Significant Risk Transfers (SRT)(also known as Credit Risk Transfers or Credit Relief Trades (CRT)) are used as a tool by financial institutions for capital optimisation. In such deals, the losses on the reference obligations are protected by for example Credit Linked Notes or Credit Default Swaps. The risk-weighted assets of the financial institution decreases, which allows for an improved capital allocation.

Client’s requests

A bank that aims to lower its capital requirements on a certain part of the loan book created a structure in which a closed end fund invests in tranches of an SRT deal referencing these loans. The fund requires valuations on the tranches on a quarterly basis plus EOY. There might be reasons for the bank to not provide these valuations itself: e.g. not wanting to value its own books, having multiple roles within the structure or hiring an external agent is more cost-effective.

LoanClear’s role

LoanClear provides the valuation of the tranches in a pre-determined schedule. As an additional service, some commentary about the movements and performance of the assets was also provided.

The impact

The bank has succeeded in its aims and has originated multiple iterations using the same platform to create a valuable shelf in the expansive toolkit of the bank. The process was smooth every time and the investors, originators, and the valuation agent were pleased to be a part of these deals.