Study on asset-backed securities : impact and use of ABS on SME finance

112 Pages·2014·0.79 MB·English

Ref. Ares(2014)78104 - 15/01/2014

Contract ENTR 03/44

STUDY ON ASSET-BACKED SECURITIES:
IMPACT AND USE OF ABS ON SME FINANCE

Final Report

Dated 30 November 2004

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Disclaimer
Neither the Commission nor any person acting on behalf of the Commission is responsible for the use,
which might be made of the information contained herein. The views in this Study are those of the authors
and do not necessarily reflect the policies of the European Commission.
Copyright
Copyright European Communities, 2004. Reproduction is authorised provided that the source is acknowledged.
EUROPEAN COMMISSION
ENTERPRISES
Commissioner: Günter Verheugen
Enterprise and Industry Directorate-General
Director General: Horst Reichenbach
The goal of the Enterprise and Industry Directorate-General is to help create an
environment in which firms can thrive, thus creating the productivity, growth, jobs and
wealth necessary to achieve the objectives set by the European Council in Lisbon in March
2000. This means promoting business competitiveness by encouraging entrepreneurship and
innovation as well as facilitating access to appropriate markets.
The Directorate “Entrepreneurship and SMEs” works on broad policy issues affecting
entrepreneurship and SMEs across Europe, as well as on mechanisms delivering support to
SMEs (networks, business support measures, financial instruments). The Multiannual
Programme for Enterprise and Entrepreneurship (2001-2005) is the legal and budgetary basis
for most of its activities. These consist in supporting Member States policies to improve the
situation of SMEs throughout their life cycle. The methodologies applied in this regard are
mainly the open method of coordination and the identification and exchange of good
practices. The Directorate B monitors the implementation of the European Charter for Small
Enterprises by Member States and by the Commission. The Directorate also runs several
networks whose role is to give information and assistance to SMEs on Community support
programmes. The Euro Info Centre is the largest and has the broadest scope. In addition, the
Director, Mr Timo Summa, acts as SME Envoy, an interface between the Commission and the
SME business community, providing a contact point for SME organisations and, at the same
time, integrating SME interests and needs into the various EU policies and initiatives.
Improving the financial environment for SMEs is another major concern of the Directorate.
Activities in this area fall under the scope of the Unit “Access to Finance”. For several years,
the Unit’s financial instruments of the Multiannual Programme for Enterprise and
Entrepreneurship have proven to be efficient in stimulating the supply of equity and debt
finance for SMEs. These instruments, which are managed by the European Investment Fund
under the supervision of the Economic and Financial Affairs Directorate-General, provide
equity to new early stage funds, co-and counter guarantees to guarantee schemes and
assistance for the recruitment of specialised staff by seed capital funds. The Unit also works
on a policy level. It elaborates policies to support Member States’ efforts in improving SMEs’
access to finance by taking into account the evolution of the financial environment and
SMEs’ financial needs. Finally, raising stakeholders’ awareness on SMEs’ financing issues is
crucial. In this regard, the communication, dissemination and exchange of information and
good practices have taken on an increasingly important part of the Unit’s activities. The Unit
also organises or participates in workshops and conferences on key issues such as the
Microcredit European Conference in 2004 and the series of 60 conferences on “Basel II”
across Europe.

Director: Timo Summa
Head of Unit: Jean-Noël Durvy
Project Steering Committee: Jean-François Aguinaga, Ulla Hudina, Patrick Klein, Jennifer
Robertson, Frieder Schmitz.
E-mail: [email protected]
http://europa.eu.int/comm/enterprise/entrepreneurship/financing/index_en.htm
Contents
Page

1 Executive Summary and Recommendations 1
1.1 Introduction 1
1.2 Content 1
1.3 Key features of securitisation and the securitisation markets 1
1.4 What are the driving forces behind the growth of securitisation? 2
1.5 The European SME securitisation market 2
1.6 Does securitisation distribute risk? 3
1.7 Does securitisation aid SME access to finance? 3
1.8 Aids to growth of the European SME securitisation market 3
1.9 Conclusion and Key Recommendations 4
2 Introduction 6
2.1 Background 6
2.2 The Report 7
2.3 Structure of the Report 8
2.4 Acknowledgements 9
3 Key Features of Securitisation 10
3.1 Introduction 10
3.2 Risk Transfer 10
3.3 Key Players 10
3.4 Securitisation is based on a “pool” of assets 11
3.5 Securitisation is a leveraging and financing tool 11
3.6 Risk is unbundled (separated) into multiple layers 11
3.7 Losses in ABS portfolios 12
3.8 Credit Enhancement of ABS 13
3.9 Securitisation is often a complex and expensive process 13
3.10 The day to day commercial relationship between Originator
and borrower 13
3.11 Securitisation creates tradable investments 14
4 Volumes and Trends in European ABS Market 15

