Deutsche Bank has sold the riskiest tranche of its global trade finance portfolio, achieving regulatory relief on its overall US$3.5bn of trade finance assets.
The bank performed a synthetic collaterised loan obligation (CLO), selling only the first loss tranche part of its portfolio (around US$216mn) to seven European and American investors. This is the largest-ever securitisation of trade finance assets.
Similar to traditional CLOs, where a portfolio of assets is divided into different risk segments (the riskiest also bringing the highest returns), then sold off to investors, a synthetic CLO is actually unfunded, meaning the assets sold are staying on Deutsche Bank’s balance sheet, but the risk is effectively passed to the investors.
By getting rid of a percentage of its portfolio that is higher than the default percentage of its overall trade finance assets, the bank has achieved risk-weighted assets (RWA) reduction on its whole portfolio. “US$3.5bn is the total portfolio, of which the first loss tranche loss is 0 to 6.5% of that, equating to approximately US$216mn. That’s the piece that we have placed with the market. But by selling that piece, it gives us significant RWA relief on the whole portfolio. We’ve kept the senior piece of the portfolio,” Guy Brooks, head of distribution and credit solutions at the bank, tells GTR.
He adds that the facility (named TRAFIN 2015-1) has a tenor of five years, though the short-term trade finance assets included in the sale will be replenished on a monthly basis.
By selling [the first loss tranche], it gives us significant RWA relief on the whole portfolio. Guy Brooks, Deutsche Bank
Risky tranches are usually sold to risk-hungry investors, but in this case the mix includes family offices, hedge funds, one insurance company and one pension fund – a development that marks the trust that traditionally risk-averse investors place in trade finance assets.
“On the whole, insurance companies and pension funds put the bulk of their money in low-risk investments. But they’ll have a segment to look at longer dated higher yielding assets, with the added advantage of this particular transaction being that the underlying asset class of trade finance has historically has low default rates, non-correlation and offers good diversity away from other traditional debt instruments. Whilst they want a bit of yield, they like the fact that it’s a lower-risk asset class,” explains Brooks.
This is Deutsche Bank’s third such transaction, and the bank plans to use this platform again in the future to reduce risk-weighted assets and manage its trade finance business more efficiently. Other users of trade finance securitisation include Citi, Santander and Standard Chartered.