Institutional structurer of the year: Societe Generale Corporate & Investment Banking

French bank helps captive insurers solve financing headaches

Nicolas Guerin, Societe Generale Corporate & Investment Banking

Structured Products Americas Awards 2016

Societe Generale Corporate & Investment Banking (SG CIB) prides itself on its ability to solve knotty financing problems. The bank buttressed its flagship collateralised financing business last year by allowing clients to post a richer variety of assets than before – a strategic move that helped reel in a number of big clients.

Top of the list was a gaggle of captive insurance companies – insurers set up exclusively to cover the risks of their parent entities. These were run by a specialist captives administrator, which sought a letter of credit (LOC) facility it could draw upon to collateralise reinsurance contracts struck with large US primary carriers.

These captives had been left high and dry by their previous financing provider after they pulled out of the market, forcing the captives' administrator to scramble for a substitute. For SG CIB, captive financing was virgin territory, yet it became one of two banks to share the discarded $2.5 billion book in the first half of 2015.

The transaction saw the French bank post LOCs to eight separate captives in exchange for a range of collateralising assets – including cash, securities, hedge fund shares and incoming LOCs from a medley of US banks of all sizes.

"It was our first foray into this space and it was a large first transaction. Two aspects were new to us: first, providing LOCs to captives was something we hadn't done previously. Second, accepting new collateral as part of the package – including incoming LOCs," says Nicolas Guerin, head of sales for SG CIB's cross-asset financing business in New York.

Julien Gimbrere, head of the US structuring team, says landing this mandate was testament to the French bank's ability to trawl through the vast heap of posted collateral and reach a level of comfort with each and every asset underpinning the LOCs.

"We really are a cross-asset shop, which gives us the capability to assign credit to each security. We also had to create agreements with around 50 banks that issued over 400 LOCs to the captives in order to gain confidence they could be drawn upon if necessary. This was a complex process to start and to monitor on an ongoing basis," says Gimbrere.

We also had to create agreements with around 50 banks that issued over 400 LOCs to the captives in order to gain confidence they could be drawn upon if necessary
Julien Gimbrere, Societe Generale Corporate & Investment Banking

The captives administrator tapped SG CIB initially for $400 million worth of LOCs, but upsized its allocation to more than $750 million soon after once it became clear the bank had mastered the requisite collateral management.

"SG CIB took the time to understand our business and listened to what our needs were. We had some open and honest conversations about what they could do and what we could do in refining the terms and conditions. Overall, it was a very positive experience that made clear to us this was going to be the start of a long-term relationship," says an executive at the captives administrator.

SG CIB applied this diligent approach to another fiendishly complex series of financing trades, this time with some funds of funds administered by a leading alternative asset manager. The client wanted to source leverage – as well as bridge financing to cover portfolio turnover – for five of its vast master funds and their affiliated feeder funds, plus an embedded foreign exchange overlay to service those feeders denominated in a currency other than that of the host master fund.

The loan, agreed in early 2015, was structured as a cash-settled, prepaid forward, secured on each master fund's underlying assets. SG CIB extended credit to the asset manager to an amount proportionate to the value of each fund's assets, which the manager can draw upon at will to lever up the exposure of specific feeder funds to the master fund, and supply cash to handle master fund unit redemptions.

The same credit line can also be used by the asset manager to facilitate currency trading, without the need for a separate collateral agreement to cover the forex derivatives contracts.

Any draws on the credit line are then cash settled at the end of the four-year term of the forward, meaning the fund retains full ownership of its assets. The size of the loan can also expand and contract at the will of the client in order to keep its exposure in line with the value of the funds' underlying assets.

Marrying complexity and scale was core to SG CIB's appeal to this client. Across the five funds covered, the asset manager secured a nominal credit line of $1.45 billion.

Julien Gimbrere, Societe Generale Corporate & Investment Banking

"We are one of only a few banks able to offer this: a derivatives product that works as a loan and gives the client all the flexibility they want. The client will pay whatever they owe us for bridge financing, leverage or anything else they need. Tomorrow, if they want to hedge some tail risk, they can do that. They don't need cash - they can use this structure," says Gimbrere.

Other institutional clients praised the bank for its flexibility and willingness to tweak the terms and conditions of specific transactions to best serve their needs. This trait was on prominent display in one other financial deal, signed with a leading US investment manager.

"What really made a difference was they were very flexible and willing to work with us to design a facility that hit all of the buttons we needed. We had certain things we wanted in terms of tenor, protection against roll risk on each credit line, and in wanting to spread out the facility across several tranches. SG CIB's team was very helpful in working through those issues and giving us the mix of terms and tenors we wanted," says a fund product manager at the investment manager.