MAGISTERARBEIT
Titel der Magisterarbeit
„ European SME Financing and Structured Finance “
Verfasser
Philip Chlupacek, BSc
angestrebter akademischer Grad
Magister der Sozial- und Wirtschaftswissenschaften
(Mag. rer. soc. oec.)
Wien, Juni 2009
Studienkennzahl lt. Studienblatt: A 066 915
Studienrichtung lt. Studienblatt: Betriebswirtschaft
Betreuer: Univ.-Prof.Dr. Alexander Stomper
European SME Financing and Structured Finance
iii
Contents
Abbreviations .................................................................................................. vii
Figures .............................................................................................................. ix
Tables ................................................................................................................ xi
1 Introduction.................................................................................................. 1
2 Small and Medium-sized enterprises......................................................... 32.1 SME Definitions ............................................................................................... 3
2.1.1 European Union.......................................................................................... 32.1.2 North America............................................................................................. 4
2.2 Characteristics of SMEs.................................................................................. 42.2.1 Corporate governance and management ................................................... 42.2.2 Value Management..................................................................................... 5
2.3 Financial issues associated with SMEs ........................................................ 72.3.1 Structure of financial environment .............................................................. 72.3.2 Funding....................................................................................................... 8
3 The Basel Capital Accord ......................................................................... 133.1 Development of the Basel Accord ............................................................... 133.2 Basel II ............................................................................................................ 14
3.2.1 Pillar 1: Minimum capital requirements..................................................... 163.2.2 Pillar 2: Supervisory review ...................................................................... 183.2.3 Pillar 3: Market discipline .......................................................................... 18
3.3 Effects of Basel II on SMEs........................................................................... 19
4 Financing alternatives............................................................................... 214.1 Equity.............................................................................................................. 22
4.1.1 Private equity ............................................................................................ 234.1.2 Venture capital.......................................................................................... 234.1.3 IPO............................................................................................................ 23
4.2 Debt................................................................................................................. 244.2.1 Bank loans ................................................................................................ 244.2.2 Factoring................................................................................................... 244.2.3 Leasing ..................................................................................................... 254.2.4 Bonds........................................................................................................ 254.2.5 Commercial Paper programmes............................................................... 26
European SME Financing and Structured Finance
iv
4.3 Hybrid financing ............................................................................................ 264.3.1 Participation certificates............................................................................ 264.3.2 Silent partnerships .................................................................................... 264.3.3 Convertible bonds..................................................................................... 27
5 Structured finance ..................................................................................... 295.1 Development of asset securitisation ........................................................... 29
5.1.1 Definition of securitisation......................................................................... 295.1.2 Origins and development.......................................................................... 315.1.3 Market situation ........................................................................................ 34
5.1.3.1 Market volumes and shares............................................................................345.1.3.2 Subprime crisis ...............................................................................................35
5.2 Concept of asset securitisation ................................................................... 395.2.1 Securitisation players................................................................................ 405.2.2 Types of transactions................................................................................ 42
5.2.2.1 “True sale” ......................................................................................................425.2.2.2 Synthetic .........................................................................................................43
5.2.3 Credit enhancement ................................................................................. 445.2.3.1 External credit enhancement ..........................................................................445.2.3.2 Internal credit enhancement ...........................................................................45
5.2.4 Payment methods..................................................................................... 465.2.4.1 Pass Trough ...................................................................................................465.2.4.2 Pay Through ...................................................................................................47
5.2.5 Securitisation process............................................................................... 475.3 Effects of securitisation ................................................................................ 50
5.3.1 Benefits associated with securitisation ..................................................... 505.3.2 Risks associated with securitisation ......................................................... 535.3.3 Effects on SME financing.......................................................................... 555.3.4 Effects on European economy.................................................................. 57
6 Conclusion ................................................................................................. 59
Bibliography .................................................................................................... 61
Annex I: Summary of U.S. small business Size Standards ...................... 71
Annex II: Relationship of SMEs and banks in Europe .............................. 73
Annex III: Main distinctive features of equity, debt and hybrid capital ... 77
Annex IV: Standard & Poor’s credit ratings definitions............................ 79
European SME Financing and Structured Finance
v
Abstract: English .......................................................................................... 81
Abstract: Deutsch......................................................................................... 83
Curriculum Vitae.............................................................................................. 85
European SME Financing and Structured Finance
vii
Abbreviations
A Austria
ABCP Asset Backed Commercial Paper
ABS Asset Backed Security
AMA Advanced Measurement Approaches
B Belgium
Basel I Basel Capital Accord
Basel II New Basel Capital Accord
BCBS Basel Committee on Banking Supervision, Committee
BIS Bank for International Settlements
CBO Collateralised Bond Obligation
CDO Collateralised Debt Obligation
CDS Credit Default Swaps
CH Switzerland
CLO Collateralised Loan Obligation
CLN Credit Linked Notes
CMBS Commercial Mortgage Backed Security
Committee Basel Committee on Banking Supervision, BCBS
CP Commercial Paper
D Germany
DK Denmark
E Spain
EEA European Economic Area
EL Greece
Europe-19 Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spain, Sweden, United Kingdom, Island,
Lichtenstein, Norway, Switzerland
EU European Union
EU-15 Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spain, Sweden, United Kingdom
European SME Financing and Structured Finance
viii
F France
FIN Finland
Fannie Mae FNMA, Federal National Mortgage Association
FGI Financial Guarantee Insurance
FHLMC Freddie Mac, Federal Home Loan Mortgage
Corporation
FNMA Fannie Mae, Federal National Mortgage Association
Freddie Mac FHLMC, Federal Home Loan Mortgage Corporation
GSE Government Sponsored Entity
I Italy
IO Interest Only
IPO Initial Public Offering
IR Ireland
IRB Internal Ratings-Based Approach
IS Island
L Luxembourg
L/C LOC, Letters of Credit
LI Lichtenstein
LOC L/C, Letters of Credit
MBS Mortgage Backed Security
NL Netherlands
NO Norway
NYSE New York Stock Exchange
P Portugal
PO Principle Only
S Sweden
SBA U.S. Small Business Administration
SIV Single Investment Vehicle
SME Small and Medium-sized Enterprise
SPE Single Purpose Entity
SPV Single Purpose Vehicle
SRP Supervisory Review Process
UK United Kingdom
European SME Financing and Structured Finance
ix
Figures
Figure 1: Percentage of SMEs using debt financing in EU-15, by country.......... 9
Figure 2: Equity ratio by sector, enterprise size, and country ........................... 10
Figure 3: Architecture of Basel II – The Three-Pillar Model .............................. 16
Figure 4: SME development stages .................................................................. 22
Figure 5: ABS outstanding ................................................................................ 34
Figure 6: Volume of outstanding securitised loans, $trn ................................... 36
Figure 7: Housing subsidence, ABX.HE 7.2 AA index, % of face value............ 37
Figure 8: Relation of US house prices and US foreclosures ............................. 38
Figure 9: Securitisation players ......................................................................... 41
Figure 10: Synthetic securitisation structure ..................................................... 43
Figure 11: Phases of a securitisation ................................................................ 48
Figure 12: Fundamental investment risks in asset securitisation ...................... 54
Figure 13: Reasons for dissatisfaction with the most important bank, by
enterprise size (in percent), in Europe-19 ................................................... 74
European SME Financing and Structured Finance
xi
Tables
Table 1: New thresholds for SMEs...................................................................... 3
Table 2: Possible weaknesses of owner-managers ............................................ 5
Table 3: Most important sources of security for the involved parties .................. 7
Table 4: Chronology of Basel Accords .............................................................. 15
Table 5: Main areas Pillar 2 of Basel II.............................................................. 18
Table 6: Phases of growth financing ................................................................. 21
Table 7: Types of ABS and used assets ........................................................... 30
Table 8: Global securitisation impetus .............................................................. 32
Table 9: Examples of securitised assets ........................................................... 33
Table 10: European securitisation market......................................................... 35
Table 11: ABS structures commonly used before the subprime crisis .............. 37
Table 12: Basic requirements for securitisation ................................................ 39
Table 13: Examples of interchangeable expressions used in securitisation ..... 46
Table 14: Analysis performed during feasibility study phase ............................ 49
Table 15: Tasks performed during pre-closing phase ....................................... 50
Table 16: Value added through securitisation ................................................... 51
Table 17: Main motives for securitisation in true-sale transactions................... 52
Table 18: Benefits of securitisation ................................................................... 53
Table 19: ABS techniques involving SME-related payment claims................... 56
Table 20: Percentage of SMEs with credit lines, by number of banks and
sectors in Europe-19 ................................................................................... 73
Table 21: Percentage of SMEs with credit lines, by number of banks and size
class in Europe-19....................................................................................... 73
Table 22: Percentage of SMEs, by maturity period for the largest bank loan and
sector in Europe-19 ..................................................................................... 74
European SME Financing and Structured Finance
xii
Table 23: Most important reason for changing a major bank account, by size
class (in percent), in Europe-19 .................................................................. 75
Table 24: Most important reason for not obtaining additional bank loans, by size
class (in percent), in Europe-19 .................................................................. 75
Table 25: Main distinctive features of equity, debt and hybrid capital ............... 77
Table 26: Standard & Poor’s long-term issue credit ratings definitions............. 79
1 Introduction
1
1 Introduction
The financial sector has changed significantly during recent decades. Higher
competitive pressure and a greater concentration of banks have diverse
impacts on lending practices. The new Basel Capital Accord, Basel II, is
supposed to harmonise international capital requirement standards in banking
and to enhance the financial system’s security and solidarity. Such changes in
the financial environment may have substantial effects on the access to finance
of small and medium-sized enterprises (SMEs), which generally tend to face
significant problems in accessing equity as well as debt. Many financial
institutions issue securitised debt on various asset classes. However, in
Continental Europe, where SMEs are of especially great economic importance,
securitisation would represent an interesting alternative to traditional finance
channels. This paper focuses on such structured finance instruments as a
financing alternative, in particular for SMEs.
