(This story appeared in the July 6 edition of the IFR Magazine)
By Anil Mayre
LONDON, July 8 (IFR) - Banca Popolare di Vicenza and Banco Comercial Portugues have both launched securitisations of small and medium-sized enterprise loans, showing this form of collateral can be used in the capital markets without waiting for the ECB to implement its much-hyped plan to unlock funding to this struggling sector.
The securitisation of SME loans has been a hot topic since the ECB announced its intention to revive SME funding and these Italian and Portuguese banks are showing that the old techniques in the new world of SME financing can still be viable.
The banks are however, following, very different strategies and degrees of publicity.
BCP quietly closed a synthetic deal, with its choice of structure reflecting an aim of managing risk rather than funding. Through issuance vehicle Caravela SME No.3, arranged by Stormharbour, it privately placed EUR255m of credit-linked notes.
These bonds reference a much larger portfolio of loans, with protection bought on those assets through a credit default swap. The size of the portfolio is undisclosed, but estimates of a ratio of 10 to 1 for loan pools versus funding components are not unusual in such deals.
This is similar to Banco Espirito Santo’s Lusitano synthetic transaction completed at the tail end of last year, also via Stormharbour. And in an environment where banks are stressed by the need to manage risk, such capital relief trades could be a solution for capital-consumptive assets.
The Caravela bonds sold were unrated and carried a legal final maturity of 2036, to match the longest loan in the pool. The coupon paid to buyers of the credit-linked notes is floating, but not the standard “Euribor plus” model of European ABS.
There is a target internal rate of return of 12%, and once that IRR is hit no additional coupons will be paid. The previous two Caravela trades were cash structures, retained in December 2008 and December 2010 for EUR3bn and EUR2.7bn respectively.
CASH FOR FUNDING Banca Popolare di Vicenza, meanwhile, is using the more standard cash structure in a deal arranged by the originator and JP Morgan, which are joined by Barclays, Goldman Sachs and SG as bookrunners.
And this seems to fit more with what the ECB wants to achieve - funding. “We are a commercial bank and want to put money back into the economic cycle. This deal allows us to transform the loans, and put the money we receive from investors back into the Italian market,” an official at the borrower said.
Its being a marketed deal opens up the range of potential investors, but brings its own challenges. Investors have not been shown an Italian SME deal since the onset of the financial crisis, market players say, and therefore have no recent pricing comparables.
The deal is not rated to Triple A because of sovereign rating caps and will have to struggle against a background of renewed difficulties in the eurozone (last week saw political tensions boil over in Portugal and further Spanish downgrades).
But European SME securitisations have generally performed well throughout the crisis, with many deals reporting lower delinquencies than UK non-conforming RMBS, for example. And BPV has opted for a clean bundle of loans for this trade. They are fully performing with no payment holidays, those secured by a mortgage have a low LTV of just 42.51% and the loans are well seasoned at 3.14 years. There are more than 10,000 loans in the pool, totalling EUR1.569bn.
Against this, BPV is structuring three tranches of bonds. There are two senior tranches totalling EUR1bn, supported by a EUR569m junior tranche. Some of the 1.76-year Class A tranches will be retained by the originator, with the level of public placement to be determined by investor feedback. Barclays and SG, or affiliates of them, may also purchase some of the Class A bonds, according to marketing documents.
BPV is an active securitiser and began looking at the deal at the start of the year, when spreads were rallying hard. Having previously focused on residential mortgages and launched a dozen RMBS transactions, it has decided to broaden its options.
BPV and BCP’s deals join a small club of placed post-crisis SME securitisations. Lloyds has sold bonds backed by UK loans from its Sandown programme (most recently in 2012) while Cajamar of Spain placed some of its transaction in April 2013. Caixa Catalunya also launched an issue in 2009 but on the whole, Spanish and Italian SME issuance has been used as collateral for repo deals with the ECB. (Reporting by Anil Mayre)