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Contents
Page

4.1 Background: The US Experience in Brief 15
4.2 European Outstandings and New Issuance Volumes 15
4.3 SME Backed ABS European Issuance Volumes 21
4.4 Other SME assets securitised 23
4.5 The Current Importance of SME ABS 23
4.6 Trends in the European Securitisation Market 24
4.7 Performance of the SME Asset class in secondary markets 25
4.8 Securitisation and the economic cycle 27
5 Drivers of Growth in ABS Markets 28
5.1 Disintermediation 28
5.2 Benefits of securitisation for Originators 29
5.3 Benefits for other market participants and for SMEs 33
6 SME Securitisation in Europe 35
6.1 What is driving SME securitisation? 35
6.2 SME Securitisation Structures: the benefits of official
intervention 36
6.3 Benefits of the Promise structure 36
6.4 Benefits of the Spanish FTPYME structure and related
Government guarantees 38
6.5 The role of the EIF in SME securitisation 40
6.6 Conclusion 41
7 Obstacles to Securitisation 42
7.1 Introduction 42
7.2 Internal obstacles 42
7.3 External obstacles 43
8 Possible Impact of Basel II on ABS Markets 47
8.1 Background 47
8.2 Analysis 48
8.3 Conclusions 51

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Contents
Page

9 Is SME Securitisation an Effective Distributor of SME Risk? 52
9.1 Introduction 52
9.2 Risk Boundaries and Distribution 52
9.3 Determining the size of FLPs 53
9.4 Principle drivers of SME Securitisation 54
9.5 The market for FLPs and the distribution of risk 55
9.6 Conclusion 55
10 Does Securitisation aid SME access to Finance? 57
10.1 Introduction 57
10.2 Behaviour of lenders towards existing individual borrowers 57
10.3 Increased exposure to the SME market as a whole 57
10.4 Conclusion 58
11 Aids to growth of the European SME securitisation market 59
11.1 Introduction 59
11.2 Making SME securitisation efficient: an agenda for banks 59
11.3 Making SME securitisation efficient: an agenda for
governments and regulatory authorities. 60
11.4 Explaining the potential benefits of securitisation to the SME
constituency 60
11.5 Allowing banks with smaller SME portfolios to access the
capital markets 61
11.6 Maximising the benefits of public sector support programmes
aiding SME finance through focused intervention in
securitisation 62
11.7 Public Sector activity in securitisation: is it effective? 65
11.8 Conclusions 68
Annex 1 Abbreviations 70
Annex 2 Glossary of Terms 72
Annex 3 Common Securitisation Structures Explained 78

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Contents
Page

Annex 4 A Typical Securitisation Documentation List 85
Annex 5 European SME Transactions from 1999 to June 2004 87
Annex 6 US Securitisation Data 90
Annex 7 EIF Credit Enhanced SME Securitisations 93
Annex 8 Conduits and multi-originated securitisations 96
Annex 9 Bibliography 101
Annex 10 Acknowledgements 104

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Tables & Figures
Page

Table 1: Examples of interchangeable expressions used in securitisation
terminology 12
Table 2: New SME Securitisation Issues - Europe and US 1999-2002
€ billions 23
Table 3: Motives for securitisation 30
Table 4: Motives for SME securitisation 35
Table 5: Benefits of the Promise structure 37
Table 6: Multi-originator issuance in Spain 39
Table 7: Contribution to overall changes in capital requirements 48
Table 8: Proposed Ratings Based Approach (RBA ) risk weights 50
Table 9: Pre-securitisation risk distribution 53
Table 10: Post-securitisation risk distribution 53
Table 11: First Loss Pieces 54
Table 12: SME Public Sector Support Programmes 62
Table 13: Soft and Commercial comparisons with regard to investment
in Mezzanine SME positions 67
Table 14: Principles of Credit Enhancement 73
Table 15: US Securitisations Outstanding as of Quarter 3 90
Table 16: US SME Securitisation Volumes 1998 to 2002 92
Table 17: Conduit and securitisation options for Originators with small
portfolios 96
Table 18: FLP: Illustrative Allocation in a multi-originated portfolio 98
Table 19: Hypothetical occurrence of loss in a multi-originated portfolio 99

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Tables & Figures
Page

Figure 1: Volume of European Securitisation New Issues € billions 17
Figure 2: All Securitisation Issuance by Country 2002 and 2003
€ billions 18
Figure 3: ABS Issuance by Country 2002 and 2003 € billions 19
Figure 4: ABS Issuance by Asset Type 2003 20
Figure 5: SME ABS European Issuance Volumes 1999 to June 2004
€ billions 21
Figure 6: Bank Assets Securitised in Europe 2003 22
Figure 7: Comparing “Rating Drift” trends of SME v Other ABS 25
Figure 8: AAA (Indicative) Spreads of SME v other ABS spreads 26
Figure 9: US ABS Issuance Volumes US$ billions 90

