Covered bonds backed by loans to small and medium-sized enterprises have gained traction in Europe as and alternative to bank financing and other debt instruments, according to Moody's Investors Service.

Turkey and Germany are two of the latest issuers of these SME covered bonds.

According to the ratings agency, the lack of bank financing and the current relatively low level of investor demand for SME securitizations imply that smaller companies will need to find alternative funding sources.

Moody's said that supporting the growth of this sector is “an apparent current market preference towards secured debt instruments."

Central banks and policy makers have also differentiated between covered bonds and other bank debt instruments, often giving the former more favorable regulatory treatment. One example of this is in the proposed EU Directive on the restructuring and resolution of credit institutions, which Moody’s said may exempt covered bonds from sharing losses.

“Central banks have also played a highly proactive role providing liquidity and have treated covered bonds favorably as collateral against other asset classes,” said Moody’s analysts in the report.

The ratings agency said it expects to see SME covered bonds issued in other European markets such as Italy, Spain and France.   

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.