Excess Spread is our weekly newsletter, covering trends, deals and more in structured credit and ABF.

Should you get paid for doing risk retention?

For a third party, the answer is clearly ‘yes’.

Investment banks have been offering this service for the best part of a decade, beginning (if memory serves) with some of the UK Asset Resolution portfolio disposals. It’s by no means universal, and it can be complicated. Goldman Sachs, Morgan Stanley, Deutsche Bank and Citi have done it in the past, and Barclays has also been fairly active following the reboot of its securitisation operations in 2017.

It’s a service that can unlock other streams of business — Pimco’s fully retained structures used to fund portfolio purchases typically include a third-party investment bank risk retention, and presumably the banks get a structuring fee for the work, as well as good relations with the world’s largest bond fund, biggest buyer of securitisation risk and so on.

On the other hand, risk-retention parties have certain regulatory and reps and warranty obligations. Citi, the risk-retention bank, was the official purchaser of the assets in Project Chester. Pimco, which UKAR described as “providing the majority of the financing” was of course driving the bus, but it was Citi that incurred ongoing rep commitments to the securitisation and signed the documents. Pimco just bought some bonds.

Risk retention is also an open-ended commitment. Deals which miss their calls could leave a bank on the hook for multiple decades, unable to sell or hedge their positions until long after everyone involved has quit or retired.

Banks do generally get money for the service, at least, usually in the area of 9bps. In Chester 2025-1, where Barclays was risk retention, the fee is 9bps running across the full portfolio size before the call, and 11bps if the call isn’t exercised, structured as a class X certificate payment (though class S payment is also a common nomenclature).

But should a bank get paid for risk retention in one of its own deals?

That probably sounds like nonsense. Banks do their own securitisation deals for a range of benefits, and risk retention is just a cost to be weighed up against those. They get “paid” by raising funding, relieving capital, transferring assets or whatever the economic purpose of the deal was.