world bank sme financing and the sme abs market in...
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SME Financing and the SME ABS Market in Europe
Michel NoelLead Financial Sector Specialist
Finance and Private Sector Development, Europe & Central Asia
WORLD BANK
AGENDA
SME Financing in Europe
Asset-Backed Instruments for SME Financing
ABS Market Trends
AGENDA
SME Financing in Europe
Asset-Backed Instruments for SME Financing
ABS Market Trends
SMEs play an important economic role in Europe
Share in # of enterprises
Share in employment
Share in value added
Share in GDP
EU-15 99.7 68.5 60.4
58.8
:
:
USA 99.7 50.9 : 50.7
EU-12 99.6 70.4
:
:
46.0*EU Candidates 99.6 64.1
Balkans 99.9 53.0 52.3
EU Candidates: Croatia, Macedonia, TurkeyBalkans: Albania, Bosnia & Herzegovina, Serbia & Montenegro
Source: For EU-27 data, Eurostat (2005). For remaining data, UNECE SME databank (2003) & SBA (2007)*No data for Turkey
SMEs face more difficulties accessing financing in the new member states than in Western Europe
• EU-15: > than 75% of SMEs in the EU-15 have sufficient financing• NMS: < than 66% of SMEs in the New Member States have sufficient
financing• Banks are the financial institution most used by SMEs
EU-15 EU-12Banks 79% 66%Leasing/Rent Companies 24% 35%Public Institutions supporting investment 11% 11%Private Investors 7% 8%Private financing companies (other than banks) 4% 3%Venture capital companies 2% 1%Other 2% 7%Don't know/No answer 12%
Source: Eurobarometer surveys, 2005 & 2006
Sources of financing used as % of the companies surveyed:
In CEE, working capital is financed mostly with internal funds…
Percent of working capital financed by:
EU 8+2: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Bulgaria & Romania
Source: BEEPS 2005
0 10 20 30 40 50 60 70 80
Interna l F unds
Equity
Borrowing from banks
In formal Borrowing
T rade Cred it
Cred it Cards
Leasing
G overnment
O ther Sources E NPB alkans E U candidates E U-8+2
…as are new investments!
Access to finance is a key problem in the CEE countries
The majority of SMEs rely on bank financing for their investments and working capitalSource: BEEPS 2005
Percent of new investments financed by:
0 10 20 30 40 50 60 70 80
Internal FundsEquity
Borrowing from banksInformal Borrowing
Trade CreditCredit Cards
LeasingGovernment
Other Sources ENPBalkans EU candidates EU-8+2
AGENDA
SME Financing in Europe
Asset-Backed Instruments for SME Financing
ABS Market Trends
Asset-backed instruments are useful financing avenues for SMEs
Traditional collateral requirements are often a barrier to finance for SMEsA-B instruments capitalize on those assets SMEs are rich in
Leasing - Financial instrument contracted between an asset owner and an asset user, in which the asset user pays rental for usage of asset
Enables companies’ to finance their investment needs without making a large initial cash outlay
Factoring – A type of supplier financing that enables companies to sell their accounts receivable to a factor at a discount for immediate cash
SME lending is perceived as risky and with a high capital cost
Securitization - Method of transferring risk from SME lender to capitalmarket investors
SME loansLeasing receivablesTrade receivablesCredit card receivablesMicrofinance loansLoans to MFIs
Typical asset securitization transaction
Credit
Enhancement
Owner/Seller of cash-Generating assets Special Purpose Vehicle Investors
Cash-generating assets Bonds
Proceeds Proceeds
Participants in a securitization transaction
Originator- the owner/seller of the cash-generating assets
Special purpose vehicle (SPV) - an independent legal entity that holds the assets until maturity
Credit enhancer - an entity or process that increases the creditworthiness of the underlying assets
Rating agency - assesses the creditworthiness of the underlying assets and the securitization structure
Underwriter - a financial institution marketing and distributing the bonds to be issued
Investors - purchasers and holders of the bonds issued by the SPV
Servicer - when needed, an entity is responsible for the recovery of the assets securitized
Key Features of Securitization
Risk transferTransfer of risk through sale of debt instruments (asset-backed securities, ABS) whose cash flows and performance depends on the underlying performance of the portfolio of assets securitized
Leveraging and financing toolEnables originators to attract investors to invest in their risk assetsReleases resources which can be used to originate new risk assets
Key Features of Securitization
