Lloyds Bank (LYG.US) joins the SRT trading boom: plans to sell £500 million in related products to raise capital levels

The Zhitong Finance App learned that, according to people familiar with the matter, Lloyds Bank (LYG.US) is selling a major risk transfer (SRT) asset associated with a commercial real estate loan of about 500 million pounds (about 681 million US dollars). The deal is part of the lender's “Wetherby SRT” project, according to relevant sources.

SRT enables banks to insure loans against default by selling credit-linked notes to pension funds, sovereign wealth funds, and hedge funds. According to reports, through SRT transactions, banks can release capital by purchasing debt insurance on the premise that assets are preserved. Lenders use these transactions to increase their solvency ratios and free up funds originally used to meet regulatory requirements. Banks usually provide default protection for the 5% to 15% portion of an investment portfolio. This type of transaction usually sells notes to investment funds, and investors can obtain a yield of more than 10% while promising to bear part of the loss when the loan is defaulted.

According to reports, other lenders such as Bank of Italy Banco BPM SpA, Macquarie Capital, German mortgage bank Deutsche Pfandbriefbank, and UBS are also discussing or finalizing related transactions. In addition, European banks such as Santander, BNP Paribas, and UniCredit Italia have promoted SRT transactions.

According to the data, in March, Deutsche Bank completed the SRT transaction pricing of 560 million US dollars through the Craft program, and the interest spread was 750 basis points higher than the guaranteed overnight financing rate. The bank's CEO, Christian Sewing, revealed in a telephone earnings conference on April 29 that an SRT pricing for a German medium-sized enterprise loan portfolio has also been completed. Sewing has revealed to analysts that SRT is one of Deutsche Bank's tools to achieve its plan to reduce risk-weighted assets by 25 billion to 30 billion euros (34 billion US dollars) by the end of the year, and the bank may even “exceed” this goal.

As the SRT market continues to heat up, the global distribution scale may reach a record high this year. Professional investment agency Chorus Capital Management predicts that global SRT issuance may reach 35 billion US dollars this year, a significant increase from the estimated 29 billion US dollars last year, of which the European market will account for the largest share. According to a survey earlier this year, the global SRT market is expected to grow at an average annual rate of 11% over the next two years.