The following section explains the characteristics of SMEs, in terms of size,
corporate governance, and value management. Subsequent, financial issues
associated with SMEs are discussed. Section 3 provides an overview of the
development and the structure of Basel II and discusses possible effects on
SME finance. After a brief outline of equity, debt and hybrid finance alternatives
in Section 4, Section 5 focuses on the main topic of this paper, structured
finance, describing its development and concept. Finally it elaborates on the
benefits and risks associated with securitisation, including its effects on SME
financing and on he European economy as a whole. Section 6 concludes.
2 Small and Medium-sized enterprises
3
2 Small and Medium-sized enterprises
2.1 SME Definitions
2.1.1 European Union
On the 1 January 2005, there was a new definition for Small and Medium-sized
Enterprises (SME) entered into force by the European Commission (see
Table 1). It introduces three different categories of enterprises. An enterprise is
by definition “any entity engaged in an economic activity, irrespective of its legal
form”.1
Enterprise
category Headcount Turnover or Balance sheet total
Medium-sized < 250 ≤ € 50 million ≤ € 43 million
Small < 50 ≤ € 10 million ≤ € 10 million
Micro < 10 ≤ € 2 million ≤ € 2 million
Table 1: New thresholds for SMEs2
For staff and financial calculation, data from the last approved annual accounts
must be used. Another important aspect concerning the used data is the
autonomy of the SME. An enterprise is only autonomous if it is independent, it is
holding less than 25% of capital or voting rights (whichever is higher) in one or
more enterprises and/or outsiders do not have 25% or more of capital or voting
rights in the enterprise; so called minority partnerships. Enterprises with
1 see European Commission (2003b) pp.6f. 2 European Commission (2005).
2 Small and Medium-sized enterprises
4
holdings of up to 50% are partner enterprises. If the stake is more than 50% the
enterprises are linked.3
2.1.2 North America
The U.S. Small Business Administration (SBA) has established widely used
small business size standards - 500 employees for most manufacturing and
mining industries, and $6.5 million in average annual receipts for most
nonmanufacturing industries. However, as these are only the primary size
standards by industry, there is no single definition in the U.S. due to many
exceptions.4 Page 71 provides a summary of the U.S. small business Size
Standards by Industry.
Canada’s national statistics agency Statistics Canada defines SMEs “… as
enterprises with less than 250 employees and less than $50 million in total
revenue”.5 Industry Canada, Canada’s national industry agency, uses similar
standards as the EU. A small business is defined as one that has fewer than
100 employees (if goods-producing business) or fewer than 50 employees (if
service-based business). A business with fewer than 500 employees is
classified as a medium-sized business, while firms with 500 or more employees
are classified as large businesses. A micro business is defined as a business
with fewer than five employees.6
2.2 Characteristics of SMEs
2.2.1 Corporate governance and management
The word “entrepreneur” usually describes a person who plans, founds and
runs a business at his own risk. Most SMEs are under the legal form of
individual enterprises or partnerships such as private limited companies.
3 see European Commission (2003b) pp.11-25. 4 see U.S. Small Business Administration (2009). 5 Canada Statistics (2009). 6 Canada Industry (2008).
2 Small and Medium-sized enterprises
5
Especially in small enterprises like family businesses the owners manage the
business. It can be observed that most of these SMEs perform highly qualified
work, especially the very small ones. However, in many cases, management is
rather poor due to the executive management’s technical background. Also, as
the key decision makers, owner-managers tend to be reluctant to change,
transparency and openness. Examples of possible management weaknesses of
owner-managers are listed in Table 2.
Weak leadership and people skills
Personal weaknesses of executive management
Only partial focus on diverse business segments
Insufficient strategic planning
Weak forecasts due to lacking planning activities
Inadequate information due to deficient accounting and controlling
Missing succession plan
Little information on competition
Table 2: Possible weaknesses of owner-managers
Another characteristic of SMEs is that long term independence tends to be
considered as more important than profit. This leads to rather risk-averse
behaviour.7
2.2.2 Value Management
For some time, Value Management was understood as increasing Shareholder
Value, the value of an enterprise for the benefit of its owners. Considering the
value of total equity being equal the value of the total enterprise, the aim to
increase Shareholder Value equals increasing the total value of the enterprise.
The underlying principle is that whoever bears the consequences has the right
to decide.8
One may argue that executive management should care about more than
profitability. Especially in Continental Europe, but also in the USA and in Great
7 see Marx (1993) pp.5-8,18-45; Janßen (2003) pp.90-92. 8 see Spremann (2001) pp.27,28.
2 Small and Medium-sized enterprises
6
Britain, executive management has to consider interests of competing groups of
stakeholders.9 This approach, the Stakeholder Value approach, is the
predecessor of the Shareholder Value approach, from a historical point of view.
Ralph Cordiner10 claimed already in the 1950s that top management of public
companies is responsible to a variety of stakeholders beyond shareholders,
such as customers, employees and suppliers. However, the supporters of the
Stakeholder Value approach failed to develop a way to measure the value owed
to each group of stakeholders. Finally, top management had to consider
interests of all groups of stakeholders, having eventually no responsibility at all,
providing always reasons for bad performance and low return. Even more,
customers are actually no stakeholders because they have no interest in the
company itself but only in the product or service the company provides. 11
Family businesses are especially important in Continental Europe. In most
cases, the understanding of creating and increasing value is different for family
businesses than for large corporations. The family business forms a major part
of the family’s property. Family members tend to manage the business (see
2.2.1 Corporate governance and management). Unlike portfolio investors, who
diversify their investments, family businesses run high risk of total loss.
Tradition and reputation are considered as extremely important. Families
owning a business care about long-term success, for several generations.
Long-term independence is the prime objective, rather than short-term profit.
The basic principle of the so-called Family Value is sustainability. Table 3
provides an overview of the three enterprise models and the interests of
involved parties.12
9 see Spremann (1996) p.481. 10 Former CEO of General Electric. 11 see Malik (2004) p.63, Reichheld, Teal (1996) p.161. 12 see Spremann (2001) pp.48-50.
2 Small and Medium-sized enterprises
7
Shareholder Value Stakeholder Value Family Value
- Market-driven behaviour
- No limitations
- Continuity
- Striving for value
- Outperformance
- Sustainability
- Long-term independence
Table 3: Most important sources of security for the involved parties13
On may argue that the purpose of an enterprise is valorisation. However,
increasing in value can never be neither aim nor purpose of an enterprise.
Being valuable is simply not a purpose. Purpose or aim may be competitiveness
in a certain market. Hence, the purpose of an enterprise would be satisfying the
customer, rather than employees or shareholders. Therefore, the purpose is
increasing the Customer Value. In that sense, the aim of shareholders is not
necessarily equal the aim of the enterprise. Furthermore, not all investors are
entrepreneurs. However, each entrepreneur is certainly an investor, but only
few investors are entrepreneurs. An investor acts time-oriented. He is only
interested in return and may sell his shares in difficult times. The entrepreneur
on the other side is interested in the competitiveness of the enterprise and
struggles through hard time. He cares for the enterprise. His motives may be
divers. In order to trade, an investor needs stock markets while an entrepreneur
does not.14
2.3 Financial issues associated with SMEs
2.3.1 Structure of financial environment
Progress in information and communication technologies, deregulation and
globalisation have been changing the financial sector continuously, over the last
decades. These changes may have both positive and negative effects on
13 Spremann (2001) p.50. 14 see Malik (2004) pp.63-68.
2 Small and Medium-sized enterprises
8
SMEs. On the positive side, higher cost effectiveness may lead to decreasing
charges and interest rates, a broader range of financial products may facilitate
SMEs' access to finance, and increasing use of electronic banking services
leaves human resources for a more client-based approach rather than a
product-based approach. On the other hand, the mergers and acquisitions
process may lead to a reduction in the number of banks available in their
region, a reduction of the total credit amount attributed to SMEs, and a
weakening negotiation power due to the increasing relative difference between
the size of the SME and the size of the bank.
Basically, there exist two financing systems in Europe: a bank-based system, as
in Germany and Austria, and a market-based financial system as in the United
Kingdom. In a bank-based financial system banks play the most important role
as finance provider because bank loans are the preferred source funding.
