Winner: Algonquin 2022-1

Bank of Montreal’s (BMO) footprint in the CRT market is both extensive and well-established. But of the four programmes it operates, it would not be unfair to call Algonquin the jewel in the crown.

First unveiled in 2020, the platform recorded the largest US dollar-denominated CRT transaction in 2022. It was not a difficult choice to recognise Algonquin 2022-1 as North American Transaction of the Year.

Algonquin securitises US and Canadian SME corporate loans. The bank has a strong foothold in six Midwest American states - Illinois, Indiana, Wisconsin, Minnesota, Missouri and Kansas, and most of the US borrowers are to be found in these states.

The reference pool for the inaugural Algonquin offering of 2022, which was brought to market in April, comprised US$7.5bn in commercial credit facilities. The guarantee linked notes had a face value of US$532m, making it the biggest deal that BMO’s risk and capital solutions arm - which is responsible for regulatory capital relief trades - has ever brought to the market. Despite the traumatic macroeconomic and geopolitical climate, headlined by the war in Ukraine, the strong response to this deal allowed it to be upsized by another US$2.5bn within only a couple of weeks.

In August, Algonquin 2022-03 - which securitised another US$4.4bn - was brought to the market. This makes US$14.4bn in total for the year to date. Bank of Montreal’s other three CRT platforms contributed only US$4bn in total in 2022, underlining the importance of Algonquin to the issuer.

Not only is the dimension of the programme striking, the pricing that the initial offering in April was able to achieve is equally eye-catching. The unrated E tranche, with an attachment point of 0.0%, was priced at SOFR plus 850bp. Given the differential between SOFR and Libor, this tranche offered a slightly thinner yield to investors than the initial Algonquin offering brought to the market in 2020, despite this year’s market turmoil and the spread widening that had affected all fixed income assets.

“The pricing of this deal reflects what investors like about our platform. It’s a North American portfolio, with a very good track record, which allows BMO to outperform its peers from a credit standpoint. That’s what created the high demand for the transaction,” explains Jean-Francois Leclerc, head of risk and capital solutions at BMO.

The E tranche attached at 0.0% and detached at 6.50% and, with a notional tranche size of US$487.5m, comprised 6.5% of the portfolio. Elsewhere in the capital stack, the low triple-B rated D tranche had an attachment point of 6.5%, a notional tranche size of US$187.5m and was sold at SOFR plus 355bp.

Further up the stack, the single-A rated C tranche attached at 9%, was worth 2% of the portfolio and yielded SOFR plus 225bp. The double-A rated B tranche attached at 11%, had a notional of 1.3% of the portfolio and offered SOFR plus 130bp.

While the issuer was not able to divulge how much capital this trade has freed up, it comments that it “is an efficient tool to manage RWA and support capital planning. However, while the initial forays into the market this year were able to shrug off the general softening of prices seen throughout asset classes, the most recent 2022-03 was not as fortunate and levels were about 100bp wider than the April deal, according to reports.

“In H1 we saw no widening. Since then, we have - but in line with the overall market, or a bit better. This reflects that fact that our portfolio is focused on North America, compared to some of our peers that have more of a European focus,” says Leclerc.

A mix of investors, from pension funds to specialist CRT buyers, is drawn to the Algonquin programme. BMO now has regular participation from a pool of investors numbered in the mid-teens, says Leclerc.

“Ultimately, what attracts investors is BMO’s risk culture and performance from a credit standpoint. This explains the strength of our programme. Investors are supportive because they see our track record through the cycle,” he concludes.

Honourable mention: Western Alliance Bank capital call deal
In recognition of the deal being the first of its kind in the US and, given the growing popularity of the asset class in Europe, likely to be the forerunner of many more of its kind.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.