German state-owned development bank Kreditanstalt fuer Wiederaufbau (KfW) launched its first non-German transaction from the PROMISE securitization program at the end of December.
Last year, a total of 11 new transactions were completed under KfW's PROMISE and PROVIDE programs - more than double the total amount completed in the two preceding years. "Our two securitization programs have become firmly established in the market," said Hans Reich, chairman of KfW's board of managing directors. "The standardization of both programs has led to a high degree of acceptance on the part of investors, so that now we can say that our securitization instruments are a great success. The securitization volume which we have now achieved reaffirms our assumption that, for typical promotional loans, the instrument of securitization is of major importance for the yield and risk management of many banks."
The latest $119.2 million transaction, Promise Austria-2002 Plc., follows the $19.8 billion previously issued from both the PROMISE and PROVIDE programs in 2002. KfW will act as an intermediary and will sell protection to the originator, Bank Austria Creditanstalt AG (BaCa). Under its platform, KfW absorbs the risks combined by way of a derivative from loans, which a credit institution extends to small- and medium-sized companies (SMEs), and KfW provides the originator with a guarantee at market prices. "In a second step, the risks we assume are placed in the swap and capital markets in individual tranches," said Reich. "By transferring the risks, the banks can reduce their tied-up economic and regulatory capital and release potential for further lending to SMEs."
According to KfW, the increased use of their programs has also provided greater secondary market liquidity for risks associated to SME and residential mortgage loans in Germany, with about $2 billion in credit-linked notes placed in the market. "German investors in particular -but also interested investors from [other] European countries and Japan - value CLNs as a diversified, high-yield investment product that also has an external rating and is suitable as a loan substitute for credit risk management," said Reich.
Going forward, the bank expects to make further use of its multi-seller transaction model, where smaller on-lending banks would benefit from a securitization funding advantage. The focus will be to gather from various regions small portfolios of roughly $50 million that would otherwise be too small to enter the market individually, and then sell them combined into the market.
This year, the state of North-Rhine Westphalia and KfW intend to jointly support transactions where SME loan portfolios of North-Rhine Westphalian banks are pooled and placed in the capital markets. Reich added that KfW plans to include in its platforms this year a purchase variant that can be added into most ongoing programs. "Portfolios acquired by KfW can be added to the pool and synthetically secured through PROMISE and PROVIDE in an efficient manner," he said.
Outside of Austria and Germany, Reich said the bank was ready to offer its platform to other European institutions where KfW would assume a neutral intermediary role. "Incorporating European portfolios will further increase the liquidity of the platforms, which will benefit all parties - including ultimately the German SME sector," he explained. "With regard to the capital market, the platforms permit the fragmentation of the European securitization market, which has resulted from the various national legal systems, to be temporarily offset."