In June, Standard Chartered sold a credit linked note issued to protect the mezzanine tranche of a $3bn portfolio of trade receivables. And on Tuesday, Raiffeissen Bank International announced it cut its risk weighted assets by about €340m through selling the junior risk piece of a synthetic securitization linked to commercial real estate loans to New York based investor Mariner Investment Group.
But regulators including the Bank of England have made it clear that they are suspicious of synthetic securitizations. The instruments gained immediate notoriety, of course, at the onset of the 2007/2008 financial crisis. Then, collateralised debt obligations of credit default swaps on other securitizations – backed by poorly underwritten real estate loans–magnified losses for investors, infamously AIG among them.
At the Global ABS conference in Barcelona in June, the Bank of England’s executive director of prudential policy said in a keynote address: “The market also needs to be based on genuine risk transfer, not regulatory arbitrage, such as synthetic sales of thin mezzanine tranches intended to maximise the reduction in regulatory capital at minimum cost.”
Without doubt, bad practices occurred. These included the now infamous hiring of Goldman Sachs by Greece to hide the extent of its indebtedness via cross-currency swaps, and the inclusion in some pre-crisis CMBS CDS documents of language that allowed deals’ originators to use CDS proceeds to invest in their own deal. These proceeds should have been held to pay off investors in the case of a credit event.
RBI’s deal is a good example. Mariner, which operates funds specifically targeting synthetic exposures to infrastructure, energy, transport and, now, commercial real estate, took down an undisclosed junior risk piece of a synthetic securitization backed by loans originated by RBI in its core geographical areas, Germany and Austria.
The fund has direct access to the underwriting criteria the bank used to make the loans, and the two parties must bilaterally agree on any further loans to be included as underlying collateral amortises. Mariner is thus able to set out credit criteria for its investments and source exposure to assets, originated by an organisation with local expertise, that meet those criteria. In return, RBI notches four much-needed basis points to its common equity tier one ratio, and cuts its risk weighted assets by €340m.
Synthetics can be used to good effect for the parties involved. What is needed, much as we are seeing in Europe’s true sale securitization market, is more a measure of standardisation. Many European banks are still in need of deleveraging, and synthetic securitization is one way they can legitimately place risk with non-financial counterparties and free up money to lend.