Standard Chartered has completed its second public trade finance securitisation Sealane II under its securitisation programme.
The deal, which was upsized from US$2.5bn to US$3bn, was solely structured, arranged and distributed by Standard Chartered.
Through the transaction, the bank has sold the credit risk of a diversified pool of trade finance loans, extended to over 1,600 borrowers – 88% of which are domiciled in Asia and the Middle East.
The transaction also includes a single unrated equity tranche of US$180mn which was distributed to accounts based in the US, Europe and Asia.
The average credit quality of the initial pool is BB equivalent, Standard Chartered says.
“The transaction was extremely well received by investors, despite the challenging market environment,” Paul Hare, global head of portfolio management at the bank, tells GTR.
“The transaction stimulated broad interest. The investors were hedge funds and asset managers with a broad global distribution. Some of the more experienced trade finance players were in there and some of the investors were investing in the trade finance asset class for the first time,” Hare adds.
The Sealane programme is unique in its repackaging of short-dated trade assets, typically with a 90 day average life, into a term investment opportunity for institutional investors.
“The synthetic part of Sealane is that the underlying assets continue to sit on our balance sheet,” Hare continues.
“We are referencing them in a credit default swap with a special purpose vehicle (SPV), Sealane Trade Finance, and that SPV is issuing credit-linked notes with a 3.5 year term to institutional investors.”
However, by creating a synthetic trade product, this is a step away from the underlying trade transaction.
The industry has been arguing, particularly with regulators in Basel, that trade finance’s close relationship to an underlying transaction makes trade a safe and transparent product.
Standard Chartered has recognised this and the SPV is designed in such a way that the synthetic part of the structure is a way for institutional investors to get exposure to the trade finance portfolio without any impact on the trade nature of the underlying transactions.
Joshua Cohen, Standard Chartered’s global head of liability and RWA management, transaction banking, tells GTR some of the motives behind the deal: “This transaction opens up an investor market that might otherwise not be available for trade finance products where traditional instruments are not in the form that institutional investors require.
“Our investing partners don’t want too much concentration; they are looking for granularity and a variety of risks in these portfolios.
“Investors are relying on a bank which can originate a portfolio with a wide spread of credit risks, and which has the potential appetite to keep an interest in the transactions referenced by the portfolio.”
Specifically, the bank retains the first 1% of losses on the portfolio, while the investor notes represent the next 6%.
Therefore, losses above 1% are absorbed by the investor tranche up to a maximum amount of the principal of the notes.
The remaining 93%, or the senior part of the transaction, is retained within Standard Chartered.
Sean Wallace, group head of origination and client coverage, wholesale banking says: “This transaction not only demonstrates our unique strength at the heart of the growing trade and investment flows in Asia, Africa and the Middle East but also further deepens our distribution channels.”
The first Sealane trade finance deal closed in November 2007 and was the first of its kind for the trade finance market.
The latest transaction under the bank’s securitisation programme was Start VI in December 2010.