Four takeaways from IMN's SRT Symposium

SCI attended IMN’s SRT Symposium at Clifford Chance last week. Based on our takeaways from the conference, here are the four things every SRT enthusiast needs to know:

1. Investor interest

“SRT is seriously hot!” Kaikobad Kakalia, cio of Chorus Capital Management and a speaker on the first panel of the day, told audience members. “Taylor Swift was asking for due diligence just the other day!”

While significant risk transfer may still be a tad too esoteric for popstars, the quip alluded to a serious point. Audience numbers at the event had swelled compared to previous years, due to an influx of new investors to the SRT market attending.

The draws to SRT are three-fold. Increasing RWAs and capital requirements have made the technology an attractive prospect, and a necessary one, given that last year the entire European banking sector was only as profitable as JPMorgan (a single bank).

ESG concerns and the pressing need for an energy transition also play a role. Harry Noutsos, md at PCS, observed: “We realise we need to change our economy – that took 100 years last time, but we need to do it in 15-20 years.”

But one concern with a flood of new investors (as Taylor Swift will have told bankers in their negotiations) is that a bigger entourage means a greater number of non-serious actors. While Kakalia insisted “Covid investors stayed” because the market scaled to support them, other market participants said privately that many of these new investors could be “tourists”, who only stick around while the market is hot.

Charis Edwards, portfolio manager at Orchard Global, asked: “Will investors still be as interested when the spreads continue to go down?”

2. Squeezed spreads

Recent deals have seen spreads tighten, with supply and demand dynamics altering due to the flood of investors in the market. One participant recently estimated that deal spreads are 200bp-400bp tighter than last year, although others dispute this.

Kaelyn Abrell, a partner at ArrowMark, pointed out: “We have US$20bn-US$25bn in the US SRT market – but the banking sector is a trillion dollar market, so we need to keep in context that this is still a growing market with too much money chasing too few assets.”

She advised issuers to have a core group of investors who will “be with you through market problems”.

James Parsons, partner at PAG, added: “The issue is not too many investors, but too many investors for the supply that there is. In the past, supply and demand has been fairly well balanced.”

3. The Endgame

Negotiations over the Basel 3 Endgame drag on, but conference-goers believed that more clarity on the proposals will emerge soon, with the effects less stringent than initially feared. Its conclusion should also offer some clarity to those concerned about tourist investors.

Alastair Pickett, portfolio manager at Chenavari Investment Managers, said: “There are new investors, but the market does tend to find an equilibrium through time. Maybe we are reaching that point where we can find a balance. We need to keep our eyes on the US: the Basel endgame will decide how interested the market is.”

4. Where’s hot?

Finally, panellists provided some indications as to which geographies are the most exciting for SRT investors right now.

Central and Eastern Europe is of interest. Alongside the well-established SRT activity in Poland, issuers in Czechia, Slovakia, Estonia, Hungary and Romania have all started to gear up.

Xavier Jordan, cio at IFC, observed: “CEE will not be as big as western Europe, but it will be very interesting, particularly if you already have a presence with banks in other markets.”

Matteo Palumbo, a vp at Intesa Sanpaolo, said existing markets may also include new areas on investment: “In Italy, we see the local banks have a presence in tourism and other sectors – but we also see a lot of portfolios with space for SRT.”

Further afield, Latin America is also showing signs of life. Ed Parker, partner at Mayer Brown, revealed he had worked on Santander transactions in the region with two unfunded, large portfolio SME deals in Mexico and Brazil, with the latter closing in December.

David Saunders, Parker’s fellow panellist and an executive director at Santander, added: “LatAm came back to the table. We were actually working on a transaction in Chile last year, which we’re hoping to close this year.”

Joe Quiruga