JPMorgan Chase plans to transfer risk tied to $3 billion loan portfolio

(Bloomberg) — JPMorgan Chase & Co. is selling a major risk transfer tied to a portfolio of about $3 billion in net asset value loans, according to a person familiar with the matter.

The SRT that protects the portfolio is about $250 million, said the person, who asked not to be named because the matter is private. Terms of the deal remain to be discussed with investors, they added. A representative for JPMorgan declined to comment.

Significant risk transfer has become increasingly popular in recent years, whereby banks are able to hold loan assets and transfer the risk by paying investment firms a fee to share in potential future losses. Typically, banks will provide default protection for up to 15% of a portfolio, and in return, investors can earn yields that are often as high as 10%.

So-called Basel III endgame rules could further boost SRT growth by raising regulatory capital requirements for Wall Street firms. The proposed changes, previewed last month by Michael Barr, the Fed’s vice chairman for supervision, stipulate that the eight largest U.S. banks will now face a 9% increase in capital to cushion financial shocks.

Equity loans have also grown in popularity in recent months as private equity firms look for ways to return cash to investors amid a lack of exit deals. This type of financing allows a company to issue debt that is secured by the net asset value of the portfolio it manages.

According to estimates released by Chorus Capital in July, global SRT issuance is expected to hit a record high of US$28 billion to US$30 billion this year based on strong issuance channels in the second half of the year. That compares with sales of about $24 billion last year.

—With assistance from Kate Hidalgo and Carmen Arroyo.

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