Market-based financial systems rely on competitive markets. Among other
forms of finance, equities and bonds are more important than bank loans.
Despite a varying importance of bank borrowing, the majority of European
SMEs depend on bank financing, revealing a lack of alternative funding
sources.15
2.3.2 Funding
SMEs and large companies face basically the sme problem in financing, i.e. the
funding and provision of capital. However, large companies are able to invest
smoothly over time, due to their size. SMEs on the other hand, face financing
problems, as investments may be larger relative to their size. In other words,
large companies have many small investments over time, while small
companies have few but large investments compared to their size.
Another problematic characteristic of SMEs are frequently too large inventories.
These are usually caused by poor logistics. Furthermore, SMEs tend to be more
dependent on single customers. Reasons are insufficient cash reserves and the
risk of bad debt of large customers.
15 see European Commission (2003) pp.13,19.
2 Small and Medium-sized enterprises
9
Traditionally, SMEs have close relationships to their main banks. This long-term
cooperation is based on deep trust and may lead to a kind of dependence of the
entrepreneur. The smaller the enterprise, the worse tends to be the rating, the
higher is the default risk, the more expensive gets the funding, and the stronger
is the dependence. If banks are reluctant to lend, small companies tend to face
bigger troubles.16
Figure 1: Percentage of SMEs using debt financing in EU-15, by country17
Most European SMEs still rely on a traditional relationship to one single bank
despite growing importance of alternative ways of funding. The prime focus
tends to lie on short-term financing. Trade credit is one of the most favourite
16 see Marx (1993) pp.64-66. 17 European Commission (2003) p.20. The survey was conducted among independent medium-sized enterprises (50-250
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forms of short-term financing. Compared to large corporations, SMEs face a
competitive disadvantage due to higher interest rates and bank charges.18
Figure 1 gives an indication of the different types of debt finance used by SMEs.
The majority of SMEs use mainly bank finance and leasing. Factoring seems to
be important only in France.
There are various relevant ratios and performance indicators. Nevertheless, the
most important ratio to banks when lending to companies is the equity ratio19.
Studies show that European SMEs have on average weaker equity ratios than
larger companies.20
Figure 2: Equity ratio by sector, enterprise size, and country21
Figure 2 provides an overview on SMEs’ equity ratios by sector, size and
country. Among SMEs, there seems to be no clear link between the equity ratio
and firm size. Differences in the equity ratio by country may be explained by
different taxation systems, financial systems, legal framework conditions, and
financing traditions. Differences by sector may be primarily caused by different
capital demands. In general, SMEs show lower equity ratios than larger
enterprises and a higher demand for external finance. The density of
18 see European Commission (2003a) p.5. 19 Equity ratio = equity as a percentage of total capital. 20 see Marx (1993) pp.67-70. 21 European Commission (2003) p.21.
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2 Small and Medium-sized enterprises
11
investments22 of large enterprises is generally higher than of SMEs. Larger
enterprises seem to be rather able to own the fixed assets, such as buildings
and office equipment, instead of renting or leasing them. And, SMEs have a
relatively higher need for working capital requirements. Furthermore, SMEs
tend to be more indebt than large enterprises.
SMEs heavily rely on bank lending. Table 20 on page 73 shows that some 40 %
of European SMEs have credit lines with only one single bank. Even more,
more than half of SMEs having credit lines concentrate them in one single bank.
The smaller the enterprise, the closer tends to the bank relationship. Micro
enterprises usually have credit lines only with one single bank (see Table 21 on
page 73). Also, the attributes of credits indicate SMEs’ bank financing. More
than half seem to have bank liabilities of more than € 100 000. As Table 22 on
page 74 shows, the majority of SMEs’ largest bank loans have a maturity period
of over three years. Compared to lending to larger enterprises, lending to SMEs
is more often a matter of collateral. Therefore, insufficient guarantee collateral is
a major reason for banks refusing to grant additional loans to requiring small
enterprises. However, Table 24 on page 75 shows that unsatisfying business
performance and insufficient information provided are more significant reasons
for medium sized enterprises not to receive required credit.
Most SMEs seem to be satisfied with services banks provide. Dissatisfaction
has its root cause in poor service, high bank charges, high interest rates and
unsuitable solutions. Figure 13 on page 74 provides an overview of various
reasons for dissatisfaction, broken down by enterprise size. Normally, SMEs do
not switch banks. It is considered as complex and brings little financial benefit. If
SMEs decide to change banks, the main reasons are more favourable
conditions and better service (see Table 23 on page 75).23
22 Ratio of fixed assets to total assets. 23 see European Commission (2003) pp.21-28.
3 The Basel Capital Accord
13
3 The Basel Capital Accord
3.1 Development of the Basel Accord
Established on 17 May 1930, the Bank for International Settlements (BIS) is the
world’s oldest financial organisation and fosters international monetary and
financial cooperation. Based in Basel, Switzerland, the BIS serves as a bank for
central banks. Currently, the BIS has 55 member central banks and 560 staff
from 49 countries.24
The most important committees are the Markets Committee, the Committee on
the Global Financial System, the Committee on Banking Supervision, and
Committee on Payment and Settlement Systems.25
The Basel Committee on Banking Supervision (BCBS), hereafter the
Committee, was established by the central bank Governors of the Group of
Ten26 countries at the end of 1974. Current members are Belgium, Canada,
France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden,
Switzerland, United Kingdom and United States.
The Committee has no formal supranational supervisory authority. Therefore,
the Committee’s conclusions do not have any legal force. Rather more, it
formulates supervisory standards and guidelines, which are expected to be
implemented by individual authorities in order to fit their own national systems.
24 Algeria, Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria,
Canada, Chile, China, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, the Republic of Macedonia, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom and the United States, plus the European Central Bank; Bank for International Settlements (2008).
25 see Bank for International Settlements (2008). 26 Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland,
United Kingdom and United States; Bank for International Settlements (2008).
3 The Basel Capital Accord
14
One important objective has been a thoroughly international supervision, based
on two principles:
that no foreign banking establishment should escape supervision
that supervision should be adequate.
Over the last few years, the Committee has promoted solid supervisory
standards worldwide and developed together with many non-G-10 supervisory
authorities the „Core Principles for Effective Banking Supervision“ and the „Core
Principles Methodology“.27
In order to harmonise international capital requirement standards in banking,
the Basel Committee on Banking Supervision created the Basel Accord, Basel I,
in 1988. Primarily focusing on credit risk, Basel I set the minimum capital
requirements at 8% of the banks’ standardised risk-weighted assets. Since
1996, the risk of market prices has been considered in Basel I, due to the
increasing importance of international trade. Initially, Basel I targeted only at
international banks. In the meantime, however, it is respected and implemented
worldwide.
However, Basel I considered the bank’s economical risks only roughly. New
financial instruments such as credit derivatives and asset securitisation are
almost entirely ignored. Furthermore, Basel I only took into account credit and
market risk as basis for the capital requirement. 28
3.2 Basel II
Based on Basel I, the aim of the new Basel Accord, Basel II, is to enhance the
financial system’s security and solidarity. Therefore, capital requirements are
more dependent on the underlying risks and new developments in financial
markets and risk management are considered. Additional focus lies on
increased banking supervision and stronger market discipline.29
27 see Bank for International Settlements (2008). 28 see Deutsche Bundesbank (2001) pp.16,17. 29 see Deutsche Bundesbank (2007).
3 The Basel Capital Accord
15
In 1999, the Committee revised the Basel I with the following objectives:
to bring capital requirements closer to the actual risk profile of banks
to cover banking risks with requirements which create incentives for
advanced implementation and
to allow banks to use in-house methods.30
Three consultative papers on Basel II were published from 1999 until 2003 in a
two-year rhythm. In 2004 Basel II was finally published and entered into force at
the end of 2006. Table 4 lists the chronology of the Basel Accords.
Month Year Item
July 1988 Publication of Basel Accord (Basel I)
End 1992 Entry into force of Basel I
January 1996 Basel market risk paper
June 1999 First consultative paper on revising the Capital Accord (Basel II)
January 2001 Second consultative paper on Basel II
May 2003 Third consultative paper on Basel II
June 2004 Publication of the Framework for the new Basel Capital Accord
(Basel II)
July 2005 Extension of the Framework by trading book aspects and the
treatment of double default effects for guarantees
End 2006 Entry into force of Basel II
Table 4: Chronology of Basel Accords31
30 see Oesterreichische Nationalbank (2008). 31 Deutsche Bundesbank (2007).
3 The Basel Capital Accord
16
With Basel II, the Committee aimed at a more qualitative banking supervision
because risk-adequate capital cannot, despite its importance, sufficiently
guarantee solvency of banks and stability of the banking system. That is why
Basel II consists of three complementing pillars: the minimum capital
requirements, the supervisory review, and the market discipline (see
Figure 3).32
Figure 3: Architecture of Basel II – The Three-Pillar Model33
3.2.1 Pillar 1: Minimum capital requirements34
The minimum capital requirements include credit market, market risk and
operational risk. Three risk measurement methods can be applied for
calculating the capital ratio35: the basic, the standardised approaches as well as
more advanced and more risk-sensitive approaches that are based on internal
32 see Deutsche Bank (2001) p.17. 33 Oesterreichische Finanzmarktaufsicht (2008). 34 see Basel Committee on Banking Supervision (2004) pp.12-136. 35 also capital coefficient.
