Announcement comes in the leadup to the implementation of Basel III Endgame regulations
JPMorgan Chase & Co. is set to sell credit risk associated with a $531 million portfolio of adjustable-rate mortgages (ARMs) in a novel transaction designed to streamline its balance sheet. This latest move is part of a broader industry trend aimed at reducing risk and meeting regulatory capital requirements, according to a Bloomberg report.
The bank plans to auction over $53 million worth of bonds tied to the riskiest segments of the portfolio, with pricing details expected later this week. This innovative transaction, termed a “deconsolidated portfolio risk transfer,” marks a new approach for JPMorgan.
Unlike traditional credit risk transfers, which might simply involve selling assets to investors, this structure will see JPMorgan transfer the $531 million mortgage portfolio to an off-balance sheet vehicle. This vehicle will issue bonds linked to the riskiest portions of these mortgages, while retaining the remaining $477 million in assets. To maintain balance between assets and liabilities, the vehicle will secure a credit agreement with JPMorgan to borrow against the retained portion.
Fitch and Morningstar DBRS have provided preliminary ratings for these bonds, ranging from AAA to B-, reflecting the varying levels of risk associated with different segments of the portfolio.
JPMorgan has characterized this deal as “inaugural” in communications with potential investors, according to Bloomberg. The mortgages involved are high-value, or “jumbo,” loans recently issued by JPMorgan to borrowers with strong credit profiles.
The trend of significant or synthetic risk transfers, first popularized among European banks, has gained traction in the US as financial institutions prepare for the implementation of Basel III Endgame regulations. Major US banks, including Goldman Sachs Group Inc. and Morgan Stanley, have similarly engaged in or explored risk transfer agreements over the past year.
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