Fitch Ratings says in its latest European SME CLO Performance Tracker that SME CLOs continued to see deteriorating asset performance since June 2012.
Two SME CLO securitisations were partially placed with investors over the last 12 months. In particular, the Italian Berica PMI Srl sold the senior notes at a spread of 240bp over Euribor. The notes benefited from substantial credit enhancement at 43.2%. Nevertheless, the average spread on the loans of 240bp was evidence that SME securitisations were still not economically viable. Hence, most banks in Italy and Spain retain SME CLOs and use them for repo funding with the ECB. The average spread on senior notes in retained transactions is around 50bp.
The report also highlights that funding support from UK and French central banks
- since the ECB allows central banks to lend against loan portfolios directly - has removed the need to structure SME CLO securitisations for ECB repo funding. In particular, French banks may use their ability to place loan portfolios with the Banque de France. Likewise issuance of funded SME securitisations have come to an abrupt halt in the UK since the Bank of England's funding for lending scheme was introduced. By contrast Spanish, Italian and Belgium banks still place SME CLOs with the ECB.
In February 2013 Commerzbank AG (Xetra: CBK100 - news) issued the first European covered bond backed by loans to SMEs. The bond is a direct obligation of Commerzbank and benefits from a guarantee provided by a SPV backed by the cash flows from the SME loan portfolio. The first bond was issued with a fixed coupon of 1.5% per annum and a five-year scheduled maturity. Fitch understands that the achieved pricing was inside Commerzbank's senior unsecured spread levels.
In Italy, delinquency levels have increased significantly since 2011 and continued to rise. Fitch has revised its expected case for Italy to an annual average default rate of 5%. The migration trend of performing loans based on Italian banks' internal rating system is showing a significant migration to lower rating categories.
Delinquency levels in Fitch-rated Spanish SME CLOs reached a new peak earlier this year at 6% of the outstanding balance and have slightly fallen since. Transactions continue to deleverage through amortisation, building credit enhancement in relative terms. SME system delinquencies, excluding real estate and construction, stood at a record 10%.
Because banks in France, Germany and the UK often repurchase credit-impaired loans from their securitisation programmes, the reported default rate for securitised portfolios is not an accurate indicator of performance. The report, European SME CLO Performance Tracker, is available on www.fitchratings.com or by clicking on the link above.
Link to Fitch Ratings' Report: European SME CLO Performance Tracker