Credit Suisse has closed an innovative transaction transferring risk from its private bank’s business jet and superyacht portfolios. The Swiss bank is one of the most active private banks in both markets.
The $2bn synthetic securitisation frees up Risk Weighted Assets (RWA) improving the economic return of the underlying portfolio. This allows Credit Suisse to reinvest risk capacity into more lending. Credit Suisse says that the transaction offers competitive terms to investors while increasing the capital velocity of the bank by a significant amount.
Although business jet securitisations are regularly issued by Stonebriar Commercial Finance and Global Jet Capital, bankers think that this is the first time that yacht or corporate jet debt has been securitised by a private bank.
Credit Suisse’s motivation for the deal is very different to Stonebriar and Global Jet Capital, which raise cash when they issue bonds. Synthetic securitisations – which typically use a mixture of credit default swaps and bonds – allow banks to transfer the risk from loans and leases. They are not about raising new capital or funding.
But, by removing the risk of a default, the bank no longer needs to allocate regulatory capital (typically cash invested in government bonds) against the possibility of loans going bad. By freeing up this regulatory capital, the bank can keep lending to new clients.
Because the transaction is synthetic, Credit Suisse did not sell the loans and leases, just the default risk. Specialist publication Structured Credit Investor, which first reported the transaction, says that there are more than 100 borrowers in the underlying portfolio. As with other securitisations the names of these borrowers and any details are shared with investors.
If a significant number of clients default, investors lose their right to interest or principal payments. Synthetic securitisations are typically tranched or split into different levels to offer investors different risks and rewards.
Structured Credit Investor says there is a $80m first loss tranche and a $10m second loss tranche. These pay much higher interest than the interest on the underlying portfolio – the first loss tranche offers interest of 11.5% over the Secured Overnight Financing Rate (SOFR) – but are the first to stop paying if there are any losses and therefore carry most of the economic risk. This interest equates to less than 50bps on the underlying portfolio which shows the high quality of the underlying loans.
The super senior tranche which is on top of the first loss tranche and second loss tranche is retained by Credit Suisse. The junior notes are listed on the International Stock Exchange.
Banks regularly use synthetic securitisations to remove risk from mortgage, credit card and other loans. The first synthetic securitisation on a commercial aircraft portfolio was in 2001.
Credit Suisse is expected to reuse the structure for future synthetic securitisations.
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