January 30, 2015 / 5:12 PM / 3 years ago

ECBC mulls covered-ABS hybrid

* Industry mulls new SME bond product

By Anna Brunetti

LONDON, Jan 30 (IFR) - The European Covered Bond Council (ECBC) is trying to create a new hybrid product that would combine securitisation and covered bond features while utilising SME loans as collateral, which could improve lending to that sector. The ECBC has been working on a plan to create a new funding vehicle for SME loans since September last year - hoping to create a Europe-wide market for a type of collateral that has so far failed to convince traditional covered bond investors. “We are still at the very early stage of discussions,” said Luca Bertalot, secretary general of the ECBC. “It wouldn’t fall under the traditional covered bond collateral universe, and would carry very different risk factors and cash flows,” he said. “So we are checking whether it’d be possible to take the leap,” he said. Given SME credit’s tight-knit link to various national economies and its lack of standardisation, covered bonds buyers have shied away from getting exposed to an unchartered risk. Meanwhile, the structuring and capital costs of SME-backed ABS is high which has made it a challenging asset to securitise. But a hybrid product could give investors a better insight into this type of credit, with loan-level information and other data typical of securitisation deals, while providing them with the safety net of a dual recourse against the collateral pool and the issuer if things turn sour. This would reduce capital costs for issuers while allowing them to slice the risk in tranches, tapping a wider investor base. (Reporting By Anna Brunetti, Editing by Helene Durand and Shankar Ramakrishnan)

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