Asset poolingSecuritized assets generally grouped into portfolios with well-defined criteria enabling clear identification and quantification of underlying cash flows (ex mortgage loans, credit card receivables)
Unbundling of riskRisk attached to securitized assets unbundled into different layersCash flows applied sequentially first to servicing lowest risk layer then in strict order to the highest risk tranches= waterfall principleBottom tranche receives residual portfolio cash flows after the needs of prior ranking tranches are met= equity piece or first-loss piece (FLP)
Key Features of Securitization
Debt obligations issued to purchase collateral assets:senior tranche (A or above)mezzanine tranche (B to BBB)subordinated/equity tranche (no rating)
Proceeds to meet tranches:coupon interest payment from collateral assetsmaturity of collateral assetssale of collateral assets
Losses in ABS portfolios:Cash flows down the securitization structure in sequenceLosses are recognized as a write down of most junior ranking tranche outstandingLosses move up a securitization structure (once tranche extinguished by losses, write down of next most junior tranche, etc)
Key Features of Securitization
Credit enhancement mechanismsOver-collateralization (face value of financial assets in portfolio exceeds amount of securities issued)Dedicated reserve (cash collateral) accountsGuarantees from third parties
Multi-originator structuresSecuritizations requires large asset pools to be cost-effectiveTo gain economies of scale, originator with small asset pools can combine their pool with that of other originators
True Sale vs. Synthetic Securitization
True Sale - the originator sells portfolio of assets to the SPV and removes it from its balance sheet
SPV uses proceeds to purchase the asset poolStructure is fully fundedPrimary benefit for originator is fundingIn Europe, more than 80% of transactions are true sale
Synthetic - assets remain on balance sheet of originator and only risk is transferred to capital markets through the use of credit derivatives, ex. Credit Default Swaps (CDS)
SPV invests proceeds in highly rated securitiesStructure is partially funded or unfundedSmaller investor baseMore complex for regulatorsEasier to carry outLower transaction costs
Types of Asset-Backed Securities
Asset-backed securities(ABS)
(In a broad sense)
ABS (In a narrow sense)
Mortgage-backed securities(MBS)
Collaterised Debt Obligations(CDOs)
Consumer Loans
Credit Card Receivables
Leasing Receivables
Residential Mortgages(RMBS)
Commercial Mortgages (CMBS)
Collaterised Loan Obligations(CLO)
Collaterised Bond Obligations(CBO)
Trade Receivables 1 SME loans may be classified as ABS or CDO. Example, Moody’s classifies loans with more than 1000 debtors as ABS, otherwise as CDOs. SME Loans1
AGENDA
SME Financing in Europe
Asset-Backed Financing Instruments for SMEs
ABS Market Trends
Issuance in European ABS market (broad sense) has traditionally lagged behind the US market
US ABS issuance volume in Q1 2008 has decreased by 76.5% from Q1 2007
European ABS issuance expected to decline to the lowest level since 2004
Source: European Securitization Forum and Asset-Backed Alert Data
0100200300400500600700800
2000 2001 2002 2003 2004 2005 2006 2007
Volume of European and US ABS (broad sense): New Issues (€ bln)
EuropeUSA
…however, a major decline is expected in European ABS issuance in 2008
UK & Spain are expected to be the most affected
CDO and Corporate ABS may pick up as Basel II capital requirements make securitization attractive
Greece, Belgium, & CEE countries are expected to see increased issuance volumes as securitization provides inexpensive fundingSource: European Securitization Forum
2007 2008 % ChangeRMBS 262 132 - 50%CDOs 101 66 - 35%
CMBS 47 30 - 36%Corporate 30 24 - 20%Consumer 21 20 - 5%
Total 461 272 - 41%
European ABS market (broad sense) is concentrated in specific countries
Source: European Securitization Forum
Europe a n ABS issua nce by country, 2006 a nd 2007 (€ b ln )
020406080
100120140160180200
Austri a
Belgi
umDe
nmarkFrance
Germ
any
Greec
eIre
landIta
lyKa
zakst
anLu
xemb
ourg
Nethe
rlands
Portu
gal
RussiaSp
ainSw
eden
Switzerl
and
Turke
y UKUk
raine
Multina
tional
20062007
• UK has 47% of total issuance, followed by Spain with 17%• Germany and Italy also large players• Nearly no market in other countries
RMBS and CDOs dominate the broad European ABS market
Source: European Securitization Forum
Europe an ABS Is suance by As se t Type , 2007 (% s hare s )
ABS 12% CDO
27%
CMBS10%
RMBS51%
European ABS market (narrow sense) isled by the same four players
Overall ABS issuance has slowed down as a result of the credit crunch!
