Bank of Montreal has offloaded $5 billion in corporate loan risk via two synthetic risk transfer deals executed over the past two months. The transactions split evenly between BMO's Muskoka and Algonquin programs, each covering $2.5 billion in loans targeting large corporate and mid-market borrowers respectively.
Synthetic risk transfers work by letting banks keep loans on their balance sheets while transferring the risk of first losses to outside investors, who receive premiums for assuming that risk. This approach gives BMO capital relief without selling the loans outright.
In these deals, the Muskoka program's first-loss tranche accounted for over 7% of its portfolio and priced below 700 basis points, signaling strong investor demand. The Algonquin program’s tranche was slightly larger than 6% of its portfolio with pricing in the mid-700 basis points range, reflecting the risk profile of mid-market loans.
Canadian Banks Embrace SRTs Amid Market Growth
BMO joins other Canadian lenders like Toronto-Dominion Bank, Royal Bank of Canada, and National Bank of Canada in actively using synthetic risk transfers this year. The global SRT market is expanding, with European and Canadian banks leading the charge toward a sixth straight year of record issuance.
The competitive pricing achieved by BMO reveals a surge in investor appetite for these synthetic risk slices, especially for large corporate credit risk priced below 700 basis points. This trend marks synthetic risk transfers as an increasingly vital tool for managing capital among Canada’s biggest banks.
