SRT investor-issuer relationships evolving

A common gripe among SRT practitioners is that the flood of new investors to the sector has suppressed spreads. However, some believe it has impacted investor-issuer relationship dynamics too.

According to one market participant, this difference in relationships is particularly pronounced between European deals and the deals which have recently been issued in the US. “While the main theme has been too many investors and tightening spreads, the big thing for me is existing investors expect there to be conversations to be had with origination, modelling and credit people, as well as cradle-to-grave data of the exposure to be shared. But these new deals look at pools of resi loans like they’re an ABS, so that isn’t happening.”

They add that while traditional investor-issuer relationships in Europe emphasise ‘risk sharing’, with the two counterparties sitting alongside each other, the tendency of US issuers is to provide a “whole dump of data”, which is less satisfactory.

A second source believes this analysis is somewhat limited to consumer-focused asset classes, like auto and residential loans. “The divergence in relationships differs dependent on the issuer, the deal and the overall strategy. In the case of the prime auto space, where there’s a lot of SRT activity at the moment, much of that is just like any other ABS to be honest.”

They continue: “There’s already an ABS market for auto loans, so a lot of the people issuing these deals are already issuers in the market or are looking to be issuers there. So, they’re just trying to get their capital down with these quite homogenous, commoditised deals.”

This represents a significant difference from the corporate or sub-line deals coming out of the US. “Non-asset-backed deals are far more strategic; perhaps even more so than European deals.”

There are two main SRT structures in the US market: those utilising CDS and those utilising CLNs issued by an SPV. CDS contracts tend to be with one single counterparty, but there are regulatory hoops for issuers to jump through before issuing CDS, whereas CLNs are more straightforward to issue.

CDS-based deals have been referred to as “very bilateral and strategic”, including the Citi and two US Bank deals issued this year.

Meanwhile, some highly syndicated programmes have quietly drawn disdain from some investors. A third source, an investor, tells SCI: “European SRTs are often over-syndicated or done as club deals, whereas US deals need to be bilateral with one single counterparty to a CDS transaction. This makes it a bigger transaction (in the case of CDS), meaning the US banks tend to trade with certain counterparties.”

This essentially means US banks have little choice but to be more involved in issuer-investor relationships. It also seems that US banks have a tendency to execute deals quickly.

The source notes: “You don’t get told in advance in the US. In Europe, there’s a bit more of an established process, as you tend to have a good sense of which banks will issue when.”

The first source suggests that executing a deal “quickly” is precisely what leads to a worse relationship: “The model may be strategic, but does the investor actually understand the risk they are sharing?”

How much of this is just the general evolution of the market? Now SRT is a known quantity in Europe, shouldn’t that mean investors require less handholding?

Our first source answers with an emphatic “no”. They explain: “The investors we’re talking to are very competent and know how banks work. If you have a granular pool of SME loans, you probably don’t need that depth of conversation, so it depends on the asset class.”

They add: “But you need to have those whites-of-the-eyes conversations with the bank team to understand what happens in different scenarios in the protected asset class specifically. That has been the secret sauce of SRT transactions.”

These new dynamics could result in a divergence between new investors and issuers and the old guard. “New investors and issuers will have their own echo chamber, and those of us who really want to interrogate a deal properly will have our own space,” the source observes.

To some extent, the split has already happened. Some new investors have been unhappy with the winner-takes-it-all syndication, complaining that the due diligence required to bid for an SRT deal can be very costly for those who are unsuccessful (SCI 19 April).

Joe Quiruga