IMN Global: Originate-to-Distribute SMEs?

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Add this to the list of reasons investors haven't warmed up to securitizations of loans to smaller companies: fears that it may encourage irresponsible lending.

Felix Blomenkamp, head of European ABS at PIMCO and a speaker on a panel at IMN's Global ABS conference Thursday, said the European Central Bank's push for SME securitization may have this uninteded consequence. 

“We don’t like origination for securitization and would like to see the originator taking on the risk on balance sheet and securitizing a more granular portfolio,” he said.

Before the financial crisis, banks that originated loans for the sole purpose of securitizating them tended to spend less time looking at the underlying credit.

Blomenkamp suggested that, instead of promoting increased liquidity to small and medium-sized enterprises (SMEs) via securitization, the ECB should look to expand its repo eligibility for the asset class.

Blomenkamp's comments took some by surprise. “It’s the first time that I have heard this take from an investor that suggests banks may look to originate SME loans for the sole purpose of securitization under the ECB initiative” said an analyst who attended the panel.

Another panelist said SME loans securitization could be an atttractive investment, though not necessarily for his firm. “For people that have the resources to really look at the underlying loans, this could present a good opportunity,” said Ramesh Kumar Ramiah, principal portfolio manager at the World Bank. However Ramiah said that his desk “plans to stick to the core markets of Dutch and U.K. RMBS and German multifamily.”

SME securitizations have been few and far between since the financial crisis. In a May 3 report, Fitch Ratings attributed this to the fact that spreads on SME securitizations cannot compete with those of other kinds of securitizations, expecially residential mortgage backeds. .

“Investors tend to perform relative pricing when evaluating an investment,” the report said. “The prevailing view is that SME securitization, due to the lack of liquidity in the market as well as the perceived additional risk, should yield a premium over more liquid reference RMBS.”

Fitch estimated that the minimum primary market spread for 'AAA' rated SME securitizations in May would be between 80 bps and 100 bp sover Euribor for core European jurisdictions in the current environment. The loans spreads charged by the lenders range from 1.2% to 2.5%, depending on jurisdiction, but have been increasing slowly.

“As a result, for SME securitizations to be economically viable, either the spreads demanded by investors have to decrease further or assets spread charged by lenders will have to rise,” the report said. 


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