The Montreal-based lender is exploring an SRT linked to a pool of project loans. Sources familiar with the matter said, "National Bank is looking into an SRT linked to a pool of project loans," and they spoke on condition of anonymity because the negotiations are private. A spokesperson for National Bank declined to comment.
SRTs are typically structured as credit-linked notes or guarantees, where investors assume a defined portion of default risk in exchange for regular coupon payments. For project financings, which often have long tenors and high capital charges, this mechanism provides significant regulatory capital relief. Banks can then redeploy that capital into new lending or other activities, improving return on equity.
By transferring a portion of default risk to investors such as insurance companies and pension funds, lenders reduce the regulatory capital they must hold. For long-dated project loans, this capital relief is particularly valuable given the high capital charges associated with infrastructure financings.
The entities that take on the risk can earn coupon payments of over 10%.
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According to Crescent Capital, loans to large corporations and to small- and medium-sized enterprises remain the most common collateral for SRTs, accounting for 59% and 15% of total volume, respectively. Financial institutions are increasingly diversifying with other asset classes, including project financings.
Spanish bank BBVA SA recently closed an SRT on a €2 billion ($2.3 billion) portfolio of project financings, which included loans for digital infrastructure. Meanwhile, Deutsche Kreditbank AG, a German lender specializing in sustainable projects, is working alongside Deutsche Bank AG to structure an SRT linked to a renewable energy loan portfolio.
While project financings still represent a modest share of SRT collateral today, their long duration and high regulatory costs make them particularly well-suited for these structures. European banks have been early adopters, and Canadian lenders are now following suit as they seek similar balance sheet efficiencies.
Project financings are typically used to fund large-scale infrastructure, energy, or industrial ventures, where repayment depends on the project's cash flows. This trend reflects a broader push by lenders to optimize balance sheets in a rising interest rate environment.
Significant risk transfers, often structured as credit-linked notes or guarantees, enable banks to reduce regulatory capital requirements. By transferring a portion of default risk to investors - typically insurance companies, pension funds, or hedge funds - lenders can reallocate capital to higher-yielding activities. National Bank's potential deal underscores a broader trend among Canadian banks to optimize balance sheets amid rising interest rates and tighter capital rules.
For Canadian banks, such transactions allow them to continue financing large infrastructure projects without tying up excessive regulatory capital. The National Bank's move follows similar discussions by TD and RBC, highlighting the sector's focus on balance sheet efficiency.
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