Morgan Stanley is reportedly in the process of arranging a significant risk transfer (SRT) associated with a $6bn portfolio of loans to private market funds.
The SRT could amount to approximately $750m, representing 12.5% of the overall loan portfolio, reported Bloomberg, citing sources familiar with the transaction.
SRTs serve as a mechanism for banks to secure insurance against loan defaults.
These are often structured as credit-linked notes sold to pension funds, sovereign wealth funds, and hedge funds, enabling banks to free up capital otherwise reserved for regulatory purposes.
In addition, SRTs help lenders in managing exposure to specific industries or loan types, typically providing default protection for 5% to 15% of loan values, with investors potentially earning double-digit returns.
The loans involved in Morgan Stanley’s SRT, known as subscription lines, are credit facilities extended to private equity and other private market funds to aid in liquidity management and enhance returns.
In July, Bloomberg reported that Sumitomo Mitsui Banking had engaged investors for an SRT related to a similar portfolio.
Bloomberg Intelligence forecasts an average annual growth of 11% in the global SRT market over the next two years.
Financial institutions such as JPMorgan Chase & Co., Goldman Sachs Group, and UBS Group AG are also exploring or finalising SRTs denominated in dollars.
In July, the Wall Street Journal (WSJ) reported that Morgan Stanley was facing an investigation by the Financial Industry Regulatory Authority (FINRA).
The probe was concerning Morgan Stanley’s wealth management client vetting processes related to potential money-laundering risks.
The inquiry is examining the firm’s client risk assessments and related practices from October 2021 to September 2024.