3 The Basel Capital Accord
17
ratings. The capital ratio is supposed 8% at least and is calculated the following
way:
€
CapitalSum of all risk - weighted assets
≥ 8%
with
€
Sum of all risk - weighted assets = Sum of credit risk - weighted assets + + (capital charges for market risk + operational risk) x 12.5
Basel II offers two approaches for measuring credit risk: the Standardised
Approach, which is supported by external credit assessments, and the more
sophisticated and more risk sensitive Internal Ratings-Based approach (IRB),
which is subject to the explicit approval of the bank’s supervisor. The Standard
Approach, which is fairly similar to Basel I, considers SME loans the same way
as loans of retail customers.
Operational risk, as defined in Basel II, is “…the risk of loss resulting from
inadequate or failed internal processes, people and systems or from external
events”. It includes legal risk, but excludes strategic and reputational risk. Three
methods for calculating operational risk capital charges: (i) the Basic Indicator
Approach; (ii) the Standardised Approach; and (iii) Advanced Measurement
Approaches (AMA). Similar to credit risk measurements, the more advanced
methods are also more risk sensitive. Continuous evolution on risk
management methods are expected, especially related to AMA, which is
supposed to be applied in particular by international banks with high operational
risk. The simpler approaches on the other hand, i.e. the Basic Indicator
Approach and the Standardised Approach, are meant for banks with lower
operational risk.
3 The Basel Capital Accord
18
3.2.2 Pillar 2: Supervisory review36
The aim of the Supervisory Review Process (SRP), which is a qualitative
approach, is to ensure that banks have adequate capital to support all the risks
in their business and encourage continuous development and use of risk
management techniques in monitoring and managing institute-specific risks.
The three main areas are described in Table 5.
Main areas of Pillar 2 Examples
Risks considered under Pillar 1 that are not fully
captured by the Pillar 1 process
Credit concentration risk
Factors not taken into account by the Pillar 1
process
Interest rate risk in the banking book,
business and strategic risk
Factors external to the bank Business cycle effects
Table 5: Main areas Pillar 2 of Basel II
In addition, Pillar 2 enables supervisors to assess compliance with the minimum
standards and disclosure requirements of the more advanced methods in
Pillar 1.
3.2.3 Pillar 3: Market discipline37
The area of discretion, which internal rating assessments provide, enhanced
disclosure requirements and transparency requirements are designed to
support the first two pillars. Pillar 3 requirements cover the application of the
capital rules, the amount and structure of capital, and quantitative and
qualitative capturing of risks. The adjustment of disclosure requirements with
36 see Basel Committee on Banking Supervision (2004) pp.158-174. 37 see Basel Committee on Banking Supervision (2004) pp.175-190.
3 The Basel Capital Accord
19
national accounting rules is considered as highly important in order to avoid
conflicts.
3.3 Effects of Basel II on SMEs
Possible negative effects on SMEs caused serious concerns during the
development of Basel II. After all, SMEs are considered are enormously
important to economical growth, employment and investment. The main
concern, Basel II leads to an inappropriate increase of financing cost of SMEs,
would result in significantly rising capital requirements. Several exemptions
were introduced to counteract such negative effects, e.g. the effect of
diversification in loan portfolios.
Depending on the applied approach, the Standardised Approach or the IRB.
cost of unsecured loans without external rating do not increase. Small
enterprises may even benefit from the recognised effect of diversification of
loans. However, credit spreads may increase as a result of improved rating
systems. In general, credit ratings will get increasingly important.38
38 Taistra (2003) pp.16-21.
4 Financing alternatives
21
4 Financing alternatives
According to Merton and Miller, Nobel Prize winners, the development of
companies is absolutely independent from its capital structure. In reality, the two
extreme categories of financial instruments i.e. equity and debt differ
dramatically in terms of interests, incentives and rights of the respective investor
as well as the degree of information provided. Thus, financial instruments are
also used to balance interests and risks related to business financing. Table 25
on page 77 provides an overview of the main distinctive features of equity, debt
and hybrid capital.
Phase Comment
0. Seed Development of ideas, pre-production, preparation phase
1. Start-Up Foundation of enterprise
2. Early Stage
( Early Stage-financing)
Development of product prototype
3. Second Stage Achieving market leadership in relevant market segment
4. Third Stage Expansion, up-scaling
5. Fourth Stage or Bridge
( Bridge-financing)
Pre-IPO, preparation of going public
6. IPO Consolidation and saturation
7. Post-IPO-Phase Internationalisation and acquisitions
Table 6: Phases of growth financing39
Technology-based one-product-businesses, competing in a dynamic growth
market typically, run through the same phases, described in Table 6.40
39 Grabherr (2001) p.33.
4 Financing alternatives
22
Figure 4 provides an overview of SME development and suitable financial
instruments per stage.
Figure 4: SME development stages41
4.1 Equity
Equity owners are the ultimate owners of the company and participate in the
profits of the company via dividends. Equity capital can be created by issuing
new shares or by retaining profits.42
40 see Grabherr (2001) pp.31-36. 41 see European Commission (2009). 42 see Coyle (2002) p.3.
4 Financing alternatives
23
4.1.1 Private equity
The most important source of capital through equity financing is retained profits.
This financing method keeps the entrepreneur independent from other
investors. And, it prevents creditors getting confidential information on the
company’s financial situation via credit assessments. Another benefit of
retained profits is the opportunity of strengthening the equity ratio. 43
4.1.2 Venture capital
Venture capital has got more and more important during the last two decades.
Many well-known companies like Apple Computers, Intel, Lotus and Microsoft
grew with venture capital.44 Typically, the venture capital industry applies a
limited partnership as organisational form. In such a partnership, venture
capitalists manage the fund while investors are limited partners and cannot get
involved in the day-to-day business. Such a partnership is usually
predetermined to ten to thirteen years.45
In Europe, debt is still much more relevant than venture capital. One reason
may be that entrepreneurs are reluctant to admit investors having a say in
running the business.46
4.1.3 IPO
Traditionally, SMEs do not have direct access to organised capital markets.
This makes strengthening the equity ratio complicated. The only way is going
public, an Initial Public Offering (IPO), which requires, however, a change of the
legal form of the company.47
43 see Marx (1993) p.70. 44 see Gompers, Lerner (2006) p.1. 45 see Gompers, Lerner (2006) pp.10,14. 46 see Steiner, Starbatty (2003) p.33. 47 see Marx (1993) pp.71,72.
4 Financing alternatives
24
4.2 Debt
Debt capital is borrowed money. The borrowed capital has to be repaid, maybe
at a premium. In addition, interests on the capital have to be paid to the
lender.48 Debt instruments include loans, factoring, leasing, bonds and
commercial papers.
4.2.1 Bank loans
Due to their relatively small size, SMEs face constraints in borrowing. After all,
only certain forms of financing are available to SMEs. Therefore, the traditional
bank loan is of greater importance the smaller the enterprise. What is more, the
higher default risk compared to large companies results in higher charges.49
The credit crunch caused by the recent economic and financial crisis
increasingly hits SMEs.50 In addition, since Basel II, large banks even aim at
reducing lending to SMEs. That is why alternative forms of financing get more
and more important in order to reduce the dependence on the main bank.51
4.2.2 Factoring
Similar to Asset Backed Securities (ABS)52, Factoring is basically selling
receivables. Unlike ABS however, Factoring requires smaller volumes because
no cost of capital market transaction occur. That is why Factoring has been of
great importance to SMEs. Since single receivables are rated rather than the
seller, the credit rating of the eventual debtor is relevant for the result of the
rating. Factoring does not extend financial resources. It is only a short-term
financing alternative as merely outstanding receivables are made to cash at an
early stage.53 And, Factoring is not appropriate for all industries. The
48 see Coyle (2002) pp.2,3. 49 see Marx (1993) pp.74-76. 50 see European Commission (2008) pp.8,9. 51 see Steiner, Starbatty (2003) p.19. 52 see Part 5 of this paper. 53 see Steiner, Starbatty (2003) pp.30-32.
4 Financing alternatives
25
construction business, for instance, finances long-term projects, for which other
financing forms are more appropriate.54
4.2.3 Leasing
Leasing has become an important alternative to the traditional bank loan. It is a
bit comparable to renting. The main difference is that, depending on the agreed
contract conditions, the lessee becomes the owner of the leased item at the end
of the leasing period. One advantage of leasing is, besides its flexibility, the fact
that leased items are booked as liabilities. Debt financed purchases are booked
as assets. Hence, leasing has positive effects on the balance sheets compared
to loan-based investments.55 In addition, it does not tie up capital. However,
leasing is usually more expensive than loans.56
4.2.4 Bonds
The capital market as funding source is particularly relevant in Anglo-Saxon
countries. In other European countries, such as Germany and Austria, bank
loans are much more common due to the traditionally close entrepreneur-bank
relationship. Bonds and loans differ inter alia in the fact that the bank organises
and places the issue rather than being the contractual partner.
