The Deutsche Bank has already sold the riskiest tranche among its portfolio on global trade finance, thereby experiencing a regulatory relief on his trade finance assets of US$3.5 billion.
The bank had a synthetic collaterised loan obligation (CLO) where they only sold the first loss trranche part of their portfolio to 7 European and American Investors at approximately 216 million USD. For the record, it was the largest securitization of trade finance assets ever.
Synthetic Versus Traditional CLOs
Traditional CLOs are when the portfolio of assets is divided in various risk segments (where the riskiest ones yield the highest returns) before being sold to potential investors. Synthetic CLO, on the other hand, is actually not funded. Therefore, the assets that were sold will be reflected on the balance sheet of Deutsche Bank; however, the risk is passed directly to the investors.
Deutsche Bank has reduced its risk-weighted assets on its entire portfolio. They did this by eliminating the percentage of their portfolio that is higher than the default percentage of their overall trade finance assets.
Guy Brooks, the head of distribution and credit solutions of Deutsche Bank, said during an interview, “US$3.5bn is the total portfolio, of which he first loss tranche loss is 0 to 6.5% of that, equating to approximately US$216mn. That’s that piece, it gives us significant RWA relief on the whole portfolio. We’ve kept the senior piece of the portfolio.”
The TRAFIN 2015-1 Transaction
He added that TRAFIN 2015-1 has a 5 year tenor, although his short-term trade finance assets are included in the sale which will be replenished every month.
The TRAFIN 2015-1 is actually the third synthetic CLO that the bank has launched based on the innovative structure that allows them to hedge a globally diverse trade finance portfolio.
Deutsche Bank’s Head of Trade Finance and Cash Management Corporates of Global Transaction banking, Michael Spiegel, said, “The TRAFIN programme is playing an important role in our ongoing risk and balance sheet management efforts at a competitive cost. Furthermore, as he programme evolves, expect it to further industrialise our distribution and hedging of trade finance risk.”
What Happens to Risky Tranches?
More often than not, risky tranches are sold to investors who love to take risks. However, in this case, they include hedge funds, one insurance company, family offices, and pension funds. This actually shows how traditionally risk-averse investors trust the 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 of trade finance has historically 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,” Guy Brooks explained further.
The bank still plans to utilize the platform again in the future in order to lessen RWA and manage their trade finance business more effectively. Other users that use trade finance securitization are Citi, Standard Chartered, and Santander.