Nord/LB finds capital relief via structured credit protection

LONDON, Aug 29 (IFR) - Nord/LB’s infrastructure loan capital relief deal, Blue Rock, points to a potentially powerful role for structured products in recycling capital for those banks still writing infrastructure business.

Project Finance International reported that the unrated deal covered a GBP307m book of 20 UK PFI loans, attaching between GBP300k (0.97%) and GBP13.5m (4.5%). Nord/LB is paying 875bp over Libor for the credit protection. The legal final maturity is 29 years, though average life is 10 years.

Blue Rock was bought by GCP Infrastructure Fund, according to PFI, a sister publication of IFR. StormHarbour Securities was structuring and placement agent on the deal.

Long-dated infrastructure loans incur fierce capital charges, and several banks have been selling portfolios as a result - some in large volume to exit the business entirely.

But offloading pre-crisis infrastructure loans, often originated at uneconomic levels by banks looking for ancillary business, that have not been marked to market, crystallises losses.

So a structured capital relief trade makes more sense for banks like Nord/LB that simply want to hold their loans to maturity, but recycle their capital into new business.


Only a handful of structured deals have been done to date, partly because they take a long time to create, and partly because capital relief deals on infrastructure assets require quite specific skillsets from investors.

Larger portfolio risk transfer trades, for example Standard Chartered’s START trade finance CLOs or Commerzbank’s SME deals from the CoSMO programme, rely to some extent on statistical approaches to model probability of default and loss given default, but infrastructure loans are less granular.

With only 20 loans in Blue Rock, buying this deal requires specific infrastructure expertise and loan-level due diligence, though this is mitigated by the underlying British government credit.

Infrastructure funds are best placed to provide this knowledge, but may not be comfortable with the bespoke funded credit default swaps typically used to write the protection.

Trade credit or corporate loan books are more common forms of collateral for capital relief deals. Buying protection on these books usually involves a much higher coupon - Standard Chartered, one of the heaviest users of capital relief structures, paid 14% for its Oryza CLO deal (USD1.5bn portfolio providing USD105m in capital relief). Tra de and corporate books also have much shorter maturities - Oryza CLO was a three-year.

GCP has done one previous trade, selling protection on a GBP233m SMBC portfolio to cover losses from GBP2.33m to GBP14m.

Santander sold the largest deals in 2008 and 2009 through its Boadilla programme. Dutch pension fund PFZW sold protection on the risk in a EUR500m book in 2008, following this with an EUR850m deal in 2009.

Nord/LB still has appetite to offer portfolio trades of this sort. It used a similar securitisation structure at the end of July, tranching a EUR14.5bn portfolio of corporate loans, real estate, aviation loans and wind farm loans to allow its shareholders, Lower Saxony and Saxony-Anhalt, to provide a guarantee on the EUR700m second loss piece.