The fifth transaction off the PREPS platform - PREPS 2006-1 - a pan-European cash deal backed by subordinate small and medium enterprise loans, is gearing up to debut in the market next month. A distinguishing feature of the transaction is that its SME loans are deeply subordinated, with a Fitch Ratings weighted average portfolio rating of BB+'/'BB.' The portfolio of SME loans, which will remain static after the deal's close, was selected by investment services provider Capital Efficiency Group AG; the offering is similar to PREPS 2005-2, which priced last December.
The three classes of fixed and floating-rate notes totaling 321 million are scheduled to mature in July 2013, and will be issued out of the platform's Ireland-based SPV. JPMorgan Securities is acting as the swap counterparty and account bank, as well as the trustee. The portfolio includes 61 subordinate instruments to 46 German, three Austrian, four Swiss, five Italian, one Luxembourg and two Belgian companies. The deal has a rather large concentration of single borrowers within its portfolio, compared to other deals in the sector. The five largest single borrowers in the portfolio entered into financing agreements totaling 12 million each - amounting to 3.74% of the portfolio's notional; the smallest single borrower amounts to 1 million - or 0.31% of the portfolio's notional.
Preliminary pricing data was not available as of press time. PREPS 2005-2's A-1 tranche priced last year at 32 basis points over the six-month Euribor, while the A-tranche priced 75 basis points over, according to JPMorgan Securities.
Loans to small and medium-sized companies are expected to be a growth area within the European market, according to some market participants, a move that could, in turn, spur an increase in the number of SME CLOs in the pipeline. "We've seen a number of banks crank up SME transactions," said David Basra, co-head of Citigroup's global securitization team, speaking at Information Management Network's Barcelona conference held recently. And once more clarity is reached regarding the accounting treatment of these loans under Basel II, "a rash of SME deals" are expected in the market, said Robina Barker-Bennett, a managing director at CIBC World Markets.
Aside from Italian deals, the European SME CLO market has displayed strong performance as of the first quarter, Fitch said earlier this month. Outstanding defaults within the overall market have slowed as transactions have traded out of exposures to defaulted assets - and the Italian market represents only a fraction of SME CLOs. While more unsecured loans are cropping up in collateral pools and rising interest rates could affect prepayments and delinquencies, so far, the Spanish market has posted low delinquency levels, according to Fitch. The default earlier this year of German toy maker Nici AG affected a handful of SME CLOs - including two deals off the PREPS platform, 2004-2 and 2005-1 - but not enough to eat through too much credit enhancement as to impact deal ratings (ASR, 05/29/06).
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