherwise be tied up meeting regulatory requirements.
Banks typically provide default protection for 5% to 15% of a portfolio. These transactions usually involve selling notes to investment funds, with investors receiving yields above 10% while committing to absorb some losses if loans default.
Other lenders including Italy's Banco BPM SpA, Macquarie Capital, Germany's Deutsche Pfandbriefbank, and UBS are also discussing or finalizing similar transactions. Additionally, European banks such as Santander, BNP Paribas, and UniCredit have pursued SRT deals.
Data shows that in March, Deutsche Bank completed pricing on a $560 million SRT transaction through its Craft program, with spreads 750 basis points above the secured overnight financing rate. The bank's CEO Christian Sewing revealed during an April 29 earnings call that the bank also completed pricing on an SRT targeting its German mid-market loan portfolio.
Sewing told analysts that SRT is one of the tools Deutsche Bank is using to achieve its plan to reduce risk-weighted assets by €25-30 billion ($34 billion) by year-end, and the bank might even "exceed" this target.
As the SRT market continues to heat up, global issuance this year could reach record highs. Investment firm Chorus Capital Management predicts global SRT issuance could reach $35 billion this year, significantly up from an estimated $29 billion last year, with Europe expected to account for the largest share.
According to a survey conducted earlier this year, the global SRT market is expected to grow at an average annual rate of 11% over the next two years.