Securitization of loans to SMEs in Western Europe and Latin America

Transcription

1 Securitization of loans to SMEs in Western Europe and Latin America Emanuel Salinas Associate Director Standard & Poor s Structured Finance Bratislava, May 15, 2008 Copyright (c) 2008 Standard & Poor s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

2 SME securitization What is securitization? Securitization can transform a pool of ordinarily illiquid and risky assets into larger assets that can be more liquid, less risky and more marketable (BIS) 2.

3 SME securitization Securitization of SME-related assets is usually done through Collateralized Loan Obligations (CLOs) SME 1 AAA notes SME 2 SME 3 SME 4 Principal and interests on loans Principal and Interest on securities AA Notes A Notes BBB Notes Original Loans SME n SPV (Issuer) Issuance Proceeds BB Notes, etc Originating Financial Institution Rights over loans Subordinated Notes Issuance Proceeds 3.

4 What is the benefit of securitization of SME assets? For originating banks Funding: Diversified funding base: Access to institutional investor such as pension funds Access to international investors Potentially lower cost of funding Capital relief Basel II capitalization requirements in lending to SMEs are higher than for other market segments For SMEs Potentially enhanced access to finance Potentially lower cost of credit For domestic investors Wider investment opportunities 4.

5 and what are the prerequisites? Economic factors Stable economic environment Sufficiently large primary markets Market infrastructure Adequate credit infrastructure Strong creditor rights Adequate legal & regulatory framework Efficient securitization laws Sufficient institutional capacity at financial authorities Investor base Access to existing institutional investors such as Pension Funds, or Credit mechanisms enhancement to access international investor base 5.

6 Structured Finance in Latin America Structured finance markets have grown steadily US Billion Domestic Cross border Source: Merrill Lynch Figures are projections but development of markets is uneven across countries Brazil 35% Peru 3% Argentina 15% 6. Chile 5% Mexico Colombia 36% 6%

7 Structured Finance in Latin America SME-related transactions are still limited in volume Autos 3% Trade receivables 10% CLO 5% Real estate 37% Estimated volume of debt issuance in the region by type of asset in 2007 Source: S&P, Merrill Lynch Public sector 15% Consumer 30% and number of transactions Argentina Brazil Mexico Chile Transaction size (US$ Million) 2 to 10 4 to to to 40 Assets Loans to farmers Trade receivables Leasing contracts Trade receivables Bank loans to SMEs Leasing contracts Trade receivables Number of deals Source: Standard & Poor s, Bloomberg. Issuance in

8 Structured Finance in Latin America Outstanding market features: a) SMEs as originators Mexico: 36% of total issuance is done by mid-size NBFIs Chile: Leasing companies are usual originators of structured transactions Brazil: non-financial mid-size firms have started to tap the capital markets through securitization of trade receivables Expected market developments in 2008 Securitization of microfinance assets Securitization of assets pooled from multiple originators to reduce transaction costs and create more sizeable and diversified assets Review of restrictions on pension funds investment on structured assets in some countries 8.

9 SME Securitization in Western Europe SME CLOs: A growing sector Record issuance in 2007 More than 100 transactions outstanding throughout Western Europe Aggregate volume 130+ billion in oustanding deals 2008: markets slowed down but still among most active asset classes New deals per year (volume and number) Volume ( bn) - Left side scale New transactions - right side scale Finland Poland Belgium Sw itzerland Germ any Portugal Italy Spain Greece Belgium De nmark United Kingdom Netherlands Average volume per transaction ( million) 0 1,000 2,000 3,000 4,000 5,000 6,000 Transactions of various characteristics Number of SMEs per deal 50 to 10,000 Size of deals 15 million to 7,500 million Size of SMEs (revenues) From 200 k to 300 million 9. Source: Standard & Poor s

10 SME Securitization in Western Europe Rationale for securitization Fully funded transactions: transfer the property of assets Funding through investors Lately used as collateral in repos Balance sheet - Synthetic 33% Arbitrage 10% Balance sheet - Fully funded 57% Synthetic transactions: Transfer the credit risk of assets, while the originating bank retains ownership Capital relief / Basel II Proportion of deals outstanding in the market Source: Standard & Poor s Recent developments Arbitrage deals Loans securitized were generated under originate-to-sell model Mainly in Germany (Mezzanine / Schuldscheine programmes) Smaller pools, larger SMEs 10.

11 SME Securitization in Western Europe...but, how stable are these SME CLOs? Performance of European ratings Defaults: No defaults of any rated transaction Downgrades on deals rated since 2000: 2.0% of rated tranches Upgrades during same period: 7.8% of rated tranches Stable Upgrades Downgrades Cumulative number of rated tranches Source: Standard & Poor s 11.

12 The role of financial authorities in development of structured instruments for financing of SMEs 12.

13 Authorities can have a major role in development of these markets 1. Creation of adequate credit infrastructure and economic environment Adequate credit infrastructure: enhances the creditworthiness of assets securitized Credit bureaus Financial information quality Enforceable creditor rights: reduces the losses for investors in case of borrowers defaults Bankruptcy / liquidation framework Foreclosure processes Property registries How does this affect the performance of structured finance transactions? Expected Loss = Probability of Default X Loss Given Default X Exposure at Default Insolvencies per 10,000 companies Germany 135 UK 57 Italy 39 Spain 2 Expected Recovery Rates Germany 40% UK 45% Italy 35% Spain 40% Concentration / diversification in securitized pools Development of primary markets: concentration of credit in specific industries / obligors transactions weakens the prospects for sustainable transactions Recovery rates for Senior Unsecured Loans Source: CreditReform Source: Standard & Poor s 13.

14 Authorities can have a major role in development of these markets 2. Creation of adequate legal framework for securitization and regulatory capacity Improved legal framework for securitization Mexico: Certificados Bursatiles Brazil: FIDCs Brazil Mexico Total securitization issuance (US$ million) Source: Standard & Poor s, Bloomberg, Morgan Stanley Enhanced institutional capacity at financial authorities: allows adequate oversight without creating bottlenecks in issuance Allows definition of adequate investment criteria for investors 14.

15 Authorities can have a major role in development of these markets 3. Creation of support programs Objective Features Benefits for originators Benefits for SMEs FTPYME Spain Funding Partial government guarantee on bonds backed by loans to SMEs Lower funding costs Wider investors confidence Issuance proceeds must be reinvested in new SME loans PROMISE Germany Capital relief Standardized platform for credit risk transfer through synthetic CLOs Lower cost of issuance (especially for first issuers) Streamlined structuring process Capital relief can enable further origination of SME loans Portugal 3% Denmark 3% Italy 4% Netherlands 5% United Belgium Kingdom 1% 1% Germany 25% Greece 1% Switzerland 1% Spain 53% Belgium 1% Poland 1% Finland 1% Outcome - Spain and Germany are by far the leading markets in Western Europe - Sustained issuance even in light of phasing out of the program (Spain) 15. Number of SME CLO outstanding by country in 2007 Source: Standard & Poor s

16 Contact Emanuel Salinas Associate Director Structured Finance STANDARD & POOR'S 20 Canada Square Canary Wharf London E14 5LH Phone: Emanuel_Salinas@standardandpoors.com 16.