Sunday, 22 July 2018

Autos roar away as CLOs stall

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The German securitisation market is slowly reviving, with more than a dozen publically placed and retained securitisations hitting the market in the last year. However, the trickier area of funding SME lending via the CLO market remains a more distant and challenging prospect. Despite industry efforts to revive this sector, SME lending looks set to remain constrained unless the State lends a hand. William Thornhill reports.

The past year has been a particularly active for Germany. It led the way in primary European auto ABS issuance, with a smattering of related lease receivable and warehouse deals. However, the once-vibrant CLO sector remains comatose.

CLOs had provided vital wholesale funding for local banks to finance the corporate operations of Germany’s closely-held small-to-medium-sized enterprises – or Mittlelstand. There have been commendable efforts to reviatlise the market but more concrete help will be needed.

In the last year there were as many as 11 German auto ABS deals with a value of €6.2bn structured. Three, worth €2.3bn, were retained with the remaining eight being placed. Of the placed deals, three, worth €1.7bn, were publicly syndicated and the remaining five, worth €2.2bn, were privately sold. In addition to these auto deals, a further three auto-related lease receivables, worth about €700m, were privately placed.

No surprises for guessing that the leader of the pack was VW, dominating the publicly syndicated market for its Driver 7 and VCL 11 deals. After a long absence, BMW returned to the market with a spectacular result for its Bavarian Sky 2 – the largest publicly syndicated auto deal of the year.

Ford, FFS bank and GMAC went to the private market, with Ford leading the way with three placements.  

In the retained space, Ford-owned Volvo structured VAB Auto Receivables 2009, which is a newly established programme. Mercedes structured the largest auto deal this year, the €1.7bn Silver Arrow 3, but it also retained the deal for ECB funding purposes. Similarly, GMAC went down the same retained route with its E-CARAT *B deal.

In other related securitisations, VW structured a warehouse financing programme, VCL Master SA, in the process unearthing private demand for as much as €650m of issuance in its Compartment 1 and 2 transactions. GrenkeLeasing issued a small lease deal backed by an odd assortment of receivables across several sectors. 

For its bold decision to go down the publicly syndicated route, the sheer size of its placement and its rarity value, BMW Leasing’s transaction is probably the German highlight of the year. In all, 49 investors from 13 jurisdictions placed €2.2bn of orders for the €742m Triple A rated A Class which was lead managed by SG and WestLB. The transaction priced at the tight end of guidance at one-month Libor plus 85bp for a WAL of 1.88 years.

Almost as impressive was VW’s Driver 7 for the simple fact that it was the first and only post-crisis primary trade in which mezzanine debt was placed. The €475m auto ABS, through joint leads HSBC and WestLB, included a €17.5m of A+/A+ rated B class notes which benefit from 6.25% credit enhancement and featured a 2.16-year WAL. Pricing for this junior piece was a lot more difficult to predict because current coupon supply of mezzanine paper in Europe is non-existent.

At the time it was announced some players had said it could come as wide as 350bp though they were highly uncertain and felt that it would probably come a lot tighter. In the end the Class Bs priced at plus 165bp, inside original guidance of 175bp area and inside the plus 170bp AAA print achieved by Driver 6. This mezzanine piece was 3.5 times subscribed and attracted 10 investors.

Among the privately placed deals the most prominent by size was FCE’s Globaldrive 2009-C.

Mercedes-Benz Bank’s Silver Arrow 3 was the most interesting of the retained deals. There is strong investor demand for its paper, according to bankers. But Mercedes-Benz Bank said the securitisation was only one instrument in its funding mix – a useful one that continues to provide cheap funding via the repo market and one that sits alongside its hugely successful retail deposit business.

“We decided not to go to the capital market and to retain the ABS transaction for the time being,” an official at the bank said at the time. 

Volvo Auto Bank Deutschland’s newly set up securitisation programme had a unique structure, allowing for additional notes to be issued in within a pre-defined mechanism. During the three-year revolving period, and provided certain trigger tests and eligibility criteria are met, additional auto loan and lease receivables can be purchased into the securitised pool to increase the issued Class A notes up to the maximum amount of €309.6m with a corresponding maximum portfolio size of €360m.

CLO issuance still in the doldrums

Despite the many strides taken by the German auto securitisation market, the wider market is barely limping ahead. It seems to be in desperate need of a pair of crutches.

Among the many different structured finance sectors that had been prominent prior to the crisis unfolding, the CLO sector was probably most important to the economy. It was vital in providing funding to small and medium sized entreprises.

That is why the German Association of Banks recently put forward proposals for setting a new premium standard for German SME securitisations. It hopes that, by freeing-up bank balance sheets, renewed lending to the SME sector will be sparked.

“Our goal is to revitalise the securitisation market, where investor confidence was largely lost as a result of the financial crisis,” said Markus Becker-Melching, managing director for competition and SME policy at the Association. “The primary objective is to support the funding of SMEs.”

The underlying principle of the new standards is that securitised loans should have a high level of transparency and quality. Securitisation will only be permitted if the loan has been on the bank’s balance sheet for at least one year or if the bank retains a portion of the loan. Re-securitisations, non-performing loans or loans that do not reflect the other lending operations of the bank are not allowed under the new standards.

“Thanks to the high standard of transparency, investors would know exactly what they were investing in without having to rely on external credit ratings,” the Association said.

There is “no justification” for the loss of confidence in German SME securitisation, said Becker-Melching. Losses in such deals were, he pointed out, “far lower than expected” during the crisis. “Securitisation tends to be viewed with distrust; the new standards are intended to counteract this perception,” Becker-Melching added.

The Association has also talked to potential investors during the development phase. “Our premium standard represents an important step forward. Time will tell whether this is enough to revitalise the market.”

But, with the CLO sector still in global disarray, it seems likely that without a helping hand, issuance prospects are going to remain fragile at best for the foreseeable future.

Riding to the rescue

Talk in Germany is that the development agency, KfW, could eventually be leaned on by the German government to help out capital constrained local banks, with a view to reinvigorating SME lending. The trouble is that, with so much of taxpayers money already being diverted to bailing out the ailing banking sector, such an initiative would likely be viewed as political suicide, no matter how important it is to the economy.

According to people involved in a so-called Credit Summit held earlier this year, behind-the-scenes discussions did take place, albeit with no official statement being released. Once current liquidity measures are withdrawn there is a fear that a new credit crunch could ensue. This is causing much political anxiety.  

In such circumstances, a Plan B could prove useful in helping to head off problems before they get worse. The Ministry of Finance and Economics may yet formally ask KfW to come up with a concrete plan. The prospective scheme might involve transferring portions of mezzanine risk – typically rated Double B, from SME loan-backed securitisations, to KfW. The remaining senior portions of mezzanine risk would be placed with third-party investors while the first loss piece would be retained by the sponsor.

Because of the implicit leverage involved within a typical securitisation, only a small portion of junior mezzanine risk would need to be transferred in order to provide a much larger amount of funding at the senior level. That funding could be directed to the SMEs.

The prospective risk transfer format could be applied to both newly securitised debt issuance but legacy bank portfolios too. In either case the effect would be to free-up bank balance sheets and deploy new lending.

The prospective scheme is likely to be targeted at relatively healthy, though capital constrained banks, as opposed to the distressed banks that have accessed the bank rescue fund, SoFFin.

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