A growing number of investors is moving to provide beleaguered lenders with special targeted transactions to help them share their risks – for lucrative fees – through a fast developing class of “regulatory capital relief” funds.
Interest in such vehicles comes as banks, particularly those in Europe, scramble to develop new funding tools and identify ways of protecting capital, as they grapple with the prospect of sovereign defaults, forced recapitalisations and new Basel III rules.
The schemes typically involve writing partial guarantees for the assets sitting on banks’ balance sheets through bespoke securitisations, meaning insurance companies or funds absorb the losses on the riskiest portions of banks’ loans.
Such transactions allow banks greatly to decrease the amount of money they must hold in reserve as a backstop for potential losses in their lending books.
David Peacock, co-head of corporate credit at the Cheyne Capital hedge fund in London, which has been striking such deals with banks since 2004, says: “This is a means of capital raising which has been used over a number of years, but the need now is much more acute than it has ever been before.
“There is a huge amount of interest now.”
Axa Investment Managers has launched a closed-end fund that will provide junior protection on banks’ loan portfolios. The investment arm of the French insurance group has already raised €80m and is aiming to increase that to €150m by January next year. Axa has previously done deals with some of Europe’s biggest banks.
Alexandre Martin-Min, AXA’s head of structured credit investment, said: “There’s a need for capital for the banks and an incentive for them to do these kind of trades.
“For Axa, it gives us access to a wider universe of investment-grade debt.”
Other companies known to be raising money for such projects include Christofferson Robb & Company credit fund manager, with a fund aimed at “bank capital regulatory relief” investments.
The World Bank was revealed last month to have invested $100m in the fund.
Mr Peacock says: “For investors this is a great way to isolate the core business of banking without the systemic risks of financials”.
Although relatively small, such funds can be used to reduce risks on huge bank lending books.
It is not the first time that banks have teamed up with insurers and funds to help ease their capital constraints.
So-called collateral or liquidity swaps involve banks agreeing to switch their assets for more liquid ones, such as government bonds, with insurers and pension funds. The banks receive high-quality assets they can use for their required ‘liquidity buffers,’ and the funds and insurers receive higher-yielding securities.
The swaps have been criticised by regulators, including the UK’s Financial Services Authority, for potentially increasing links within the financial system.
Regulators have also warned that higher capital requirements for banks may squeeze risk into the less-monitored ‘shadow banking’ system of so-called financial intermediaries.
Simon Gleeson, partner at the Clifford Chance law firm, said: “It can certainly be done, many insurers and funds are currently flush with cash and wondering what to do with it.
“But it would be about how you structure it. It may be an awkward and difficult technique.”
