Europe's banks deploy SRT scalpel across private credit exposures
Europe's banks deploy SRT scalpel across private credit exposures.
European banks are increasingly deploying synthetic risk transfer (SRT) transactions to manage private credit exposures, using bespoke transactions to free up capital, reduce concentrations and support continued lending.
Banks in Europe are using SRTs to manage private credit exposures across infrastructure debt, subscription lines and NAV facilities.
Exposures to private credit and private equity funds — particularly fund-finance structures — are viewed by investors as high quality, and trade at tight spreads.
Capital relief remains the primary driver as private credit loans attract high risk weights, creating strong SRT incentives.
Heightened regulatory scrutiny around financing provided to SRT investors and concerns over back leverage have prompted some banks to reduce the availability of repo funding.
"Banks have been active in the direct lending space in the past few years, sometimes with the intention to write large tickets that can push them above their internal borrower limits," says Alan Shaffran, senior portfolio manager and partner at Magnetar. "This creates an incentive to find partners to share that risk."
Monsur Hussain, head of markets research at Fitch Ratings, notes that European banks are facing "increasingly pointed regulatory scrutiny over their private credit exposures," while internal risk teams are looking to actively manage these positions, adding that in this context, SRT transactions "can be likened to a scalpel, allowing banks to target exposures with precision — whether at the level of individual obligors, sectors or geographies."
Broad scope Private-credit SRTs span a broad range of assets — from infrastructure loans financing renewable energy projects, data centres and project finance, to shipping loans — while subscription lines and NAV lending remain among the market's largest segments.
"What we are seeing are SRT-like transactions aimed at optimising bank balance sheets, where direct-lending-type loans or club-deal loans increasingly sit alongside broadly-syndicated leveraged loans," Shaffran notes.
Investors note that the scope of private-credit-related SRTs goes well beyond direct lending portfolios.
The SRT market has been used to distribute both direct private-credit exposures — such as highly leveraged loans backing LBOs — and exposure to private credit and private equity funds or investment structures such as BDCs, says Matthew Moniot, co-head of credit risk sharing at Man Group. In contrast to high leverage LBO loans, fund-level exposures are considered to be of a very high quality, and as a result they trade at extremely tight spreads, Moniot notes.
Behind the curtain The SRT market is fiercely private and relationship-driven, but details of a handful of transactions offer a glimpse into how banks are deploying SRTs.
One such deal was completed by BNP Paribas in December last year, with the French lender issuing its first synthetic securitisation referencing RCF exposures to US Business Development Companies (BDCs). This transaction — thought to be the first such deal executed by a European bank — referenced a portfolio of $1.25 billion and is understood to have been placed with Golub.
At the outer edge of the SRT framework, law firm A&O Shearman in June publicised its advisory role in two credit risk transfer transactions referencing single loans with an aggregate notional amount of roughly €630 million in the digital infrastructure sector.
Meanwhile, BBVA was in late June expected to close an SRT transaction that would reduce its risk exposure to AI infrastructure loans.
Sources consulted by LCD News said it is difficult to determine whether SRT activity linked to private credit is growing faster than the broader SRT market, given the rapid expansion of risk-transfer transactions across an increasingly diverse range of asset classes. What appears more likely — at least for now — is that banks are using SRTs to remain within internal risk limits and concentration thresholds set by their risk management teams.
According to Alan McNamara, managing director in Howden CAP's Balance Sheet Advisory & Structuring business, banks are seeking to free up capacity on financing lines provided to sponsors or funds (notably through asset-based lending), either because they are approaching internal borrower concentration limits, or because they want to de-risk parts of their portfolios to continue lending and expand relationships with their clients.
Frank Benhamou, risk transfer portfolio manager at Cheyne Capital, points to the growing number of "opportunistic transactions." In his view, SRTs referencing private credit portfolios are likely to become increasingly prevalent as the market continues to expand across a broader range of asset classes.
