France SME scheme to fuse securitisation and covered bonds
LONDON, May 16 (IFR) - The scheme that French banks are working on to help boost SME funding will fuse technology from different, and often opposed corners of the capital markets.
Banks will be able to obtain loans from a securitisation SPV, incorporated under the French Fonds Commun de Titrisation (FCT) rules, with each member bank having a separate Compartment, or individually segregated issuing vehicle.
But the FCT will use elements of the French SFH (societies de financement de l'habitat) covered bond law to take security over each bank's assets, though this was originally developed to fund mortgages.
Banks taking part in the scheme, which is believed to cover BNP Paribas, Credit Agricole, Natixis, and Societe Generale at least, will retain SME loans on their balance sheet, but will borrow secured loans from the SPV using them as security.
The SPV will fund the loans by issuing bonds, which will be eligible collateral at the Banque de France or, hopefully, accepted in the private market as high quality collateral. The bonds will not be rated at first, as the Banque de France will not require it, but may eventually obtain a rating.
If individual banks default, the SPV takes over the SME assets, transferring them to the Compartment using the legal framework of the covered bond law.
The difference from both securitisation and covered bonds is in how the new bonds will be credit enhanced. In a securitisation, subordinated bonds would be issued from the same Compartment as the senior bonds.
These junior bonds would take losses before the senior notes, protecting them. Meanwhile in a covered bond, a bank commits to adding more collateral to the pool than it has bonds secured on it - the same idea as credit enhancement, but in reverse.
For the new scheme, credit enhancement will come at an individual asset level. Banks will use the Bank of France's existing SME valuation model, originally developed to repo whole loan portfolios, to haircut individual loans before they are used as security.
Although the proposals will see all the institutions financed under the umbrella of the same FCT, the Compartment structure means recourse goes directly to each individual institution.
This means it is similar, but not identical to how Caisse de Refinancement de l'Habitat (CRH) funds French mortgages.
In CRH, French banks share the equity and take loans from the issuance vehicle in proportion to the mortgage assets they pledge to it.
CRH funds the loans to the banks using covered bonds, which are duration matched. CRH, and bond investors, do have recourse to the underlying assets, but the mortgages of all the member institutions are pooled. (Reporting By Owen Sanderson, editing by Anil Mayre)