European banks are having a hard time getting loans off their books by bundling them into collateral for bonds, which would free up capital for more lending. So instead, many are opting to sell securities exposed to the risk in these assets.
The latest recognition of what is known as “synthetic” securitization comes from the Prime Collateralised Securities Initiative, an independent non-profit that seeks to boost asset-backed issuance by labeling securities that meet its criteria as “high quality.” On Thursday, the PCS announced a new label to be awarded to synthetic transactions.
“PCS hopes that its new label will, once again, help support the market by assisting both protection buyers and investors through standardization and added transparency,” the organization stated in a press release.
The organization’s website touts synthetic securitization as “another way for banks to break the iron link between how much equity they hold and how much lending they can extend to the real economy.”
It is the first new label from PCS since the creation of its original PCS True Sale Label in 2012.
PCS has already granted its first PCS Risk Transfer Label to a recent transaction by Italy’s UniCredit linked to the performance of a pool of loans to small and medium-sized companies. (The size of the transaction was not disclosed.)
Data on synthetic securitization is scarce, given the private nature of the deals. Deutsche Bank recently published an estimate that issuance reached €94 billion in 2016.
Among notable transactions, Dutch pension fund PGGM announced in January of last year that it had entered into a €2.3 billion transaction with Banco Santander to assume credit risk on more than 6,000 loans to the banks clients in Spain.
Europe’s true-sale securitization, in which an originator (or aggregator) sells loans to a special purpose vehicle, which then issues asset-backed securities, is “broken” in the words of Deutsche Bank economist Orçun Kaya. In a Feb. 21 report, he said the outstanding volumes of all securitized European assets tumbled to $1.5 billion at the end of 2016 from $3 trillion in 2009.
The good news is that synthetic securitization, in which the originator transfers the credit risk of the bundled loans via credit derivatives or guarantees to the capital markets, offers many of the same benefits - despite the fact that the loans themselves remain on the originator’s balance sheet.