JPMORGAN Chase plans to sell credit risk on a US$531 million portfolio of adjustable-rate mortgages, a new kind of offering by the bank and the latest example of the industry’s efforts to de-risk balance sheets.
Its offer includes more than US$53 million worth of bonds to be sold through an auction, with pricing for the deal expected sometime this week, according to sources familiar with the matter.
Banks have lately been selling more bonds that transfer credit risk to investors, allowing them to book a lighter capital charge on their assets. One newly popular form of the trade in the US is called a significant or synthetic risk transfer, in which a bank buys insurance on risky portions of a specified pool of assets.
Unlike some types kinds of credit transfer arrangements, JPMorgan’s latest deal, which it’s calling a “deconsolidated portfolio risk transfer”, would remove the assets from its balance sheet.
After transferring US$531 million of mortgages to an off-balance sheet vehicle, that entity will issue bonds tied to the riskiest portions of the loans but keep the remainder, or US$477 million. To keep assets and liabilities balanced, the vehicle will then enter a credit agreement with a JPMorgan entity to borrow against the value of the retained portion.
The bank has described the deal as “inaugural” in details shown to prospective investors. Fitch and Morningstar DBRS assigned preliminary ratings ranging from AAA to B- to the bonds backed by the riskier portions, according to the sources with knowledge of the transaction, who were not authorised to discuss it publicly.
JPMorgan declined to comment.
The assets involved are large, or “jumbo”, loans originated recently by JPMorgan to borrowers with strong credit scores.
Significant risk transfers first became popular among European lenders, but have taken off in the US recently as big banks prepare for more stringent capital rules known as Basel III Endgame. JPMorgan, Goldman Sachs and Morgan Stanley, as well as some regional US banks, have all entered risk transfer agreements or explored them over the past year. BLOOMBERG
