Funds Created to Offload Credit Risk From Big Projects

The Mariner Investment Group, a $10 billion global alternative investment firm, has created two funds that will buy up credit risk from deals used to finance large projects in areas like infrastructure, transportation and energy, allowing financial institutions, including European banks, to free up capital they would otherwise need to hold under regulatory requirements.

At the same time that Mariner announced the creation of the two funds, worth a total of $450 million, it closed its first such deal. UniCredit, the largest bank in Italy by assets, sold default risk on a 910 million euro portfolio of loans for energy and infrastructure projects to Mariner. Mariner bought that risk with credit-linked notes â€" a kind of credit derivative.

The notes effectively free UniCredit from holding large amounts of capital against potential risk from the loans. In an ideal world, UniCredit could then use that money to increase lending, which is in short supply in Europe. It could also use the capital to protect against other assets on its balance sheet.

“The magnitude of the capital requirements for banks substantially exceeds available capacity in equity markets,” said Andrew Hohns, senior portfolio manager for the new Mariner funds. “Banks are currently developing alternative strategies to meet these stringent new demands, and this business initiative is designed to be a flexible partner to banks to assist them in meeting the new requirements.”

European banks are facing stricter capital rules under the so-called Basel III accord, which requires that they hold higher-quality assets like stock to protect against possible losses. Under the new rules, the banks may conclude that they cannot earn a satisfactory return on capital held against the loans for infrastructure projects. By selling some of the credit risk from the energy and infrastructure loans, the bank can hold less money against those assets. Investors gain access to the credit risk of an unusual group of assets: Instead of stocks or bonds, it can be bridges or tunnels.

“This is it the first operation of this kind involving a project financing portfolio, and we do expect to see more deals like this one,” said a UniCredit spokeswoman. “The deal could be followed by similar transactions, as UniCredit seeks to increase loans to Italian companies at a time when the first signs of economic recovery will emerge.”

Banks will have to be careful, however, that such risk-transfer deals do not provoke regulators. “We have designed the strategy as best we can in response to the articulated best practices that the regulators have put forth,” Mr. Hohns said.

The bank can use the deal to reduce its calculation of risk-weighted assets, but it cannot use the deal to calculate its leverage levels.

It has been relatively common to sell credit risk for small and midsize business loans, but it is more unusual to do it for large project deals.

“What is novel about the strategy is to bring many of those well established tools and apply them to a new asset class on bank balance sheets, specifically infrastructure assets,” Mr. Hohns said.

Mariner has committed to donating 5 percent of its management fees to the Unicef Bridge Fund, which helps the organization expedite help for children in emergency situations.