Behind the SRT heatwave: American office buildings become "minefields", European banks transfer commercial real estate risks at a high price.

In the important and highly volatile Significant Risk Transfer (SRT) market, investors are increasingly inclined to provide hedges for European banks' deteriorating commercial real estate loans, which exceed 200 billion euros (approximately 232.5 billion US dollars), but this process comes at a high cost. The embattled Deutsche Pfandbriefbank AG, which is eager to offload its various exposures in US commercial real estate debt, entered the SRT market for the first time in December last year. According to sources, this milestone transaction clearly demonstrates that investors providing insurance for high-risk commercial real estate loans can receive substantial yield spreads. According to the sources, in the evaluation of the PBB's SRT transaction, initially more than 20 institutions were invited to participate, of which about two-thirds ultimately submitted non-binding bids. The key reason for the unexpectedly high demand is that the reference loan portfolio is relatively small (covering less than 30 loans) and highly concentrated in the US office sector - with many loans categorized as phase two (significant increase in credit risk but not yet in default). The bank, headquartered in Augsburg, officially announced on December 22, 2025, that it had finalized a credit risk hedge of $2 billion for its loans by Oak Tree Capital Management, a subsidiary of Brookfield Group. In this transaction jointly led by Alvarez & Marsal Financial Services and Deutsche Bank, Oak Tree Capital further purchased $320 million in credit-linked subordinated notes, forming a dual risk mitigation structure for high-risk assets. Sources revealed that the pricing of this SRT transaction was more than 15 percentage points above the benchmark interest rate; and according to data from Seer Capital Management, which has been focusing on investing in SRTs since 2010, the premium levels of most SRT transactions in the past 12 months were less than 10 percentage points. According to the terms of the transaction, sources revealed that PBB retained a first loss share equivalent to about 3% of the total reference portfolio value. Representatives from PBB, Alvarez & Marsal Financial Services, Deutsche Bank, and Oak Tree Capital all declined to comment on this arrangement. Default Protection Banks provide risk protection for loans through large risk transfer mechanisms, often receiving risk coverage equivalent to 5% to 15% of the loan value. These transactions are often structured in the form of credit-linked notes, which can effectively increase capital adequacy ratios and reduce reliance on financing measures that are unpopular with shareholders, such as issuing new shares or cutting dividends. At the same time, this mechanism can also create more space for banks to increase new loan issuance, conduct mergers and acquisitions, or implement capital operation strategies such as shareholder dividends. PBB officially announced the termination of its US operations in June last year and simultaneously launched a disposal plan for approximately 4.1 billion euros of US commercial real estate loans - optimizing asset structure through asset shrinkage, securitization operations, or direct sales. It is worth noting that in the SRT transaction completed in December last year, the reference portfolio size nearly accounted for half of PBB's total exposure in US commercial real estate at that time. Although NatWest Group in the UK and Aareal Bank in Germany have issued SRT products linked to commercial real estate loans, they rarely use them as tools for a systematic exit from the entire commercial real estate business line. The high-risk nature of SRT determines that investors are more inclined to choose banks that have "sustained motivation to ensure stable performance of SRT" - these institutions will continue to issue SRTs on similar loans in the future, forming a virtuous cycle of risk sharing. In contrast, institutions that simply use SRT as a business exit tool often struggle to gain long-term trust from investors. Although European banks have significantly reduced their non-performing loan stock over the past decade, regulatory authorities still see problem commercial real estate exposure as one of the financial industry's biggest vulnerabilities. According to data from the European Central Bank, as of the end of the third quarter of last year, large banks had a total of 221 billion euros of commercial real estate loans classified as phase two. Standard & Poor's Global Ratings awarded PBB a BBB- credit rating, which is the lowest investment-grade level. In November last year, Standard & Poor's further downgraded the outlook for PBB to negative, citing potential risks during PBB's business model transition - borrower behavior may further weaken its profitability.