External ratings are enormously important to companies issuing on capital
markets. Failed issues would cause significant costs and would damage the
issuers’ reputation. Bonds are, due to high cost and large volumes required,
primarily suitable for large companies.57
54 see Gaubatz (2003) pp.301,302. 55 see Steiner, Starbatty (2003) pp.28-30. 56 see Marx (1993) p.78, European Commission (2003a) p.8. 57 see Steiner, Starbatty (2003) pp.22-24.
4 Financing alternatives
26
4.2.5 Commercial Paper programmes
Commercial Paper (CP) programmes are a series of corporate bonds, which
are issued little by little. Contract conditions are agreed on in a framework
contract and are adjusted to current market conditions. The total programme
runs usually two to seven years. SMEs rarely use CP programmes due to high
cost related and large volumes required.58
4.3 Hybrid financing
Hybrid financial instruments combine features of both, equity and debt. Hybrid
securities enable companies to raise capital at reasonable cost and provide at
the same time investors with a supplement to debt and equity to their
investment portfolios.59
4.3.1 Participation certificates
Participation certificates are basically non-voting shares and represent a
proportional ownership of participating capital. This type of investment
guarantees a share in the issuer’s profit, but no voting rights. In addition,
holders participate in any liquidation of the company and have the right to
subscribe for new shares. Participation certificates allow the issuer access to
non-voting, low-par-value equity capital, which is publicly tradable after the
initial offering.60
4.3.2 Silent partnerships
Silent partnerships are very typical for the German market. It is a debt-like
financing instrument that “…can be explained by return requirements and the
anticipated proportion of buy-backs, underlining the role of public-private
58 see Steiner, Starbatty (2003) pp.24-26. 59 see Coyle (2002) pp.2,4. 60 see Swiss Exchange (2009), Deutsche Börse (2009).
4 Financing alternatives
27
partnership agencies in Germany”.61 So-called typical silent partners participate
in the company’s profits, but have limited control rights. Typical silent
partnerships are considered as liability position. On the other hand, atypical
partners also participate in the company growth and the company liquidation.
That is why it represents an equity position.62
4.3.3 Convertible bonds
Convertible bonds are unsecured fixed-interest bonds. Holders of convertible
bonds have the option to exchange their bonds for common stock of the same
corporation at a preordained price. The ratio of exchange, i.e. stocks for bonds,
is called conversion ratio. While issuers benefit from lower interest rates,
investors appreciate the combination of bond-like attributes and growing
potential of stocks.63
61 see Bascha, Walz (2001) pp.5,13. 62 see Müller (2008) p.154 footnote 613. 63 See Haugen (2001) p.11, Coyle (2002) p.8, Kimes (2009).
5 Structured finance
29
5 Structured finance
5.1 Development of asset securitisation
5.1.1 Definition of securitisation
With securitisation, one party can transfer risk, e.g. credit risk, to another party,
the investor. In most cases so-called Asset Backed Securities (ABS) are used
for this transaction. Its cash flows and credit rating depend entirely on its
securitised assets.64
Securitisation can be simply defined as packaging individual debt instruments
and converting the package into tradable securities.65 Asset securitisation or
“Asset Based Finance” respectively, is basically selling bundled debt on the
capital markets rather than holding them until the due date. The resulting cash
flow is used for refinancing the own business.66
Focusing on the substance rather than on the process, securitisation “consists
of the use of superior knowledge about the expected financial behaviour of
particular assets, as opposed to knowledge about the expected financial
behaviour of the originator of the chosen assets, with the help of a structure to
finance the assets more efficiently”.67
In many countries, the term “Structured Finance” is a synonym for asset
securitisation, as well as for rating agencies. However, swaps, futures and any
kind of ‘Taylor Made’ finance can be called structured finance.68
64 see GBRW (2004) p1. 65 see Kendall (1996) pp.1f. 66 see Bertl (2004) p.1. 67 see Kravitt (1996) p.1. 68 see Bär (1997) p.37 footnote 45.
5 Structured finance
30
Today, many different variations of ABS exist. The following three steps
however, are common to all:
• Transfer of assets from the original owner to a Special Purpose Vehicle
(SPV).
• Emission of securities by this SPV.
• (Almost) exclusive dependency of servicing the securities from an
economical perspective through the transferred assets.69
Basically, all kind of assets may be used for securitisation. Depending on the
underlying asset, three main types of ABS exist, as described in Table 7:
Mortgage Backed Securities (MBS), Collateralised Debt Obligations (CDO), and
ABS in a narrower sense.
MBS CDO ABS (narrower sense)
RMBS (Residential Mortgage
Backed Securities):
residential mortgages
CMBS (Commercial Mortgage
Backed Securities):
commercial mortgages
CLO (Collateralised Loan
Obligations): loans
CBO (Collateralised Bond
Obligation): tradable loans
Credit card receivables
Leasing receivables
Trade receivables
Consumer receivables
Table 7: Types of ABS and used assets70
Mortgage Backed Securities (MBS) are debt obligations representing pools of
mortgage loans, usually on residential property.71 There are two broad types of
real estate property used: residential and nonresidential properties. Residential
property includes houses accommodation up to four families. Nonresidential
properties include commercial properties such as office buildings.72
69 see Bertl (2004) pp.5,6. 70 see Thonabauer, Noesslinger (2004) p.13. 71 see U.S. Securities and Exchange Commission. 72 see Fabozzi (2001) p.3.
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31
Collateralised Debt Obligations (CDO) issue debt and equity. Like a company,
CDO invests the raised money in financial assets like corporate loans and
MBS.73 However, CDO tend to invest in several assets making categorising
difficult. That leads to various definitions. Collateralised Loan Obligations (CLO)
and Collateralised Bond Obligations (CBO) are very similar. Both issue debt
and equity backed by loans exclusively in the case of CLO and high-yield
assets such as high-yield corporate bonds, emerging markets bonds in the case
of CBO, and bank loans.74
5.1.2 Origins and development
Emerging in the financial markets since the 1930s, securitisation has been
significantly influencing the way of meeting borrowing needs of both, consumers
and businesses.75 The New Deal, a framework for financial expansion, was a
response to growing concerns regarding the expansion of speculative and
consumptive credit over the course of the 1920s. It introduced a barrier between
financial markets and deposits through a separation of commercial and
investment banking. Moreover, caps on interest payments were introduced, and
a federal system of securities markets regulation and the thrift industry were
created. The New Deal period also laid the foundations for the rise of
institutional investors like insurance companies and pension funds.76 During the
pre-deregulation, the cartel era of 1933 until 1980 in America was characterised
by very costly and highly structured ways of doing business. At that time
securitisation was rather seen as “…the substitution of more efficient public
capital markets for less efficient, higher cost, financial intermediaries in the
funding of debt instruments”77.
Deregulation and a severe shortage of funds in the late 1970s and 1980s, and
the increasing use of pension fund and other managed accounts nourished a
73 see Lucas, Goodman, Fabozzi (2006) pp.3,4. 74 see Dunlevy, Devito (1998) p.241, Thompson (1998) p.237,Tavakoli pp.27,28. 75 see Kendall (1996) p.1. 76 see Konings (2009) pp.82-84. 77 John Reed, former Chairman and CEO of Citicorp, Citibank, and post-merger, Citigroup,
and former Chairman of the New York Stock Exchange (NYSE).
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32
wide range of new financial products.78 The neoliberal and monetarist
transformation of American finance during the late 1970s and early 1980s was
characterised by a deregulation process nourishing new financial innovations.79
In the 80’s, tradable securities such as syndicated credits replaced more and
more the traditional credit business. The term ‘Securitisation’ refers to this trend.
However, in the meantime, it refers in a narrower definition to an innovative
financing form, the ‘Asset Securitisation’. Today, the main instruments are ABS
and MBS.80
Several forces, listed in Table 8, gave impetus to securitisation getting global,
starting with the United Kingdom at first, following continental Europe and other
international markets.
Issuer demand
• Basel Accords (capital adequacy ratios)
• Balance sheet/Liquidity management
• Efficient funding mechanism
Investor demand
• High-quality assets with attractive returns
Profit opportunity for Wall Street firms
Table 8: Global securitisation impetus81
The international banking community established the Basel Accords, which
went into force in 1992 (see The Basel Capital Accord). At that time capital was
in short supply. Securitisation offered an opportunity to regulated financial
institutions to manage their balance sheets and liquidity to the new standards,
serving as an efficient way of funding. At the same time, ABS offered attractive
78 see Kendall (1996) pp.1-16. 79 see Konings (2009) pp.90,91. 80 see Bär (1997) pp.21-27. 81 Myerberg (1996) p.140.
