The recent joint 4.5 billion ($6.4 billion) Danske Bank and KfW Bankengruppe securitization deal on small and medium enterprises (SMEs) in Europe is a highlight of the growing SME securitization market.
The transaction, made up primarily of Danish SME risk, was arranged solely by Barclays Capital and was launched with the name Prime Bricks 2007-1, under the KfW securitization (Promise) platform. The underlying portfolio contains 14,771 loans with risks from private housing loans also securitized. All loans in the portfolio are mortgage-backed, the average indexed LTV ratio is 47.7% and the maximum concentration is 0.3%, according to a KfW report.
Of the total volume, 357.6 million is backed by the issue of credit-linked notes. The first loss piece, which amounts to 2.38 million, remains with Danske Bank. The remaining 4.14 billion of the loan portfolio default risk is covered by credit default swaps.
The capital market has heralded the transaction as proof that SME risk securitization in Europe has officially come into its own.
The recent Global ABS conference in Barcelona held a panel on SMEs in Europe moderated by Benedicte Pfister, a director of ABS ratings at Moody's Investors Service.
One contributor to the talks, Dieter Gluder, head of asset securitization at KfW, drew attention to government-supported programs, such as Promise and the Spanish FTPYME programs, which are helping to facilitate and duplicate SME securitization. Based on these initiatives, the two countries have emerged as the top SME players and continue to change.
"In Germany, the majority of SME transactions have been synthetic, while the Spanish market has seen mainly true-sale securitizations to date," Pfister said. "However, both markets are evolving, and we may see more true-sale SME deals out of Germany and an increased interest in synthetic SME deals in Spain."
In 2006, 1 billion was earmarked to create SME platforms to be utilized from 2007 to 2012 in Germany, where more than 90% of businesses are SMEs, according to the "5th Round Table of Bankers and SMEs," a meeting held last year in Frankfurt between the European Commission and KfW.
"Asset securitization, whose development in the German market KfW has supported intensively, is today an important element and an efficient instrument of SME financing," Ingrid Matthaus-Maier, a spokeswoman for the Board of Managing Directors of KfW, said in a statement.
According to a series of workshops convened last March by the European Commission's department of enterprise and industry, SMEs across Europe will receive greater government support and will also have better access to financing through a variety of incentives, such as loans that are repaid according to the success of the borrower's business.
Reflecting Mixed Pools
Another example of the way SME deals in Europe are evolving is based on mixed SME pools that are combining standard SME loans with more CMBS-type loans. As one source put it, it is becoming harder and harder to tell if some deals should be classified as SME and if some deals should be categorized as CMBS.
"[One] interesting development is the placement of more subordinated tranches in the market," Pfister said. "While most of the issuance comes from Spain and Germany, other countries, such as the U.K., the Netherlands, Greece, Eastern Europe and now Switzerland and Denmark, are contributing to growth in the sector."
SME securitization success is also getting the attention of countries that, until now, have been cool on the SME concept. "In Italy, we have seen very few securitizations of SMEs," said Marco Grimaldi, head of European Securitization at Dresdner Kleinwort. "But this may change when the Basel II rules come into full force in the near future."
SMEs in Italy have traditionally funded their assets through leasing, and the leasing ABS market has therefore been very active over the past five years, added Grimaldi, who believes that in the future, "We will see lots more funded and synthetic SME deals out of Italy."
But none of this comes as a surprise to Pfister, who said that the current performance of SME securitizations has been within expectations to date. "Overall, the trend in the SME securitization market is positive," she said. "Securitizations of SME loans in Europe have experienced large growth in recent years, and we expect the growth to continue."
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