Private credit firms to help expand SRT growth in the USPrivate credit lenders are increasingly pursuing synthetic risk transfers, which have been common practice in Europe and are now a burgeoning investment opportunity in the US as banks seek to offload risk from their loan books ahead of changes in regulation. Asset managers, including Blackstone and KKR, have invested in SRTs, according to sources, agreeing to take the first loss if loans in a portfolio drop in value. The move by private credit lenders to get involved could significantly expand the buyer base for these transactions. SRTs have picked up recently in the US as banks, anticipating the finalisation of Basel III endgame regulations, seek to manage their risk and capital requirements without selling off key assets. Morgan Stanley, JP Morgan and Santander have completed US SRTs in the past year. Large banks have carried out most SRT transactions so far, but market participants expect regional banks to follow suit. "It's possible, even probable, that the US will ultimately be a larger market for SRTs than Europe in the next several years, depending on continuing regulatory progress and adoption by the highly fragmented banking system," said Alan Shaffran, senior portfolio manager and head of the London office at alternative asset manager Magnetar Capital, which has invested in SRTs. Risk transfers With SRTs banks make periodic payments to investors at a fixed interest rate, typically through a credit-linked note, in exchange for protection against the first portion of losses that a pool of assets may incur. According to a European Systemic Risk Board paper, the concept was introduced during Basel II in 2004 to allow banks to reduce their capital requirements if significant credit risk is transferred. It is used in the European Union regulatory framework to refer to capital relief trades. "You are likely going to start seeing them happen in the US much more frequently because there continues to be significant need for banks to optimise their balance sheets," said Avi Korn, co-head of US asset-based finance at KKR. The volume of SRT transactions from US banks could reach more than US$24bn and as high as US$81bn if regional lenders and large banks were to conduct risk transfers on 3.5% of their assets, according to Terry Lanson, managing director at credit investment firm Seer Capital Management. Because SRTs offer steady income, high yields and exposure to high-quality assets, they have drawn the favour of asset managers such as Seer, several of which have set up strategies dedicated to transfers. Attractive assets The underlying assets for SRTs are often part of banks' core portfolios, so they seek risk transfers rather than selling the assets outright. Although SRTs can be expensive for banks, freeing capital can make it worth the cost, said Matthew Bisanz, a partner at the law firm Mayer Brown, who has advised banks in structuring SRTs. Investors in SRTs gain exposure to assets they otherwise may not be able to access, as BlackRock wrote in a March report on risk transfers. Bisanz said SRT yields may range from the high single digits to as much as 15%. "From a risk-return perspective, we think SRTs are more attractive than just about any other investment opportunity which we have right now in credit, including private debt," said Al Alaimo, deputy chief investment officer of Arizona State Retirement System. On Wednesday, AXA IM Alts said it had received a US$400m commitment from the pension fund for its SRT strategy. In Europe, the trade volume is roughly €20bn–€25bn annually, said Milan Stupar, co-head of bank capital solutions and specialty finance at AXA IM Alts. In the past year, SRT transactions have caught on in the US, especially after the Federal Reserve released guidance in September regarding their use in credit risk mitigation and the circumstances under which they could be considered to reduce risk-weighted assets. Since then, Morgan Stanley, Santander, US Bank, Truist and Huntington have re
Bellwether