Three years after its third synthetic collaterised loan obligation (CLO) became the largest-ever securitisation of trade finance assets, Deutsche Bank has returned to the market with the fourth iteration of its Trafin programme.
Trafin 2018-1, which was announced Tuesday, will refinance Trafin 2015-1, which was launched in December 2015. To structure the deal, Deutsche Bank’s global transaction banking division took an underlying portfolio of US$3.5bn in flow business, short-term trade finance, letters of credit, supply chain finance and documentary credit business, and divided it into different risk segments, placing the first loss tranche of US$216.13mn – or 6.5% of the total portfolio – with institutional investors. These investors take on the risk of absorbing initial losses while the loans themselves remain on the bank’s balance sheet, helping to reduce the capital required by the bank. Given the underlying portfolio’s short-term nature, Deutsche Bank will continually replenish the assets in Trafin.
Commenting on the refinancing, Jonathan Lonsdale, head of securitisation and repackaging for trade finance assets at Deutsche Bank, who led the transaction, says: “The strong demand shown by investors and their commitment to remain invested in our business for a further period of up to five years shows investors’ confidence in the continued low default rates and high performance of Deutsche Bank’s trade finance business.”
While banks have long pushed for trade finance to be treated differently to riskier assets from a capital requirement perspective, regulators are yet to heed their calls. For a small number of banks, including Deutsche Bank, Standard Chartered, Citi and Santander, repackaging trade finance assets through securitisations is one way to obtain balance sheet relief, as well as gain additional sources of trade finance capital by tapping into an investor base that would not usually consider trade finance as an asset class.
“This transaction shows our commitment to this method of hedging and, indeed, to expanding the amount of hedging that we do through this means. We expect to execute more CLOs as time goes by. This type of transaction allows us to scale the amount of hedging we do, allowing for aggressive growth of the portfolio and, ultimately, increased amounts of trade finance funding for our clients,” says Guy Brooks, global head of risk and portfolio management at Deutsche Bank.