Crédit Agricole CIB has signed its largest ever synthetic risk transfer (SRT) with the International Finance Corporation (IFC), as it seeks to expand its trade finance activities in emerging markets.

The structured finance transaction will see the IFC provide a US$182mn guarantee on a US$4bn-equivalent reference portfolio composed mostly of Crédit Agricole CIB trade finance assets in emerging markets.

Unlike a funded securitisation in which assets are sold to investors, synthetic risk transfers work by investors providing a bank with predetermined credit risk protection for assets that are kept on its balance sheet, which in turn frees up regulatory capital that would otherwise have to be allocated by the bank to such assets and can therefore be used to generate new lending.

“SRTs have always played an important role in encouraging banks to extend more credit to priority business lines,” says Paulo de Bolle, senior director of IFC’s global financial institutions group. “The Covid-19 pandemic has made many types of credit exposure riskier, so capital markets transactions of this nature are even more relevant to increasing financing flows to emerging market borrowers.”

According to Crédit Agricole, this SRT is the largest structured finance project of any sort ever implemented by IFC. It is also twice as large as a similar transaction carried out in 2018, in which the IFC made an US$85mn investment in credit risk protection on a portfolio of the bank’s emerging market trade finance and corporate loans worth US$2bn.

This transaction comes amid recent warnings from the African Development Bank (AfDB) and the African Export-Import Bank (Afreximbank) that the trade finance gap is widening in the continent as export revenues fall and firms and banks’ balance sheets deteriorate as a result of the pandemic.

Last year, the International Chamber of Commerce (ICC) calculated that as much as US$5tn of trade credit market capacity will be needed to return trade volumes back to 2019 levels.

“We see a risk that the impacts of Covid-19 could compound longstanding gaps in the provision of trade finance – potentially leading to a chronic shortage of the very credit that will be needed to power a rapid economic rebound,” said John Denton, secretary general of the ICC, at the time.

Among the global business organisation’s recommendations to address this issue was freeing up banks’ balance sheets to lend to more exporters, which this transaction manages to do.

“For emerging markets to have a sustainable recovery from the Covid-19 pandemic, more financial support for them compared to the past is required,” says Laurent Chenain, head of international trade and transaction banking at Crédit Agricole CIB. “This transaction – a milestone in terms of both structure and scale – is an excellent example of how Crédit Agricole CIB is committed to working with investors such as IFC to support clients and facilitate a solid, post-pandemic reconstruction.”