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US Bank is in the process of syndicating an IG corporates synthetic risk transfer trade.

While there have been a number of IG corporate SRTs in the US, they have tended to be issued as one large tranche, stretching between 0% (first loss) and detaching at 12.5% via an SPV-issued CLN.

Because of concerns over interpretations of SPV-issued CLNs according to the Volcker Rule, many banks continue to take the view that they can only place a single 0-12.5% tranche with a single investor.

The Volcker Rule prohibits a bank from sponsoring a covered fund or retaining ownership of the SPV. SPVs can be structured to avoid the bank being considered the sponsor and avoid taking ownership, but banks have still been reticent about trying these structures.

In other instances, an investor can do the SPV and effectively syndicate or re-tranche the SRT.

US banks generally go for a 0-12.5% tranche because of the Collins Amendment to the Dodd-Frank Act, which floors the risk weights used to calculate capital requirements in line with Basel standardised models for credit risk.

The US banks thus have to hedge thicker tranches of their portfolios to achieve capital relief.

While banks do not face this issue for direct CLN SRTs, this structure is limited to an aggregate outstanding reference portfolio principal amount of the lower of 100 percent of the bank’s total capital or $20bn, per the Fed.

Banks have therefore used this capacity sparingly.

The entire US Bank SRT covering 0-12.5% has been tranched at the source. Class R is estimated to be 0-2.5% and Class D is estimated to be 2.5%-3.8%, according to industry sources.

Class B-1, Class B-2, Class C, and Class D notes were rated by DBRS in the pre-sale. The notes were rated respectively: AA, AA, A, BBB.

The reference portfolio consists specifically of syndicated term and revolving credit facilities. The reference portfolio is static and prohibits reinvestment.

US Bank did not reply to a request for comment.