SME Catch a Break

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With Global ABS around the corner, it’s only fitting that we turn our attention to Europe.

In particular, the securitization of SME loans, which seems to be winning the hearts of officials at the European Central Bank. As Nora Colomer reports in the cover story, SME loans are a natural for the sector, as their capital intensive nature would give banks that securitize them more regulatory relief.

Currently the few deals being done are used as collateral in repos with the ECB; if the central bank were to provide some kind of credit guarantee, investors might be willing to accept narrower spreads, making securitization an attractive funding alternative.

SME-backed transactions present a contrast to the re-invigorated CLO sector in Europe. Sponsors have been able place the entire capital stack of recent CLOs with investors.

But that doesn’t mean everything’s rosy. As I explore in an article, Fitch has warned that some recent CLOs present unprecedented currency risk, with chunks of collateral denominated in currencies other than euros and no hedge attached. ASR sister publication Leveraged Finance News, meanwhile, reports that S&P is singling out another risk to investors of European CLOs: the shift in maturities of loans collateralizing legacy deals. 

Catastrophe bonds are also on our minds this month. In his article, John Hintze discusses renewal season in the sector, as deal sponsors capitalize on investor demand to roll over existing cat bonds at lower rates and beef up programs. Felipe Ossa tackles cat bonds as well but with a geographic lens. He finds that emerging markets are unlikely to generate more than the sporadic deal unless their rates of insurance coverage rise significantly.

Closer into the future is an $8.7 billion sale of RMBS-backed CDOs that Nora has found could be absorbed by the market without much digestion (it’s slated for the last week of May, so we’ll see).

Finally John’s second article is on the remarkable tightening of the CMBS market and whether we’re reaching a chapter of caveat emptor with credit quality potentially going south.

There’s more in magazine – a good deal  more – but I’ll let you get to it.

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