Hedge fund Seer Capital Management is working with Cantor Fitzgerald and insurance broker Lockton on a proposed $300m insurance-backed financing facility designed to support investments in the fast-growing significant risk transfer (SRT) market, according to a report by Bloomberg.
According to people familiar with the discussions, the facility would be provided by First Abu Dhabi Bank (FAB) and backed by an insurance policy from Nationwide Mutual Insurance. The transaction is expected to be completed later this year, although terms remain under negotiation.
The financing would allow the New York-based hedge fund to leverage capital committed by investors when acquiring SRT transactions from banks. Under the proposed structure, the lending facility could represent more than half of the net asset value allocated to the investments.
SRT transactions have become an increasingly important capital management tool for banks, allowing them to transfer portions of the credit risk associated with loan portfolios to institutional investors while retaining the underlying assets. The market has attracted growing interest from hedge funds and other private capital investors due to the potential for double-digit yields, even as competition for transactions has intensified.
The use of insurance-backed financing has also expanded as investors seek lower-cost leverage. By wrapping lending facilities with guarantees from investment-grade insurers, market participants can reduce financing costs compared with traditional borrowing structures.
Based on the size of the proposed facility, the financing could support investments linked to loan portfolios with an aggregate value of more than $4bn, according to market estimates. SRT transactions typically transfer the credit risk associated with between 5% and 15% of a bank’s loan portfolio.
Representatives for Seer Capital, Cantor Fitzgerald, Lockton and Nationwide Mutual Insurance declined to comment on the reported transaction. First Abu Dhabi Bank also declined to discuss individual client relationships or transactions, while reiterating its commitment to supporting clients in line with applicable governance and regulatory standards.
The proposed deal comes as regulators continue to increase their scrutiny of the rapidly expanding SRT market. Supervisory authorities have expressed concern about the growing interconnectedness between banks and non-bank financial institutions, particularly where transferred credit risk is subsequently repackaged into new financing vehicles that themselves rely on bank funding.
Regulators have also focused on the use of repurchase (repo) financing for SRT investments. Higher capital requirements for banks providing repo financing have encouraged market participants to explore alternative funding structures, including insurance-backed lending arrangements such as the one being developed for Seer Capital.
