Should the European Commission (EC) and European Investment Bank (EIB) follow through on proposals to spur lending to small and medium companies, issuance of SME-backed deals could be relatively brisk in 2014 and 2015, according a report released today by Barclays analysts.
Over the last several months, European Union officials have been making noise about stimulating SME securitization.
The idea is to reduce the sector’s over-reliance on a banking industry that is still struggling in much of the region. One idea that has been floated is for the EIB to guarantee the mezzanine tranche of a fairly basic SME-backed deals, probably of no more than three tranches. The mezzanine would make up 10%-15% of the capital structure.
Barclays analysts believe there’s a strong chance that European Central Bank would then make that tranche eligible for collateralized funding, further stoking investor demand. What is more, thanks to the guarantee, such a tranche might not even be a securitization from the regulatory standpoint, translating into additional capital-relief benefits for investors.
A few approaches to the guarantee have been floated. In a joint report from the EC and EIB, three options are put forth. One would be guarantees for new SME lending by financial institutions and for new SME loan portfolios earmarked for securitization. A second would be similar but available to existing SME portfolios as well. A third would cast the broader net of the second approach with an added ability to pool risk, possibly among EU member states.
Barclays believes the options that allow for existing portfolios to be securitized are the ones with the best chances of being implemented. The reason is the urgency among politicians and officials to stimulate the EU economy.
“The SME funding gap in certain countries appears to be a pressing concern for EU politicians, [who] will not be eager to wait two to three years until the initiative shows first results,” the analysts said. “Hence the EC-EIB program could be implemented in early 2014, with the ECB following shortly afterwards in terms of the repo eligibility for guaranteed mezzanine tranches.”