CBI comments on Credit Agricole green synthetic securitisation deal

The green debt market continues to diversify with a new synthetic securitisation deal, which the Climate Bonds Initiative (CBI) says is exciting as it represents another step in the development of green securitisation and will encourage other banks to follow suit.

As announced last week, Crédit Agricole CIB and Mariner Investment Group have completed a USD-3-billion (EUR 2.8bn) private synthetic risk transfer through a Green Capital Note and the CBI explains what’s it all about.

Crédit Agricole is freeing up capital by transferring the risk of a USD-3-billion portfolio of infrastructure loans to Mariner Investment Group LLC. The loans remain on Credit Agricole’s balance sheet; the risk transfer means that Mariner now shares some of the liability in the event of any default.

Crucially, this risk transfer allows the bank to hold less regulatory capital (essentially the levels of capital banks must carry as reserves, which are higher following the global financial crisis).

The use of the resulting USD 2 billion of freed up capital is what makes this synthetic deal innovative -- Crédit Agricole have committed it in full to new green lending.

A central benefit of synthetic securitisation is the high leverage opportunities. The FT reports that Mariner’s investment in this first green synthetic deal is likely to be around USD 150 million. Using that amount to unlock USD 2 billion of new green lending is an exciting prospect given the urgent need to scale up low-carbon investment.

Green synthetic securitisation: the next evolution in structured finance?

The overall green securitisation market reached USD 5 billion of issuance in 2016, but until now, all of those deals have been ‘true-sale securitisations.’ In a true-sale securitisation, a portfolio of loans is moved off the issuer’s balance sheet into a special purpose vehicle (SPV), which then issues asset-backed securities to investors.

In contrast, a ‘synthetic securitisation’ sees the assets remain on the issuer’s balance sheet; a portion of the risk is transferred to the investor rather than the full asset.

What are the green credentials of the deal?

The green credentials of the synthetic securitisation deal arise from the ‘proceeds’ of the deal, in the form of USD 2 billion of freed up capital, being allocated to green projects.

The USD-3-billion portfolio backing the deal is not green, but a mix of 200 mainly non-green loans from a range of sectors, including power, oil and gas, real estate and more.

That is exactly what we need to see: banks finding ways to use their non-green legacy assets to finance new green ones at scale, and so over time “colouring the balance sheet green,” in the words of Pascale Olivie, head of structuring, research and asset allocation in Crédit Agricole’s credit portfolio management group.

New green investment

So what kind of new green projects is the bank getting ready to fund? Crédit Agricole is using their existing green bond framework to determine eligible green projects for the USD 2bn of freed up capital. The framework includes renewable energy, energy efficiency loans for commercial real estate renovation, public transportation, and sustainable waste and water treatment facilities, and has an external review from Sustainalytics.

Crédit Agricole has also committed to reporting on what types of green projects they lend to, and include more details on selected projects.

The last word

This deal is exciting in its own right, primarily as it represents another step in the development of green securitisation and will encourage other banks to follow with similar risk sharing structures that free up capital for new green investment.

In the wake of last week’s deal, Mariner has already discussed with banks the potential for replicating the success by securitising commercial real estate loans and allocating proceeds to low-carbon buildings.

Bravo!

We look forward to reporting on other institutional investors taking up green securitization opportunities.

Until next time,

Climate Bonds

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