Optimism prevailed at SCI's recent Capital Relief Trades Seminar, where panellists were bullish on the future of the risk transfer market. While capital relief trade activity has slowed this year compared to last, speakers concurred that issuance will grow in 2018, with a greater number of issuers and asset classes emerging.

Kaikobad Kakalia, cio, Chorus Capital Management, said: "Towards the end of 2016 there was a big rush to complete deals and so issuance in 1H17 looked lower in comparison. However, this may not be the case for the whole year, as issuance typically picks up in Q4. I would also add that there have been a number of large bilateral deals done in 2017, which were less visible publicly, and fewer investors participated."

He added that the year ahead should see an uptick in issuance on the back of regulatory agreements and that the synthetic model will persist. "For 2018, I am bullish and I think it will be a strong year for issuance. Regulatory changes, their implementation timelines, as well as grandfathering, should be agreed. Once uncertainty is reduced, issuance will start to pick up."

He continued: "Implementation of IFRS 9 could also create an incentive for banks to use risk-sharing transactions in order to mitigate capital impacts. 2018 will see more trades issued. We expect most capital relief trades to be issued in synthetic securitisation format, although it's possible that we will see growth in true sale transactions as well, as banks securitise consumer assets for capital relief purposes."

Francesco Dissera, md at StormHarbour, also commented on 2017 being a "year of pause" for the CRT sector, with only around 13 deals completed so far. He said, however, that this is mainly because the period towards the end of last year saw a flurry of activity, with issuers trying to meet the expected grandfathering period.

Of 2018, Dissera echoed Kakalia's expectation for greater CRT issuance, but suggested that other challenges may appear. "We expect to see more issuance in southern European jurisdictions, greater issuance of CRTs in the next 12-18 months and to see more support from the supranationals (EIF, EIB inter alia with the Investment Plan for Europe)."

He added: "I think we'll also see a reduction in the traditional investors and it will be harder to maintain double-digit or high single-digit returns from the sponsors. We may also see greater focus on contingent CRT transactions, following the new ECB guidelines on provisioning on NPEs."

Regarding the development of funded versus unfunded transactions, panellists agreed that while there is some demand for unfunded transactions, funded transactions will continue to dominate. Part of the reason for this is that there is a perceived volatility associated with unfunded deals. Unfunded deals are therefore counterproductive, according to one panellist, as that is what CRT transactions are essentially aiming to minimise.

Kakalia observed: "I believe funded transactions will dominate; however, there is space for unfunded transactions. I think banks look for unfunded protection in asset classes where funded transactions are inefficient. A combination of funded and unfunded tranches could also be an option."

In terms of what the growth areas will be for 2018, panellists agreed that the future will see new players coming to the market and existing firms becoming repeat issuers. Panellists also suggested that 2018-2019 will see the emergence of CRT deals for shipping and aviation, alongside a growth in the number of renewable assets involved in CRTs, such as wind and solar-based assets.

Kakalia said: "I think we'll see more of the same. Large corporate and SME loan transactions will continue to dominate issuance. Banks which have issued their first transactions in 2016-2017 will return with repeat transactions. We should see the number of issuers and assets classes expand further. I also believe that we will see more transactions focused on green assets: ESG compliance features will grow in popularity."

Dissera agreed that the coming months will see more similar transactions and repeat issuers coming to the market, but added that not all CRT transactions will follow STS guidelines. He concluded: "We will possibly get a greater number of non-STS backed collateral. It's not yet applicable to the synthetic market, but it is likely that some 'portfolios' that do not fit in the STS definition (e.g. lack of granularity) will not be supported within the STS definition. I agree too that we'll see more long-dated assets."

RB