(with the exception of Spain)Spanish SME sector contributed to 25% of total ABS volume
UK volumes rise due to SME transactions, however the UK market has slowed down due to credit card securitizations
Issuance in Italy declines due to a decrease in leasing and consumer loan issuanceSource: Moody’s
European ABS transactions:2004-2007
020,00040,00060,00080,000
100,000120,000
Spa i
n
Unite
d Ki
ngdo
m
Ger
man
y
Neth
erla
nds
Italy
Fran
ce
Turk
ey
Euro
ma r
ket
Portu
gal
Tota
l
EUR
Milli
on E
quiv
alen
2004 2005 2006 2007
…while the SME sector is dominant in the narrow ABS market.
SME sector represents 53% of overall ABS rated volume in 2007
(up from 33% in 2006)
Automobile loans are the next largest sector, followed by consumer loans
Source: Moody’s, EMEA-CIS, CEE, North Africa, & the Middle East
EMEA ABS Transactions 2007: Volumes by Asset Type
Leases 7.6%
Other3.5%
Whole Business 8.6%
Health Care Receivables
2.2%Future Receivables
3.0%SME53%
SME Loans - cash31.0%
SME Loans - synthetic22.3%
Floorplans - Auto Dealer0.9%
Credit Card 0.5%
Consumer Loans8.5% Automobiles - Prime
11.9%
European SME ABS market is increasing and led by Spain
In 2007, SME issuance increased by 94.1 % year on year, with SME loans being the largest source of underlying assets
Source: Moody’s, EMEA-CIS, CEE, North Africa, & the Middle East
European SME CDO market is declining, led by Spain & Germany…
–
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1999 2000 2001 2002 2003 2004 2005 2006 2007
Germany Spain Netherlands Austria B elgium
Switzerland Italy P o rtugal Bulgaria Finland
European SME CDO - Portfolio Notional Amount by Country1999–2007
(EURm)
Source: Fitch
2008 Ratings Outlook: Stable
2008 Asset Performance Outlook: Declining
Spanish SME CDOs highly concentrated in real estate; thus projected to slow down
…reflecting the importance of public support programs!
Spain34.8%
Finland0.6%
Bulgaria0.0%
Portugal3.1%
Italy0.3%
Switzerland2.9%
Belgium3.2%
Austria0.6%
Netherlands12.2%
Germany42.2%
European SME CDO - Portfolio Notional Share by Country1999–2007
Source : Fitch
`
Outstanding Defaults Across European SME CDOs
Default rates in Europe are expected to rise !
Performance of European ABS
Upgrades outpaced downgrades by a ratio of 2.2:1.
Performance of European Consumer ABS deteriorated in 2007, mainly by poor performance of UK credit card transactions
In 2008, asset ratings are expected to be mostly stable
In 2007, rating activity of US ABS has been positive…
Despite fears of subprime contagion, upgrades outpaced downgrades by a ratio of 4.4.:1 (excluding real estate)
In 2008, asset performance of US consumer ABS is expected to decline
Same declining trend in the U.S. SME CDO market
Figure 1: U .S . SME C LO Volume
12
28 26
14
8 6 3 3 3
-
5
10
15
20
25
30
1999 2000 2001 2002 2003 2004 2005 2006 2007
Ye a r
# Tr
ansa
ctio
ns
-2,0004,0006,0008,00010,00012,00014,00016,00018,00020,000
Vol
umne
($m
m)
# Transac tions (left ax is ) Dollar Volum e(right ax is )
SME loans: Loans that are not publicly rated and with par amounts less than $250 million. Transactions that are backed by more than 50% SME loans.
Source: Moodys