5 Structured finance
33
returns to investors seeking high-quality assets. Finally, securitisation was a
profit opportunity to Wall Street firms.82
In most countries, the securitisation market developed through MBS. In the
meantime, the types of assets that are securitized are broadened.83 Following
the success of MBS, several other ABS market segments evolved (see
Table 9), based on assets such as leasing contracts, automobile credits and
credit cards.84
Aircraft Leases
Auto Loans (Prime and Sub-prime)
Auto Leases
Boat Loans
Credit Card Receivables
Equipment Leases
Home Equity Loans
Manufactured Housing Contracts
Marine Shipping Containers and Chassis Leases
Mortgages (Residential and Commercial)
Railcar Leases
Real Estate
Recreational Vehicle Loans
Royalty Streams
Stranded Utility Costs
Trade Receivables
Train Wagon Leases
Truck Loans
Table 9: Examples of securitised assets85
Although first American securitisations took place already in the 1970s, started
to evolve only in the early 1990s.86 The evolvement of the securitisation market
in Europe and the USA is different from a regulations perspective. Only the
United Kingdom is to some extend similar to the United States, which can be
explained by the tradition of common law. Securitisation may evolve freely as
long as law does not prohibit any new developments. In Continental Europe,
civil law traditions require passing new laws to allow the securitisation market to
develop. Therefore, the market catches up constantly depending on the
82 see Myerbeg (1996) pp.139-151. 83 see PricewaterhouseCoopers (2007) p.4. 84 see Bertl (2004) pp.51-58 85 PricewaterhouseCoopers (2004) p.4. 86 see GBRW (2004) p.1.
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34
regulators. Conversely, the market flourishes and regulators have to catch up.87 88
5.1.3 Market situation
5.1.3.1 Market volumes and shares
Until the subprime crisis, securitisation had been the largest growing
contribution to global capital markets. The European market, for instance, grew
by 40% in 2006 and reached a new high of nearly € 460 billion. This trend was
supported by economic recovery, lower levels of credit defaults and
consequently higher investor confidence in the market. The main growth drivers
were RMBS, CDO and CMBS.89
Figure 5: ABS outstanding90
87 see Kravitt (1996) pp.3-7. 88 Baums and Wymeersch (1996) provide on overview of the legal and accounting conditions
for Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, Italy, The Netherlands, Norway, Spain, Sweden, and Switzerland.
89 see PricewaterhouseCoopers (2004) p.4; PricewaterhouseCoopers (2007) p.5. 90 Sources: Thomson Financial, Bloomberg, SIFMA.
0
500
1,000
1,500
2,000
2,500
3,000
$ bi
llion
s
Other
Student Loans
Manufacturing Housing
Home Equity Loans
Equipment Leases
Credit Card Receivables
Automobile Loans
5 Structured finance
35
Figure 5 describes the evolution of world wide outstanding ABS during the last
ten years, breaking down the key market sectors.
Due to the requirement of a certain level of expertise, there is a concentration in
investment and insurance companies, as shown in Table 10.91
Investment Companies 43%
Insurance Companies 22%
Asset Management 16%
Federal/State/Local Government 5%
Corporations 4%
Mutual Funds 3%
Pension Funds 2%
Other 5%
Table 10: European securitisation market
5.1.3.2 Subprime crisis
The American residential mortgage market flourished in the late 1970s due to
the strong desire for home ownership and escalating house prices. Freddie Mac
and Fannie Mae, so-called government sponsored entities (GSE), set and
monitored underwriting standards and offered quasi-government guaranties on
high yield products.92
The immense growth in subprime lending was nourished by expectations of
rapidly rising house prices and strong investor appetite for higher-yielding
securities.93 At the same time, securitisation gave originators, mainly banks,
more balance-sheet flexibility and investors better access to all sorts of credit
91 see PricewaterhouseCoopers (2004) p.5. 92 see Kendall (1996) p.6. 93 see Kiff, Mills (2007) p.7.
5 Structured finance
36
risk. By 2006 the volume of outstanding securitised loans had reached $28
trillion (see Figure 6). 2005, three-fifths of America's mortgages and one-quarter
of consumer debt were bundled up and sold on.
Figure 6: Volume of outstanding securitised loans, $trn94
ABS structures, which were commonly used by banks but whose popularity
heavily suffered during the subprime crisis, are briefly explained in Table 11.95
Apart from CDO and CLO, CDO squared, also called multisector CDO or CDO2
emerged in 1999 to satisfy the investors’ need to securitise their own structured
products portfolios. The collateral of CDO squared may vary, being backed by
differently rated tranches of CDO. Structured Investment Vehicles (SIV)
emerged in the 1980s and are offshore SPE. Many are incorporated in the
Cayman Islands. SIV invest in assets and issue notes at very low funding cost.
This way a kind of arbitrage can be achieved. SIV may be set up for various
purposes, including for creative accounting.96
94 The Economist (2008a). 95 see The Economist (2008a). 96 see Tavakoli (2003) pp.301-303.
5 Structured finance
37
Collateralised Debt Obligations (CDO) repackage ABS
CDO squareds resliced and repackaged CDOs
Collateralised Loan Obligations (CLO) repackage corporate loans
Structured Investment Vehicles (SIV) and
Conduits
used by banks to keep some of their exposure
off their balance sheets
Table 11: ABS structures commonly used before the subprime crisis
In January and February 2007, one started to realise that many 2006 borrowers
would default on their loans that year. A few months later, the losses of two
Bear Stearns hedge funds were revealed and investors realised the potential
threat of these defaults to the structured-credit market. The full impact of the
credit crunch seemed to hit in summer 2007. Figure 7 shows the fall of value of
ABS, as measured by the ABX index97, in 2007.
Figure 7: Housing subsidence, ABX.HE 7.2 AA index, % of face value98
97 The ABX, launched in January 2007, serves as a benchmark of the market for securities
backed by home loans issued to borrowers with weak credit. (Wong, 2009)) 98 The Economist (2007).
5 Structured finance
38
Prices of securities rated AA, except a brief point in September 2007, when the
worst seemed to be over, crashed down to just over 45. This level finally
distressed debt trades. Even prices of AAA notes, went down to between 80-
82.5 cents, a level much too low for their rating. Table 26 on page 79 explains
Standard & Poor’s ratings definition.
The reason for this downfall was the underlying loans. Those who took out
mortgages in 2006, tended to borrow more than they could hope to repay. They
were either hoping to make quick profit by selling the property soon again or to
refinance within a couple of years. But when house prices started to fall, the first
option did not work anymore. As soon as low interest rates expired, borrowers
were unable either to refinance or to afford the higher monthly payments.99
As a result, banks claimed back the property used as collateral, but nothing
more. When housing prices dropped below the size of the mortgage, banks had
to sell the properties at a loss.
Figure 8: Relation of US house prices and US foreclosures100
99 see The Economist (2007). 100 The Economist (2008b).
5 Structured finance
39
The vicious circle started because the housing slump fed on itself. Only as little
as half the value of the mortgage from a foreclosure may be recovered after
legal and other costs. Furthermore, foreclosures nourished house-price falls by
adding to the stock of unsold houses (see Figure 8).101
5.2 Concept of asset securitisation
According to Kendall102, seven basic requirements, listed in Table 12, are
substantial for successful securitisation programs. Furthermore, three elements
are key for the success of the securitisation system:
• Attraction of private capital.
• Competitive forces providing lower cost credit and greater choice.
• Stability by managing risks inherent in lending and investing.
Standardised contracts Standardisation of servicer quality
Grading of risk via underwriting Reliable supply of quality credit enhancers
Database of historic statistics Computers to handle complexity of analysis
Standardisation of applicable laws
Table 12: Basic requirements for securitisation103
Standardised contracts strengthen the securitisation participants’ confidence
that the respective collateral allows meeting the contractual obligations.
Professional underwriters evaluate the nature and grade of risk associated with
the collateral. A database of historic statistics allows stress test in order to
examine the performance under different conditions. Recognised standards in
the application of law create confidence critical to liquidity and efficient pricing
and trading. Similarly critical is the standardisation of the quality of servicers.
101 see The Economist (2008b). 102 see Kendall (1996) pp.6-8. 103 Kendall (1996) p.5.
5 Structured finance
40
The credit enhancer is frequently the weakest link in the transaction, putting
pressure on the entire security’s rating. There, each credit enhancer is rated
individually. If its rating changes, the rating of the issue it guarantees, changes
too. Finally, computers enable modelling securitised structures with high
volumes, tracking cash flows, and overseeing all relevant information on a daily
basis. 104
5.2.1 Securitisation players
ABS can have many different structures, depending on the transaction.105
Figure 9 provides a basic overview of a securitisation transaction and the
involved participants.
The originator, who normally initiates the securitisation originally owned the pool
of assets, assigns assets or risks in a securitisation transaction. Possible
incentives may be cheap funding or management of the balance sheet and risk
(see 5.3 Effects of securitisation).106
The SPV, also called Special Purpose Entity (SPE), separates legally the pool
of assets transferred from the originator. Its activities are limited as the only
purpose of the SPV is to hold the assets and to contact investors on its own
behalf. An SPV may be a corporation, trust or other entity.107
104 see Brendsel (1996) pp.22-25. 105 see Riegler (2004) p.158. 106 see Bertl (2004) p.7. 107 see Basel Committee on Banking Supervision (2004) §552.; Bertl (2004) pp.7,8.
