Olivier Renault, md, head of risk sharing strategy at Pemberton Asset Management, answers SCI's questions

Q: You joined Pemberton at the beginning of December to establish the firm’s new risk sharing strategy (SCI 1 December 2021). Can you provide some background to this move?
A: The aim of the risk sharing strategy is to leverage Pemberton’s strengths: we have significant origination and credit capabilities, with eight offices across Europe. Although the strategy is global in scope, European issuers account for around 80% of risk-sharing transaction volumes, so our European presence will prove extremely helpful in sourcing deals.

Pemberton has around €13.5bn in AUM, as of March 2022, the majority of which is in direct lending funds. Direct lending is a credit-intensive activity, and we have 18 credit analysts dedicated to the asset class.

Bolting on to this expertise will enable me to undertake transactions in both statistical and concentrated pools. And the advantage of having feet on the ground in eight locations is that a direct lending origination could lead to a capital relief trade (CRT) conversation with a client and vice versa.

We’re now in the process of actively raising dedicated money in significant risk transfer (SRT) transactions. Pemberton has a broad set of LPs already and so far I’ve been pleasantly surprised about their strong grasp of the SRT market. I’m also taking a systematic approach to issuers - I’ve spoken to over 45 banks already and many are expecting to issue SRTs this year.

Q: What are the risk sharing strategy’s key areas of focus?
A: In terms of asset classes, we will focus on our core strengths, which are in corporate and SME financing and trade finance/receivables. Over 75% of the credit risk transfer market is represented by corporate, SME, trade finance and consumer finance exposures, so that suits us fine.

From a US perspective, global large corporate deals - such as those issued by Citi and JPMorgan - are very interesting to us. We’re not the best bid for deals referencing retail assets - like autos and mortgages - or mortgage warehouse pools, where prices are in the mid-/single-digits.

The strategy will target first loss and junior mezzanine tranches. We could do some cash deals, but we’ll mainly concentrate on synthetic securitisations, which represent the bulk of issuance.

Q: How will Pemberton differentiate itself from its competitors in the risk sharing space?
A: We believe that the current environment is a great time to launch a risk sharing strategy. We’re starting with a blank sheet of paper - there are no legacy assets in the fund and we can exclude or reduce certain industry exposures that may be sensitive to energy prices or political volatility.

There are a few investors in the space now, but we believe that the combination of Pemberton’s credit expertise and my track record as originator and structurer is a compelling differentiating factor. I have been executing capital relief trades for over 15 years on the sell-side, so I can put myself in an issuer’s shoes and engage constructively with them.

For example, we’re not going to demand changes that would lead to a higher cost of capital for an issuer or mean that they are no longer able to meet the Basel 3 criteria. We want to bring a more thoughtful approach and, for instance, act as a trusted advisor for first-time issuers and guide them towards successful execution.

We saw eight first-time issuers enter the market last year. Getting an inaugural CRT over the line is time-intensive and so can be less competitive – issuers can test a trade with one or two investors, design a deal that works for everyone and investors can often achieve a larger allocation. As an issuer, if you’ve been through the hassle of persuading everyone internally to execute a CRT, you may as well establish a programme and use it as a tool and roll it out across different asset classes.

Q: Which challenges/opportunities do you anticipate in the future?
A: The era of zero losses is over. If the credit market starts to become a little more stressed, banks will have to begin making loss provisions and they will need to think about asset growth. This backdrop represents a good opportunity for us to invest in deals under a new set of conditions.

Effectively, CRTs are all floating rate and therefore provide natural hedges against rising interest rates. Historically, returns have been based on a combination of spread and pricing-in forward rates. For years, market participants have overestimated future rates.

Rates readjustment on the way up is potentially good news for investors. In terms of pricing CRTs, it’s no longer a matter of considering just supply and spreads.

The introduction of simple, transparent and standardised (STS) synthetics is also great news for the market and adoption of the standard has been strong so far. This is one of the reasons why more banks are tapping the CRT market, including standardised banks. An STS synthetics label is not an investment criterion for us, but if it makes CRTs economically viable for banks, that’s helpful for all parties.

This year, we expect to see more than 10 new banks enter the SRT market and over 30 issuers in total. Our analysis finds that the sector has grown by 15% per annum since 2010. On this basis and taking last year’s number of circa 65 deals for US$13.5bn in volume, we could see over US$15bn issued this year.

Corinne Smith