Seven new banks signed the joint letter of intent associated with the much-anticipated German true-sale initiative, drawn up between the original six participating institutions earlier this year (see ASR 6/9/03). Thirteen banks are now part of the initiative, including: Commerzbank, Deutsche Bank, Dresdner Bank, DZ BANK, HVB Group, KfW, Bayerische Landesbank, Citigroup, DekaBank, Eurohypo, HSH Nordbank, Landesbank hessed-Thurigen and West LB.

But the true sale initiative hit a bump in May, when changes to the Mittelstand law (which were to benefit small- and medium-sized entities) were delayed and passed on to a conciliation committee. According to industry sources, the conciliation committee would not be addressing the laws that specifically referred to trade tax in securitizations. Nonetheless, the delay was expected to deter implementation of the law until after the summer recess.

However, the conciliation committee has quickly agreed on the changes proposed to SME laws and the bill is once again in front of the Bundesrat, Germany's upper house of Parliament. It's awaiting final approval before it becomes law, an action which now could come as early as Friday. "According to our information, the law was subject to a mediation process in the mediation committee of Bundestag [lower house] and Bundesrat, which did, however, not refer to the ABS part of the law," explained Dr. Kurt Dittrich at Linklaters Oppenhoff & Radler. "The result of the mediation was to recommend to pass the law in its original form, [that is] without any privileges for corporates, which are also, to our knowledge, currently not expected to be addressed elsewhere."

Where securitization is concerned

The main objective of establishing a true-sale initiative is to alleviate the cost of funding for German Banks that have faced the challenges of efficiently raising funds because of their deteriorating credit environment, analysts said. According to Dresdner Kleinwort Wasserstein, German banks have primarily used securitization of synthetic structures for regulatory capital relief. In the current market environment, however, that focus may be shifting toward funding. "However, the ultimate benefit of these tools depends on the individual bank's objectives and restrictions, e.g., whether it wants primarily to achieve regulatory capital relief, lower funding costs, transfer economic risk or maintain covenants," reported analysts.

Under the current draft bill, foreign and SPVs that purchase receivables originating from bank loans in securitizations would be exempt from trade tax in Germany.

The Linklaters solicitors following the development of the trade tax changes considered "the most important add-back in the context of securitizations is the add-back of 50% of the interest payable on long-term debt' (Dauerschulden), i.e. debt with a term of at least one year." The Parliament amended Section 19 of the German Trade Tax Ordinance, referred to as the Gewerbesteuerdurchfhrungsverordnung. As it reads, SPVs buying loan receivables from banks in securitizations will be treated like the originator banks and therefore exempted from the add-back.

Dresdner estimated that more than €180 billion (US$204 billion) of assets at HVB, €120billion (US$136 billion) at Deutsche Bank and €100 billion (US$113 billion) at Commerzbank could be game for securitization once the law is implemented. "In our point of view, HVB has the highest incentive among the peer group to improve its regulatory capital situation via securitization," reported Dresdner. "Our calculations suggest, however, that even if HVB were to securitize 20% of all securitizable risk-weighted assets, it could boost its Tier One ratio by only approximately 50 basis points."

As for the clear winners of TSI, Dresdner believes that HVB may be the only bank that can clearly take advantage of the true-sale structure to enhance earnings. "In terms of true-sale securitizations, our findings suggest that many structures would not enhance the earnings of German Banks, largely because the costs of ABS funding at present often exceed the costs of senior unsecured funding on balance sheet," said analysts.

Based on Dresdner's assessment, it's likely that Commerzbank and Dresdner may have less of an incentive to securitize their assets for regulatory capital relief. These banks would also have to consider the risks of earnings dilution since their focus right now is on maintaining and enhancing revenues.

On a broader scale, the true-sale initiative would only make sense to banks if they were able to achieve triple-A funding costs. At that rating level, banks would see funding costs dip significantly below current synthetic funding costs and senior funding levels for all asset classes, said Dresdner, noting, "The conflicting nature of its member banks' objectives and restrictions is likely to make this a difficult process and the likelihood of a compromise seems high."

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