Why invest in CRS

At PGGM we believe Credit Risk Sharing (“CRS”) is an asset class with attractive characteristics, in particular in the context of the asset mix of a pension fund.

The main benefits of the asset class are:

  • Attractive risk-return profile with stable cash flows
  • Exposure to unique credit risks
  • Close cooperation with high-quality credit originators


Attractive Risk-Return Profile with Relatively Stable Cash Flows

By investing in a CRS transaction, an investor takes an equity position in the capital structure of a specific portfolio of credit exposures. This comes with an equity-like expected return, but with different risk drivers compared to equity investments. The main risk driver is credit risk. As the investor takes the first loss risk, it commensurately gets a relatively high premium paid.

Compared to equity, the upside of CRS is limited by the fixed coupon amount. The downside risk is driven by uncertainty of losses following default of loans in the underlying portfolio, and of the timing of such defaults. In times of economic headwind, losses can be expected to increase. Hence, structuring robust transactions is important to limit the impact of such a situation to a certain degree.

In recent years, CRS transactions have become more robust due to changed regulations. This has led to thicker first loss tranches and therefore a bigger cushion to absorb losses, but also a lower premium as the risk has reduced. This bigger cushion is welcome in periods of economic downturn during which defaults are expected to rise.

In all, for a pension fund, investing in credit risk instruments allows for diversification. In addition, the fact that the return comes in the form of relatively high and stable cash flows, makes CRS an attractive asset class for an investor with a steady flow of periodic distributions, such as the regular payments to a pension fund’s beneficiaries.

Exposure to Unique Credit Risks

By investing in a CRS transaction, the investor gets exposure to credit risks that are often not available in public markets. The most important distinction with bonds is that the return on CRS is purely driven by credit risk, whereas for bonds interest rate risk is an important risk driver as well.

Looking at credit risk only, CRS transactions provide diversification compared to publicly traded bonds as well. Firstly, investors can share in the credit risk of debtors who are financed by banks, and do not have access to capital markets. These parties include Small- & Medium-Sized Enterprises (SME’s) and consumers. Secondly, credit facilities on the balance sheets of banks have different characteristics than publicly traded bonds. For example, trade finance facilities, project finance loans, real estate backed loans, consumer credit and revolving credit facilities all have different risk-return profiles than publicly traded corporate bonds.

Even in case of a term loan provided by a bank to a large corporate, the bank typically is in a better position than a public bond investor, as a bank can typically benefit from a better security position and better covenants in the loan contract. As a result, the expected loss profile of the underlying loans and other obligations in CRS transactions are different from publicly traded bonds.

Close Cooperation with High-quality Credit Originators

We believe that banks are very well positioned for originating and monitoring credit risk. Credit risk management is in the DNA of a bank. Our risk sharing partner banks have developed their credit originating and monitoring expertise over decades, if not centuries. Added to this come the resources banks employ within credit risk management, which are beyond what is attainable for most investors.

Further, banks typically have access to information on their clients beyond what is available for outside investors. Market-leading banks typically have a strategic relationship with their (large) corporate clients, which allows for access to management and for multiple touchpoints throughout the organisation. In combination with visibility on cash flows, banks are very well positioned for assessing the credit risk of their clients at origination and afterwards on an on-going basis. Via risk sharing transactions, an investor can participate in the loans underwritten by these high-quality originators.