The rapidly growing collateralized debt obligation (CDO) market in Europe can pay thanks to the ever-popular securitization of small and medium-sized loans (SMEs), an asset class that since its inception in 1998 has contributed sizeable volume to the structure.

According to Fitch, SME loans are defined as loans made to companies with an annual turnover of less than EURO250 million, and they represent one of the main pillars of the growth of issuance in European CDOs. In 1998 the volume of issuance accounted for 7% of total European ABS that year. By 2000 SME CDOs made up almost 15% of the total volume and as the need for banks to free up cash from the balance books continues, so should the popularity of this asset class. "The main motivation for these securitizations is to provide regulatory capital relief and cover potential capital relief in the future; it is very much likely that other banks will continue to incorporate this tool," said one analyst familiar with the situation.

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