5 Structured finance
41
Figure 9: Securitisation players108
The investor buys the securities and overtakes the risks. In addition to the
directly involved players, there is also the group of service providers. The
servicer does administrative work and collects principal and interest payments.
The servicer is commonly the originator but especially in non-performing loans
transactions, roles are separated from each other. The back-up servicer
replaces the servicer in case of its default. The trustee takes legal responsibility
for the activities of the securitisation vehicle and for the coupon payments. The
investment bank is responsible for structuring, underwriting and marketing the
transaction. Tax and accounting advisers are in charge of accounting and tax
implications. The rating agency sets the credit enhancement level of the asset
portfolio. This includes an evaluation of servicing capabilities and monitoring
performance of the transaction. The payment agent makes principal and
interest payments to security holders. Legal advisers develop the sale and
108 PricewaterhouseCoopers (2007) p.10.
Benefits for borrowers
Better credit terms: borrowers benefit from the increasing availability of credit terms, which lenders may not have provided if they had kept the loans on their balance sheets. For example, lenders can extend fixed rate debt, which many consumers prefer over variable rate debt, without overexposing themselves to interest rate risk because of the existence of a market for Mortgage-Backed Securities. Credit card lenders can originate very large loan pools for a diverse customer base at lower rates. Nationwide competition among credit originators, coupled with a strong investor appetite for securities, has significantly expanded both the availability of credit, and the pool of cardholders over the past decade.
1.6 Securitisation players
This section describes the players involved in a securitisation transaction. In addition to directly involved parties, there are a number of other parties, generally defined as service providers, which are also involved in the securitisation process. Below you find an overview of the most relevant parties:
Originator The securitisationvehicle Investors
Assets
Cash
Securities
Cash
The securitisation service providers
Servicer Trustee Investment banks
Paying agent Rating agencies
Tax and accounting advisors Auditors Legal advisors
Credit enhancement providers Calculation and reporting agents
Back-up servicer Asset managers Liquidity providers
Obligors
Payment over Time
Goods or services
Obligors/Borrowers
Obligors owe the originator a payment on the underlying loans/assets and are, therefore, ultimately responsible for the performance of the issued note. As obligors often are not informed about the sale of their loans, the originator, in many cases, maintains the customer relationship. From a credit risk perspective, securitisation groups obligors by letter or popular categories.
•
Securitisation in Luxembourg10 PricewaterhouseCoopers
Originator
The entity that assigns assets or risks in a securitisation transaction. Usually it is the party (lender) who originally underwrote and securitised the claims (loans). The obligations arising with respect to such loans are, therefore, originally owed to this entity before the transfer to the SPV takes place. Occasionally, the originator may be a third party who buys the pool with the intention to securitise it thereafter; in that case, the originator is also named as “sponsor”. Originators include captive financial companies of the major car manufacturers, other financial companies, commercial banks, building societies, computer companies, manufacturers, insurance companies and securities firms.
Investors
Investors buy the notes that are issued by the SPV and are, therefore, entitled to receive the repayments and interests which are due to the underlying assets. Collaterals are the pecuniary claims from these assets and, therefore, just the cash flow. Investors do not participate directly in the cash flow generated by the assets. The largest purchasers of securitised assets are typically pension funds, insurance companies, fund managers and, to a lesser degree, commercial banks. The most compelling reason for investing in Asset-Backed Securities is their higher rate of return relative to other assets of comparable credit risk.
Servicer
The entity that collects principal and interest payments from obligors and administers the portfolio after transaction closing. It is very common in securitisation transactions that the originators act as servicers though this is not always the case. For example, in most Non-Performing Loans (NPL) transactions, specialised servicers tend to carry out this role. Servicing includes customer service and payment processing for the obligators in the securitised pool and collection actions in accordance with the pooling and servicing agreement. Servicing can also include default management, collateral liquidation and the preparation of monthly reports. The servicer is typically compensated with a fixed servicing fee.
Back-up servicer
In case the original servicer defaults, the back-up servicer replaces them. They take over all the responsibilities which where allocated to the servicer.
5 Structured finance
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purchase agreement, and provide its legal opinion on the “true sale” of the
portfolio. The credit enhancement provider guarantees the principal and the
interest payments to the security holders. The calculation and reporting agent
calculates the waterfall principal and interest payments to the note holders.
Liquidity providers provide the SPV with cash, in the form of some kind of bridge
loan, in order to avoid any unsteadiness of cash flows to investors. Liquidity
providers are usually banks. The asset manager selects the underlying assets
and monitors the portfolio. 109
5.2.2 Types of transactions
There are two forms of transactions, natural securitisation and synthetic
securitisation, depending on the transfer of rights of assets.
5.2.2.1 “True sale”
Natural securities are based on the direct payment of interest and principal.110
In its Third Consultative Paper on The New Basel Capital Accord (Basel II), the
Basel Committee on Banking Supervision of the Bank for International
Settlements (BIS) defined a traditional securitisation as “…a structure where the
cash flow from an underlying pool of exposures is used to service at least two
different stratified risk positions or tranches reflecting different degrees of credit
risk. Payments to the investors depend upon the performance of the specified
underlying exposures…”.111 In a traditional “true sale” transaction, the originator
sells a pool of assets to a SPV. The vehicle is funded through the issue of
tranches of securities. The securities are rated by an agency. Therefore, the
SPV is isolated from the originator’s credit risk.112 In a “true sale” transaction,
the loan originators get credits off their balance sheet, thus achieve a reduction
109 see PricewaterhouseCoopers (2007) pp.10-12. 110 see Kendall (1996) p.8. 111 Basel Committee on Banking Supervision (2004) §539. 112 see PricewaterhouseCoopers (2007) p.8.
5 Structured finance
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of their economic and regulatory capital charge. At the same time, generated
funds may be used to refinance future lending activities.113
5.2.2.2 Synthetic
Synthetic securities involve the recycling of cash flows or credit risk from natural
securities revise the bundles of rights and characteristics.114 In a synthetic
securitisation, the originator does not sell any assets but buys protection
through a series of credit derivatives. These transactions transfer risk and
reduce regulatory capital requirements, instead of providing the originator with
funding. Figure 10 shows such a typical synthetic securitisation structure.
Figure 10: Synthetic securitisation structure115
113 see Jobst (2006) pp.4,5. 114 see Kendall (1996) pp.8-11. 115 PricewaterhouseCoopers (2007) p.8.
ABS represents the residual part of the securitisation market, which is characterised by the heterogeneity of the underlying assets. The underlyings of ABS-transactions may vary from consumer loans, secured credit card receivables, trade receivables, student loans to the securitisation of life insurance policies.
True sale vs. synthetic transactions
With regards to the transfer of rights of an asset, there are two forms of securitisation transactions:
True sale transactions
In a traditional true sale structure, the originator sells a pool of assets to a Special Purpose Vehicle by removing these from its balance sheet. The vehicle funds the purchase by issuing notes, which are rated by an agency. The rating of the notes reflects the fact that the SPV is isolated from any credit risk of the originator and the credit enhancement of the pool. Thus, the originator transfers both the legal and beneficial interest in the assets to the SPV. As a result, the investor of the SPV receives a legal and beneficial right to the underlying assets.
Synthetic transactions
In a synthetic securitisation, the originator buys protection through a series of credit derivatives instead of selling the asset pool to the SPV. Such transactions do not provide the originator with funding. They are typically undertaken to transfer credit risk and reduce regulatory capital requirements.
As a general rule, the owner of the assets (which we can refer to as the “Protection Buyer”) transfers the credit risk of a portfolio of assets (a “Reference Portfolio”) to another entity (the “Protection Seller”) or directly to the capital markets. Although the credit risk of the Reference Portfolio is transferred, actual ownership of the Reference Portfolio remains with the Protection Buyer.
The transfer of credit risk may be accomplished in a number of ways:
The Protection Buyer might issue credit-linked notes to the Protection Seller or directly to investors. The terms of the notes would provide for a reduction of the Protection Buyer’s repayment obligation on the notes upon defaults or other credit events arising with respect to the Reference Portfolio;
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Securitisation in Luxembourg8 PricewaterhouseCoopers
Alternatively, the Protection Buyer can enter into a credit default swap, total return swap or other credit derivative transaction with the Protection Seller. The Protection Seller agrees, in return for certain payments, that upon default or another credit event in respect of a Reference Portfolio, to pay an amount to the Protection Buyer. This is calculated by reference to the amount of payment defaults or on the diminution of market value of the defaulted Reference Portfolio.
The figure below shows a typical synthetic securitisation structure:
Originator
Portfolio
SPV
First Loss
SuperSenior
AAA
BBB
A
Investors
Collateral
CDS
CDS
CLN
CDS
The credit risk is structured and transferred by credit derivatives. CDS are negotiated with the counterparties of the Super Senior Tranche and the First Loss Pieces. Credit Linked Notes (CLN) are more often used for tranches which are publically issued for a wide range of investors.
1.5 Benefits of securitisation
Below is a listing of the common benefits of securitisation, which may offer one or more of the benefits described below. However, securitisations are complex structured financings and it is critical that potential issuers understand the range of options and related implications to make informed decisions. While these benefits have varying degrees of importance for different originators, the common hallmark of securitisations is the desire for lower capital cost.
