JPMorgan Plans Risk Transfer Linked to $3 Billion Loan Portfolio

(Bloomberg) -- JPMorgan Chase & Co. is selling a significant risk transfer linked to a portfolio of about $3 billion in net asset value loans, according to a person with knowledge of the matter.

The size of the SRT providing protection on the portfolio is around $250 million, said the person, who asked not be identified because the matter is private. The deal’s terms are still subject to discussion with investors, they added. A representative for JPMorgan declined to comment.

Significant risk transfers have become increasingly popular in recent years, enabling banks to hold onto loan assets and offload the risk by paying investment firms to share any potential future losses. Usually, a bank would obtain default protection for as much as 15% of portfolios, and in return investors can receive yields that frequently top 10%.

So-called Basel III Endgame rules could boost SRT growth further by increasing Wall Street firms’ regulatory capital requirements. The proposed changes, previewed last month by Federal Reserve Vice Chair for Supervision Michael Barr, stipulate that the eight biggest US banks would now face a 9% increase in the capital they must hold as a cushion against financial shocks. 

Net asset value lending has also grown in popularity in recent months, as private equity firms seek ways to return cash to investors given a lack of deals to exit their investments. This type of funding allows firms to issue debt secured against the net asset value of the portfolios they manage.

Globally, issuance of SRTs is on pace to hit a record high of $28 billion to $30 billion this year, based on a strong second-half pipeline, according to Chorus Capital estimates released in July. That compares with about $24 billion last year. 

--With assistance from Kat Hidalgo and Carmen Arroyo.

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