Credit Risk Sharing At PGGM

PFZW has a dedicated allocation to Credit Risk Sharing (“CRS”) since 2006 and has given PGGM an exclusive mandate to invest up to 3% of its assets in CRS transactions.

PFZW initially allocated to CRS as an alternative to equity, hence the long-term target return is similar to that of an allocation to equity, for less risk. Since a number of years, CRS is seen as part of the allocation to the credit block. The CRS mandate is part of PGGM’s Private Markets Platform with its own strategic allocation in PFZW’s asset mix, making PFZW one of very few investors that have embraced CRS as a stand-alone strategy. The strategy is buy-and-hold; we do not sell our transactions in the market.

PGGM’s Credit Risk Sharing strategy has a clear focus. We only share in healthy credit risks that are part of a core lending activity of a bank, on a ‘blind’ pool basis. The banks we partner with have a very strong position in that lending market. Often the bank is one of the national champions with ample experience in the relevant lending market and strong client relationships. Our principal belief is the importance and value of genuine sharing of risk: any losses PFZW experiences as an investor in the CRS transaction should go hand-in-hand with losses experienced by the bank in its loan book. This risk alignment is achieved by requiring banks to keep at least 20% of the shared exposures unhedged. We are used to paying credit losses to banks, as that is part and parcel of the risk consciously taken. It is important to note that the losses paid out are well within expectations, resulting in attractive net returns for PFZW.

Our Philosophy

Long-term partnership focus Diversification Understanding the underlying portfolio A healthy and sustainable market

As a pension fund asset manager, PGGM by its nature has a very long-term investment focus. Accordingly, we strive to build long-lasting risk sharing relationships with top-ranking market players, engaging via CRS in the bank’s core activities. These core activities generally form an integral part of the bank’s strategy and are most likely to receive the bank’s full attention, ensuring ongoing high-quality and successful risk management. At PGGM, we value being an important, reliable and long-term risk sharing partner, executing bilateral transactions of significant size, and providing high execution certainty. Fitting with a long-term risk sharing partner is rolling over transactions when they mature, continuing the credit hedge for the bank on the relevant lending books. As a partnership, we aim to negotiate deal terms that are beneficial to both the bank and the investor and are willing to consider amending these terms if the transaction is not as efficient as initially expected. The principle of alignment of interest, reflected by the bank’s minimum requirement of 20% unhedged exposure, is engrained in our way of working and guarantees that both investor and bank benefit from high quality risk management and if the credit losses occur they would both incur these losses.

A well-diversified portfolio across banks, countries, sectors and types of credit risk is important to create a healthy and robust portfolio for our client. For PFZW, CRS is an attractive way to add unique credit exposures that cannot be found in public markets, both by individual obligors as well as types of credit risk and geographies. We work with different leading banks across the globe, sharing in the credit risk of different types of loans such as revolving credit facilities, project finance and trade finance products; for different client segments ranging from SMEs to large corporates. Throughout time, we aim to expand our long-term relationships with our partner banks to other core activities within their lending business, thereby leveraging the knowledge and mutual understanding between us and our partner bank to further deepen our investment relationship.

For every transaction, a thorough understanding of the underlying loan portfolio and lending business is of vital importance. During the investment process, it is crucial to understand all risk aspects associated with the transaction, the loan portfolio and the bank’s business. This includes, amongst others, understanding of the types of loans, the contract terms, the bank’s processes of extending loans and monitoring credit risk, the importance and strategy of this lending business to the bank and the performance the bank has achieved in this business through the economic cycle. Understanding the bank’s credit originating and risk management processes and track record is vital considering that we invest in ‘blind’ pools. We believe that our risk sharing partner banks are better equipped to originate and manage credit risks. It is our conviction that we cannot add value by knowing the names of the borrowers in the reference portfolio (‘disclosed’ pool) and replicating the rating of loans ourselves. More information regarding PGGM’s due diligence process to assess these risks can be found here.

PGGM and PFZW help the banking sector to manage and spread its credit risk exposures in a sound way, leading to less systemic risk in the banking sector and a more sustainable financial system, one of the pillars of the responsible investment philosophy of both PFZW and PGGM.
PGGM believes in the significant growth potential of the relatively young market for CRS. We find it important to help this market develop further long term on a sound and solid basis and hope to stimulate this through dialogue, knowledge sharing and collaboration where possible. We have been fortunate to find a large like-minded pension fund investor in Alecta, who has embraced investing in CRS on the basis of the same core philosophy. We have solidified our relationship with Alecta through a co-investment agreement.
Finally, we keenly support healthy transaction structures that ensure simplicity, transparency and standardisation to stimulate the wider acceptance and growth of this securitisation market. We aim to actively and constructively contribute to discussions, roundtables and consultations around regulation which may impact CRS, such as the STS framework or the topic of Significant Risk Transfer. More information on PGGM’s on views and activities regarding regulation is available here.

Our Philosophy

Long-term partnership focus Long-term partnership focus

Diversification Diversification

Understanding the underlying portfolio Understanding the underlying portfolio

A healthy and sustainable market A healthy and sustainable market

Pension Fund Standards

Our CRS transactions are based on the principle of understanding the underlying portfolio and a genuine sharing of credit risk between the bank and the investor. This leads to three key principles of our pension fund standard:

Adequate risk alignment of 20% to avoid the originate-to-distribute model. CRS transactions, unlike the typical true sale securitisation, are focused on covering the first losses on a loan portfolio. As such, for CRS the regulatory minimum of 5% risk alignment is insufficient as that is quickly compensated through origination fees and a few coupon payments. For more information about approach to risk alignment please see here.
Mitigation of counterparty credit risk to the bank by collateralising the funded notional. This leads to a clear risk-return profile where we only share in the credit risk of a loan portfolio. Not including this for CRS transactions has led to a lower standard of Simple Transparent and Standardised (STS) securitisation for CRS compared to true sale, which by its nature is collateralised. In addition, it runs counter to a key lesson from the Global Financial Crisis and the regulatory trend. For more information about our approach to collateralisation, please see here.
Having the right data to evaluate the credit risks of the loan portfolio and estimate expected losses throughout the economic cycle. This includes reporting data that is fit-for-purpose, reflecting the bank’s modelled PD and LGD data, as well as a sufficiently lengthy period of historical data to understand the performance of the portfolio through economic cycles. This is significantly more than 5 years. For more information about our approach to data and due diligence, please see here.

Environmental and Social Responsibility

A core belief of PGGM as pension fund asset manager is that sustainable development is essential in order to generate good and stable investment returns. This is especially true in the long term during which the money of our clients is entrusted to us. In addition, PGGM wants to contribute to a liveable, more sustainable world for the pension beneficiaries. By using investments as driving force for change, PGGM believes that a positive contribution to sustainable developments can be made.

Track Record

Since December 2006, PGGM has successfully executed more than 84 CRS transactions with a total of 19 counterparties, a cumulative invested amount of approximately € 18 billion per ultimo 2023 and referencing diversified loan portfolios in different types of credit exposures all over the world in over 80 countries. With the majority of our risk sharing partners, multiple transactions have been executed, leading to a strong relationship in which we have a better understanding of the bank’s internal processes. This track record has led us to become one of the most experienced asset managers worldwide in this segment of the securitisation market. By sharing credit risks the bank holds as part of its core and successful lending activities, the mandate has generated an average annual return up to 2023 of around 11% for PFZW.

As per 31 December 2023, our portfolio consists of 38 transactions, with a market value of € 6.6 billion, referencing approximately € 82 billion notional of underlying loans. An overview of current investments is available in the transparency list of PFZW.