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Section 1 Executive Summary and Recommendations

1 Executive Summary and Recommendations
1.1 Introduction
In March 2004, GBRW was commissioned by the European Commission Enterprise
Directorate-General to undertake a Study of the European securitisation markets,
focusing on SME securitisation and the impact of such activity on the availability of
credit for SMEs. Given that SMEs account for well over 90% of all European
enterprises, their ability to access adequate finance is crucial. This Report has been
compiled from a variety of professional and academic sources, and was further aided
by a survey and interviews with seventeen EU banks from 7 countries that account for
about 80% of all SMEs in the EU15. Other discussions took place with market
specialists and key public sector agencies.
1.2 Content
The Report commences with a description and explanation of securitisation and an
overview of US and European securitisation volumes, including those in the SME
sector. Drivers of the market growth are then considered before examining in greater
detail the SME securitisation market and in particular activity in Spain and Germany,
where SME securitisation has been most evident. Obstacles to securitisation are also
explored, with particular regard to the SME product. The effectiveness of SME
securitisation in transferring risk from the Originator to third parties is then
considered. The penultimate section of the Report tackles the key issue, namely, does
securitisation aid SME access to finance? In the closing section, the Report summarises
possible developments of the market, which could facilitate increases in the volume
and efficiency of SME securitisations, and discusses how continuing public sector
support might act as a catalyst in deepening the SME securitisation market.
1.3 Key features of securitisation and the securitisation markets
Securitisation is a method of transferring risk from one party, the Originator, to
Investors through capital market transactions. In most securitisations, risks are
transferred to Investors by the cash sale of debt instruments (Asset Backed Securities
or ABS), whose cash flows and performance are wholly dependent on the underlying
performance of the portfolio of assets sold; hence the expression “securitisation”.
Although securitisation issues in the US date back to the 1970s, the European market
did not properly emerge until the early 1990s, a fact reflected in the outstanding
volumes of securities. In the US by the end of 2003, there were some US$7,600 billion
(€6,333 billion) of securitisations outstanding of which ABS (exclusive of residential
mortgages) accounted for US$1,365 billion (18%). By contrast, the European
securitisation market is estimated to have outstandings of €900 billion at the end of
2003, of which around €200 billion (22%) is ABS. Overall new issuance in Europe for
the year 2003 was €217 billion (compare the US, €1,400 billion equivalent).
It is notable that the level of SME securitisation in Europe is substantially larger than
the US. For the period 1999 through 2002, the aggregate volume of European SME

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Section 1 Executive Summary and Recommendations

new issuance was €16.9 billion compared with US$2.9 billion (€2.5 billion) in the US.
European SME securitisation, although accounting for only a relatively small part of
overall market volumes, is an established asset class attracting increasing attention
from analysts and Investors.
1.4 What are the driving forces behind the growth of
securitisation?
The following factors have been important ingredients in the development of the
securitisation market and indeed are essential characteristics for its future
development and expansion:
i. Improvements in the techniques of risk analysis;
ii. Advances in information technology;
iii. The trend in disintermediation, whereby banks originate and distribute
some or all of the resultant risk to Investors;
iv. The growth of derivative products and techniques for hedging and risk
transference;
v. The relative stability of ABS as a risk class, with consistently lower levels
of default compared with other rated asset classes as demonstrated over
a number of years; and
vi. Greater Investor sophistication.
These factors have enabled securitisation to become a flexible financing technique
providing banks with potential benefits such as:
i. Funding diversification and cost and maturity benefits;
ii. Targeted transfer of risk as part of overall asset portfolio management;
and
iii. Releasing Regulatory and Economic Capital, thereby enabling banks to
grow organically rather than having to access additional external capital.
1.5 The European SME securitisation market
Since the first SME portfolio was securitised by Deutsche Bank in 1999, some 47 issues
have been completed through to June 30, 2004 with an aggregate issue value of €24.57
billion. In 2003, new SME securitisations represented 3.3% of total new securitisations,
which was consistent with the levels of the previous three years. The two main
markets have been Spain and Germany, where €11.45 billion and €7.07 billion of new
issues respectively have been completed since 1999. The high level of activity in these
two countries is attributable to the KfW Promise programme in Germany and the
FTPYME programme in Spain, supported by the Spanish Government. At the
Community level, SME securitisation has also been effectively supported by the EIF,
which has accumulated a portfolio of SME securitisation investments. The Report
considers all of these programmes in detail.

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