Earlier this year, Bayview Asset Management structured two re-securitisation trades worth $642m, the structures of which were modelled after similar pre-2008 financial crisis transactions by a major US bank, according to a report by Reuters.
A Reuters source provided information on how the deal was structured in exchange for anonymity. Separately, six industry bankers and investors confirmed these deals were the first of their kind since the crisis, aiming to redistribute risk that had already been sold once.
The $18.5bn Florida-based hedge fund firm sold credit default swaps to Huntington National Bank, SoFi Bank and SoFi Lending last November and December. The US lenders insured up to 12.5% of losses on a $5.2bn portfolio of automobile and student loans.
In March, Bayview created bonds from the Huntington CDS and sold portions of that risk to other investors, conducting a similar deal the following month with the SoFi CDS. Investors in these bonds receive a share of an annual 7.5% insurance premium paid monthly by Huntington, assuming some default risk.
SoFi Bank and SoFi Lending each pay a fixed premium of 1.2631% annually on the reference pool, plus a floating 30-day average of SOFR, according to Moody’s.
Huntington described the trade as a “capital optimisation strategy” for Q4 but declined to comment further, as did Sofi, beyond its prior disclosure about entering a CDS on student loans, which boosted its risk-based capital ratios by over 1%. Bayview profits from the arbitrage between the cost of structuring the transactions and the premiums received, while also retaining some risk on its books, according to the Reuters source.
Reuters cited unidentified industry experts in describing Bayview’s transactions as having more structural safeguards than those conducted pre-crisis. Now, money raised from reselling insurance payments is deposited into a cash collateral account, and insurance buyers’ premium payments are backed by a letter of credit.
For Huntington, the cash collateral is initially held at Wells Fargo, while letters of credit from the Federal Home Loan Banks of Cincinnati and San Francisco, as well as Goldman Sachs, back the transactions for Huntington and SoFi, covering up to five months of missed fixed premium payments.
However, these structures might still obscure underlying problems in the banking system, according to Jill Cetina, a finance professor at Texas A&M University, pointing out that risks could arise from how banks use upfront cash collateral provided as guarantees.
Cetina noted that lightly regulated non-banks supplying capital to lenders could also introduce governance issues, emphasising the need for greater disclosure from banks regarding their use of credit risk transfers.
Scott Kenney, a senior analyst at Columbia Threadneedle Investments, which is currently negotiating a similar trade, added that the trades aim to resolve capital issues rather than asset problems, “so investors are very happy to be the bearers of long-term high quality asset risk”.
Bayview is headquartered in Coral Gables, with additional offices in New York, London, Geneva and Luxembourg. The firm was founded in 1993 and focuses on mortgage and consumer credit, according to the company’s website.
