A new SME guarantee scheme announced by the U.K. government could be positive for SME ABS issuance and would align the U.K. with its European peers.
In a speech to the conservative party annual conference, George Osborne, Chancellor of the Exchequer, said he has asked the Treasury to look at ways of injecting money into small businesses, namely credit easing. He unveiled preliminary details of an initiative aimed at bolstering lending to small and mid-sized enterprises.
"The government intends to focus this stimulus directly on corporate sector funding, in contrast to the Bank of England's earlier quantitative easing, which involved government bond purchases," Standard & Poor's analysts said.
If the government introduced an SME guarantee scheme similar to those used in Germany or Spain, U.K .banks would issue more SME CLOs.
The U.K. currently has a government guarantee scheme where 75% of an eligible SME loan is guaranteed by the government. The scheme is at the individual loan level and relatively small compared with the UK's European peers. Fitch Ratings analysts said.
In Spain, SME transactions benefit from central and regional government guarantees. Fitch rates over EUR2 billion of Spanish SME CLO notes with a government or European Investment Fund (EIF) guarantee.
"The schemes work by guaranteeing a senior tranche of an SME securitization," Fitch analysts stated. "The bank originating the loans retains the first loss exposure to the SME portfolio."
In Germany, the government mainly supports SMEs through the state sponsored bank, KfW. KfW's Promise securitization platform program acts as an intermediary for the synthetic transfer of the credit risk of SME loans, Fitch analysts said.
"It allows banks to securitize loans to SMEs in a highly standardized way, which since its inception in December 2000, has led to investors becoming increasing familiar with the asset class," Fitch analysts said. "Since the onset of the crisis, many of these transactions have been issued privately. A KfW guarantee qualifies the transactions for inclusion in public-sector Pfandbrief. "