VLADIMIR, TO THOSE WHO ARE NOT FAMILIAR WITH THE TERM “STRUCTURED FINANCE”, CAN YOU EXPLAIN WHAT IT IS?
“One of the best explanations for structured finance products especially in terms of securitisation is that securitisation is the issuance of marketable securities backed not by the expected capacity to repay of a private corporation or public sector entity, but by the expected cash flows from specific assets.”
“In a securitisation, the seller of assets is called the originator. It sells receivables – an asset or a flow of future receipts to a special purpose vehicle (SPV) established to isolate the receivables.”
HOW IS THE SPV STRUCTURED?
“It is usually structured as a bankruptcy-remote vehicle: it has legal protection against claims arising from the bankruptcy of the originator, limiting the credit risk faced by investors to the assets of the SPV. Although as a final result of the securitisation, the originator is collecting financing means, it is not borrowing, but selling a future of cash flows.”
“A crucial element is that the securitised asset is by all means effectively “separated” from the other assets of the originator, and in case the originiator goes bankrupt, this does not affect the rights of final investors on the securitised asset. This is a very important distinction from plain “vanilla” types of financial instruments widely available on the market. These are instruments such as a mortgages or overdrafts and look at the credit strength of the borrower.”
WHY DOES STRUCTURED FINANCE APPEAL TO SMEs?
“In the years following the last financial crisis, the credit channels in a number of jurisdictions have been impaired in regard to quantity, price and distribution of credit with the effects particularly felt by small and medium-sized enterprises (SMEs) – especially in Europe. This is due to the fact that these companies were reliant on traditional bank lending, and they are now faced with important financing constraints in an environment characterised by widespread bank deleveraging.”
“Investors need internal analytical capabilities and in-house expertise for the assessment of the pools of loans subject to securitisation and in order to assess the credit quality of the resulting securities. This can partially explain the fact that SME securitisation as an asset class is considered by some to be a niche market.”
HOW DO OMNIA APPROACH THIS MARKET?
“At OMNIA, we are working with banks, institutions and other non-traditional lenders who have the ability and information required to perform detailed fundamental analysis of the securitised assets and broadening the existing investor base for SME securitisations. Pension funds and insurance companies – as well as their asset managers – have been building in-house expertise in order to invest in this asset class, but the market is still in “larval stage” and has a lot of growth potential with some public sector support.”
“We believe that loans to SMEs are a key driver for the functioning of the economy and, properly applied, the securitisation technique is a replicable tool that can enhance access to finance for SMEs. Using this instrument in developed capital markets, public sector support for SMEs (e.g. guaranteeing mezzanine tranches) can create multiplier effects – and hence it is an efficient use of public ressources, which is especially important against the background of a high public debt burden in many key countries.”
SME issuance is still suffering from the crisis, however, the overall issued volume is growing to about EUR 19 billion in 2019, still a long way from EUR 27 billion five years ago.
“Since a well-functioning securitisation market can be essential in helping financial intermediaries broaden their funding base, achieve capital relief and ultimately, increase their SME financing, the recovery of the (SME-) securitisation market is also one of the focus areas of the Capital Markets Union (CMU). Furthermore, the European Commision intends to revive securitisation with the objective “to ensure that it can act as an effective funding channel to the wider economy and mechanism to diversify risk.”
DO SMEs EVEN KNOW OF THE POSSIBILITES WITH STRUCTURED FINANCE?
“Based on personal experience, SME owners and directors are not aware of the possibilities in structured finance (securitisation) markets, as SME securitisation traditionally has been done by financial intermediaries, such as banks which would extend loans to SMEs and then re-package these loans to be passed on to off balance-sheet vehicles.”
THEN, WHAT SHOULD BE DONE TO MAKE ENTERPRENEURS AWARE OF THE WORLD OF STRUCTURED FINANCE?
“In order to make the owners aware of the possibilities of structured finance, the public sector could and should provide support for raising awareness – among SME entrepreneurs as well as smaller local financial institutions traditionally serving SMEs – about the availability and attractiveness of such financing alternatives for SMEs and financial intermediaries.”
“The public sector could co-operate with private sector institutions in improving the visibility of successful transactions and platforms for such instruments.”
HOW DO WE EMPOWER SMEs IN TERMS OF FINANCING OPTIONS?
“All SMEs tend to reach out to their local bank when seeking financing. While such a relationship has its benefits, it often leads to, or perpetuates, SMEs’ lack of awareness of other financing options potentially available to them, such as those provided by the “shadow banking” industry, including crowd funding platforms or hedge funds that directly finance small businesses.”
“It is a well-known fact that SMEs generally are ill-equipped to deal with investor due diligence requirements, and that lack of information and understanding leads to a weaker position for SMEs in financing negotiations.”
I argue that when it comes to financing options, SME managers or owners need to be supported by independent advice, no matter if it is coming from the regulator or an independent market participant.
“Independent advice and financial education, more generally, could empower SMEs to reach out for the best financing option – be it a bank loan or something more sophisticated – and more importantly it would enhance competition between finance providers.”
“I believe that creating a central “meeting point” between investors and SMEs would encourage communication and increase awareness of alternative funding opportunities for SMEs. An experienced mediator like OMNIA ensures that SMEs are aware of different funding opportunities whilst delivering all the necessary information to investors in a manner that is both efficient and standardised allowing for a better functioning market.”