The Euro Secured Notes Issuer, a vehicle set up by five French banks to securitize loans to small and medium-sized enterprises, made its debut issuance this month, selling €2.6 billion ($3.5 billion) of bonds with maturities of up to three years.

BNP PARIBAS, BPCE GROUP, Credit Agricole Group, HSBC France and Societe Generale are the sponsors of the program. However, all European banks (not just French) can sell ECB-repo-eligible SME collateral to the vehicle, according to a press release issued by the French Banking Federation.

The bonds, which were sold on April 11, have not been rated by a credit rating agency, however they are backed by loans that have been awarded a high rating by the Banque de France (FIBEN). The bonds will remain on the balance sheet of the lender, and the issued securities cannot be tranched.  

In Europe, SME loans form a large part of banks’ balance sheets, but they are an underused source of collateral, largely due to "legal impediments as well as operational constraints", according to an April 23 report published by ABN AMRO. “The French banks solve this problem by setting up a simple and transparent SPV, which should result in a rise in available collateral to banks,” the report stated.

FBF said that it expects further issues to follow in the coming weeks. The “notes increase liquidity in the financing available for small and mid-sized firms while offering high-quality collateral to capital market participants,” the industry group stated. The outstanding amount of loans to households and companies in the eurozone is 9.6 trillion, while the overall size of the SME loan market is around €1.5 trillion, according to ABN AMRO.

This new form of securitization is based on bank loans to SMEs meeting the eligibility criteria for Eurosystem refinancing operations. “If successful, the structure might be an example for other countries,” said ABN AMRO analysts in the report.

The European Central Bank has been looking for ways to revive bank lending.The ECB believes that securitization could be the solution for the funding gap Europe's SMEs face — in the next five years European banks will decrease financial leverage by 7% of their balance sheet, or $2.6 trillion, which will potentially leave a €4 trillion funding gap, according to figures reported in 2013 by the Prime Collateralized Securities (PCS) secretariat, a securitization industry trade group.

However public issuance of ABS remains very limited and most deals are retained by banks to use as collateral for ECB repo operations. The outstanding amount of ABS in the EU is currently about €1.5 billion, or around one quarter of the size of the U.S. ABS market, according to figures reported by the ECB.   The chart below highlights retained vs. placed issuance in European securitizations.

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