SME Update: ABS Solutions for Europe's Funding Gap

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The European Central Bank continues to consider soltions to make the securitization of SME loans a more cost effective process, for both issuers and investors.

According to a Reuters report this week, the European Central Bank said it was advising on several options for supporting SME ABS issuance, which would include guarantee provisions, credit enhancement of SME loan pools, and ABS purchases by the European Commission and European Investment Bank.

The ECB said "the regulatory treatment for securitization should acknowledge the credit performance and ensure an unbiased playing field with other securities regarding risk, rating, and maturity." 

The ECB believes that securitization could be the solution for the funding gap Europe's SMEs face. A March report published by the Prime Collateralized Securities (PCS) secretariat shows that in the next five years European banks will decrease financial leverage by 7% of their balance sheet, or $2.6 trillion, which will potentially leave a €4 trillion funding gap.

In May the ECB governing council said it would begin consultations with other European institutions on initiatives to promote a functioning market for ABS collateralized by loans to non-financial corporations.

Standard & Poor’s also notes this week in a report that the Danish Financial Supervisory Authority has introduced a bill to allow banks to jointly refinance SME loans through an independent SPV.

The bank funding structure “includes elements of securitization, in our view,” said S&P.  

Under the bill banks would be allowed to jointly refinance SME loans through an independent SPV. The banks would keep the loans on balance sheet, logging them in a “refinance register”. The FSA is seeking feedback by Aug. 12.

Securitization isn't the only solution being shopped; banks in France are partnering with major institutional investors to create financing solutions that target SMEs.  

This week Tikehau IM, part of the Tikehau Group, was selected by the Caisse des Depots et Consignations (CDC), the Federation Francaise des Societes d'Assurances (FFSA) and 18 institutional investors; to manage a loan fund targeting French SMEs, the company said in a press release.

The Tikehau Group was set up in 2004 to invest and manage long-term capital for institutional and private investors in various asset classes. In 2007, it launched Tikehau IM, an investment company specializing in fixed income products.

The new fund, created at the initiative of insurance companies and the CDC, aims to provide loans to SMEs by directing available savings to growing companies.

“The establishment of this fund to finance companies is a key initiative at a time when those who do not have access to financial markets face scarcity of funding,” said Bruno de Pampelonne, President of Tikehau IM.

In May 2012, Societe Generale and AXA insurance group launched the first of these partnerships, creating a fund that targets French companies with revenues of more than €250 million and gross debt of more than €150 million.  

SG said that the partnership between two major players in the insurance and banking sectors had dual objectives: “to offer French companies an alternative funding solution, and to enable AXA to seize opportunities to diversify its investments by capitalizing on its experience as a credit investor while benefiting from Societe Generale’s expertise.”

One market source familiar with the arrangement said that there are a number of insurers who are looking for similar access to SMEs. “You have asset managers today approaching banks with an aggregate of interest from smaller insurance companies who on their own might not have the critical mass on their own to join that trend,” said the source.

AXA signed the same kind of agreement with Credit Agricole CIB in October 2012. The partnership provided a 5-year, €100 million SME loan for Neopost, a key player in the mailroom equipment market.

Also in October 2012, Ageas, the Belgian insurer signed a partnership agreement with Natixis to invest €2 billion over 3 years in infrastructure loans targeting SMEs that are structured by Natixis.


















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