SRT Q&A with Milan Stupar

Q: Apart from the highly attractive yields, what is the main benefit of adding SRT to a portfolio?

Diversification is probably the most important feature. SRT provides access to types of credit exposure that are very difficult, and sometimes impossible, to access through traditional private debt funds or syndicated markets. Many of the underlying loans are banking products that only banks originate and hold. For example, large revolving credit facilities for multinational corporates are generally arranged by banks and remain on bank balance sheets.

These facilities often come with strong covenants and relationships that have existed for decades. Through SRT, investors gain indirect exposure to those borrowers. The same applies to many small and mid market European companies. Banks remain the dominant lenders to the European economy, especially compared with the US, where capital markets play a larger role. As a result, SRT can provide exposure to parts of the real economy that are otherwise difficult to reach.

From a portfolio construction perspective, the asset class has historically shown a relatively low correlation with both traditional fixed income and broader risk assets.

Q: Could there be any potential issues with the rapid growth we’ve seen in the SRT market?

In some jurisdictions, regulators have already introduced limits around the extent to which SRT can contribute to capital management. The regulatory framework is therefore evolving alongside the market. Banks should not become overly reliant on SRT, and regulators are very focused on that issue. However, the current regulatory view is generally supportive because SRT is seen as a prudent capital optimisation tool rather than a mechanism to artificially inflate capital ratios. 

It is also important to remember that SRT transactions are relatively short dated. Maturities are typically between three and five years. Banks continuously reassess their capital needs and refinance transactions over time.

Ultimately, banks use SRT because it improves capital efficiency. If a bank can free up capital and redeploy it into new lending, acquisitions, technology investment or shareholder returns, that is positive for the bank’s equity value. 

Q: Do you see US banks developing in the same direction as European banks regarding SRT?

The market remains predominantly European. Last year, roughly 80% of issuance came from European banks. The US market has grown meaningfully over the past few years, but it is still much smaller. However, SRT is not new to the United States. Transactions existed as early as the mid-2000s and we completed our first trades there in 2006. What has changed is that issuance restarted more meaningfully after a long quiet period.

Today, the US represents around 20% of global SRT activity, whereas five years ago it was close to zero. That said, the rationale is somewhat different. In Europe, SRT is primarily driven by regulatory capital relief. European banks operate under relatively stringent capital frameworks and therefore have a strong incentive to optimise capital usage.

In the US, the motivation is often more related to balance sheet management or credit hedging. Since the expected tightening from the original Basel Endgame proposals has softened considerably, the urgency for capital relief is lower than many anticipated two years ago. 

Q: What other trends are you seeing in the SRT market today?

One major trend is the broadening of underlying asset classes. Ten years ago, around 95% of SRT transactions referenced corporate loans. Today, that figure is closer to 80%. Large banks that have been active issuers for many years are increasingly including other types of assets such as real estate lending, trade finance and subscription line facilities.

Geographical diversification is also growing. While Europe remains dominant, SRT activity is increasing in regions such as Japan and Latin America.

On the investor side, SRT is no longer viewed as a niche strategy. Many large institutional investors now have strategic target allocations to the asset class. 

Another important development is the stability of issuance volumes throughout the year. Historically, SRT was heavily concentrated in the fourth quarter because banks mainly used it to optimise year-end capital ratios. CFOs would often initiate transactions late in the year to gain a few additional basis points of CET1 before reporting dates. That seasonality has largely disappeared. Banks now approach SRT in a much more strategic and long-term manner, resulting in a steadier issuance profile across the calendar year.

Q: Has the growing interest in the asset class compressed spreads?

Yes, spreads have tightened materially over the past two to three years. At the peak of the market, many transactions offered double digit spreads. Today, most deals are priced in the 7% to 8% range, with some even tighter than that.

The main reason is increased interest in SRT. However, access remains extremely important in SRT. Longstanding relationships with banks matter a great deal. Managers with established networks across banking institutions - especially in Europe - still have significant advantages in sourcing and selecting transactions.

This remains a relatively relationship-driven market with meaningful barriers to entry. A newer investor cannot replicate a twenty year network overnight. And it’s also important to mention that while spreads have compressed, underwriting standards have generally remained disciplined. We have not seen a broad deterioration in portfolio quality simply because competition has increased.

Q: How has SRT performed during previous periods of market stress?

One of the strengths of the asset class is the structural flexibility embedded within transactions. During stressed environments, investors can improve collateral quality and increase protections within the structure. 

At the same time, banks themselves are generally highly motivated to preserve these relationships because SRT has become an important funding and capital management tool for them. Historically, the market has proven resilient through periods of volatility. While spreads can widen temporarily during stress events, the underlying structures were designed precisely with adverse scenarios in mind.

Q: Finally, what differentiates your approach from other SRT investors?

One key differentiator is the breadth of our platform. Some SRT managers only focus on one type of underlying exposure, typically large corporate lending, because that is where their internal expertise lies. We are able to analyse a much broader range of asset classes, including areas such as real estate, trade finance and subscription finance. We also have a very long track record in the asset class, meaning we have witnessed even the most extreme market scenarios. 

That matters because the SRT market itself is becoming increasingly diversified. We also offer dedicated SRT strategies rather than simply allocating to SRT opportunistically within broader credit portfolios. Investors therefore gain targeted exposure to the asset class through a specialised platform.