The revival of Europe’s collateralized loan obligation market doesn’t extend to middle market loans, according to Fitch Ratings.
Fitch said today that it remains uneconomical to securitize loans to small and medium sized European enterprises, at least if the securities are placed with investors.
That’s because potential investors in SME securitizations tend to expect to receive a yield pick up over residential mortgage backed securities, which are more liquid and are also perceived as less risky.
Fitch said the last “significant” placement of an SME securitization in the primary European market was Sandown Gold 2012-1 from Lloyds, which had with a spread of 200 bps over Libor for the 'AAA'-rated tranche. But spreads have tightened significantly since then. “Based on investor meetings and roundtable discussions, Fitch estimates that the minimum primary market spread for 'AAA' rated SME securitisations would be between 80 bps to 100 bps over Euribor for core European jurisdictions in the current environment,” the ratings agency said.
“Conversely, loan spreads charged by the lenders range between 1.2% to 2.5%, depending on jurisdiction, but have been increasing slowly,” it said, adding, “Surprisingly, the asset spreads in Italy and Spain are at the lower end of the range.”
As a result, for SME securitisations to be economically viable, either the spreads demanded by investors have to decrease further or assets spread charged by lenders will have to rise.