•
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In general, the owner of the assets transfers the credit risk of the assets of his
portfolio to the SPV. At the same time, he remains the owner of his assets. The
structured credit risk is then transferred through credit derivatives. Credit
Default Swaps (CDS) are used for the Super Senior Tranche and the First Loss
Pieces, while Credit Linked Notes (CLN) are more common for publicly issues
tranches.116 CLN are generic debt securities created out derivative structured
claims on securitised assets.117
Basel II defines a synthetic securitisation as “…a structure with at least two
different stratified risk positions or tranches that reflect different degrees of
credit risk where credit risk of an underlying pool of exposures is transferred, …,
through the use of … credit derivatives or guarantees…. Accordingly, the
investors’ potential risk is dependent upon the performance of the underlying
pool”.118
5.2.3 Credit enhancement
Credit enhancement providers guarantee principal and interest payments to the
security holders. Commonly, either a third party insurer or a parent company of
the originator provides the credit enhancement. Credit enhancement protects
investors. Without credit enhancement, the investors would bear all the credit
risk in the pool of assets. Credit enhancement can be external or internal. 119
5.2.3.1 External credit enhancement
In the case of a third party guarantee, losses up to a certain amount are
reimbursed. Rated insurance companies or parent companies of the seller
usually provide these reimbursements. Such a guarantee may be based on
various means of credit enhancement.
116 see PricewaterhouseCoopers (2007) p.8. 117 see Jobst (2006) p.5. 118 Basel Committee on Banking Supervision (2004) §540. 119 see PricewaterhouseCoopers (2004) pp.6,7.
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Financial Guarantee Insurance (FGI) guarantees the timely interest and
principal payment to investors. Therefore, it normally produces the highest
possible rating, which is secured through strict regulations and continuous
controls. Prior, the originator has to ensure an investment grade rating through
additional credit enhancements in order to achieve a Financial Guarantee.120
A Pool-based Insurance, compared to a Financial Guarantee, guarantees the
value of the pooled assets only under concretely defined conditions.
Furthermore, such insurance normally covers only a certain loss limit rather
than 100% of the pool or tranche. While Financial Guarantees are usually only
provided on investment grade securities in combination with other credit
enhancement forms, Pool-based Insurance covers higher risks, too.
Letters of Credit (LOC, L/C)121 provide the guarantee that financial institutions
cover the possible losses, may it be interest or principal. The financial
institutions are required to have cash readily available. This guarantee,
however, is not in all cases irrevocable.122
5.2.3.2 Internal credit enhancement
There are two main groups of internal credit enhancement, Overcollateralisation
and Subordination123. Either the originator covers part of the risk or priorities of
payments from the asset pool are to be adjusted.
Overcollateralisation is when the value of the underlying pool assets exceeds
the amount of securities. This way, more assets are available to cover possible
losses.
Subordination is to prioritise cash flows to protect senior tranches by
subordinate tranches in case of losses (Table 13 explains common tranches).
Instead of emitting only one single tranche, the asset pool is divided in several
120 Financial Guarantees are also called Surety Bonds. 121 Two types of Letters of Credit may be differentiated, i.e. Standby Letters of Credit and
Commercial Letters of Credit. 122 see Bertl (2004) pp.179-202. 123 Subordination is also called Senior/Junior Structure or Cash Flow Bifurcation.
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tranches, which may differ in several aspects such as risk, duration, and interest
and principal payment modalities.124
Description Common term Alternative term
Unrated tranches ranking in
payment priority ahead of
rated AAA tranches
Super-senior tranches
ABS rated in the A to AAA
range
Senior tranches Junior tranches
ABS rated in the B to BBB
range
Mezzanine tranches
ABS rated below B or unrated
junior ranking instruments
Junior tranches
The most junior position in a
securitisation
Equity tranche First Loss Piece
Table 13: Examples of interchangeable expressions used in securitisation125
5.2.4 Payment methods
5.2.4.1 Pass Trough
A Pass Through is a passive structure without cash flow management, which
was mainly used, in the early times of securitisation. Payments made by the
SPV to the investors take place in the same period as the receivables. Cash
flows are simply passed through. Consequently, investors bear the risk of
fluctuations and early repayments.126
124 see Bertl (2004) pp.206, 217, 222-223; PricewaterhouseCoopers (2004) p.7. 125 GBRW (2004) p.12. 126 see Bertl (2004) p.236, 217, 222-223; PricewaterhouseCoopers (2004) p.21.
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5.2.4.2 Pay Through
Unlike the Pass Through, Pay Through is a payment method, where cash flows
to investors are prefixed in terms of pattern and maturity.127 Hence, cash flows
from the SPV to the investors are managed and not directly dependent on the
payments of the receivables.
Tranches, which are fragments or slices of a securitisation deal, are commonly
used to create ABS with differing payment structures. An Interest Only (IO)
Tranche, also called IO-Bond, is an extreme example where the investor has
only the right to interest payments, but not to principle payments. A Principle
Only (PO) Trance, on the other hand, entitles the investor only to one single
payment similar to a Zero-bond. Combined, both tranches represent a tranche
with coupons.
Further methods of cash flow management are Zero-bonds, also called Accrual
Bonds where interest and principal payments are hold for certain periods but
are paid at the end together with the final principal payment.128
5.2.5 Securitisation process
The typical securitisation process can be outlined as shown in Figure 11. During
the feasibility study phase, corporate finance analysts review the asset
origination, servicing, reporting processes, and performances of previous
securitisations. Table 14 provides an overview of the analysis performed during
the Feasibility Study phase.129
127 see PricewaterhouseCoopers (2004) p.21. 128 see Bertl (2004) pp.237-242. 129 see PricewaterhouseCoopers (2004) p.8.
5 Structured finance
48
Figure 11: Phases of a securitisation130
The Operations/Infrastructure Review phase is a self-assessment before the
undertaking the transaction and is part of the evaluation and planning process.
Analysis on the asset origination and servicing and reporting is imperative to
outsiders. Concerning the asset origination, items such as the credit review
process, documentation, and any possible legal issues are reviewed. The
servicing and reporting system is reviewed regarding its robustness, flexibility,
and readiness. Furthermore, the system needs to generate appropriate
operating and management reports.
During the Collateral Analysis phase, the evaluation of the collateral portfolio
includes the assessment of the portfolio’s credit quality, which is typically based
on historical financials, and sufficiency of asset files. Portfolio data analysis
includes reviewing historical asset performance. In addition, the completeness
of physical asset files and the saleability of assets in terms of data
inconsistencies and deficiencies are reviewed.
130 PricewaterhouseCoopers (2004) p.8.
Structuring Securitisation Transactions in Luxembourg8
1.9 Phases of the securitisation process
The different aspects of a securitisation transaction are outlinedbelow. Though not exhaustive, the list should give a good idea ofthe processes involved in a typical transaction.
1.9.1 Feasibility study phase
A company considering a securitisation issue or program must beable to delineate its objectives and the constraints under whichit operates. To ensure that the transaction gets off of the ground,corporate finance analysts must review the asset origination,servicing, and reporting processes as well as information aboutpast performance of the assets to be securitised. For many newissuers, this phase is the most critical because it brings relevantfactors and options to light that may significantly influencethe direction taken. As a result, the company’s objectives are morecompletely realised. Typical areas to review include among others:
• Operations overview: systems, policies, responsibilitiesof each party.
• Portfolio performance: compare to standard securitisationindustry practices.
• Financial overview: funding alternatives, profitabilitymeasurement, current funding sources.
• Legal overview: asset segregation, existing covenants andagreements.
• Tax implications: impact on tax liability, tax advantagedstructures.
• Credit overview: rating of individual obligors and portfoliooverall, level of concentration, risk disclosure and riskmanagement policies, and originator and servicer credit quality.
• Regulatory overview: National, EU or US requirements andimpact of securitisation.
• Strategic: What business model achieves the highest overallprofitability? What are the risk-reward trade-offs? What isthe best way to raise capital in this business model?
• Identification and evaluation of alternatives to achieveobjectives and to mitigate weaknesses for key areas suchas: operations, systems, cash flow, financial reporting, legal,tax, regulatory, and credit.
If a structured financing is to be executed, it is in the issuer’sinterest to complete a self-assessment before presentinginformation to outside parties. The next two sections discussoperations and financial review; these phases are completedas part of the evaluation and planning processes beforeundertaking a transaction.
1.9.2 Operations/infrastructure review phase
Invariably, practical problems arise in a company’s ability toprovide historical data and information concerning the asset poolor with their ongoing ability to meet servicing and reportingrequirements. It is imperative for outside parties to evaluatereceivables and servicing systems as well as assess underwritingstandards and collection policies. Items to consider include:
Asset origination• What is the credit review process? Do policies exist and are
they consistently applied? Can credit review be made moreefficient through system improvements, staffing enhancements,credit scoring, etc.?
• Is application processing timely and efficient from originatorand obligor perspectives? Can it be streamlined or expedited?
• Is documentation standardised (to the extent possible)?• Are there any legal issues, such as enforceability?
Servicing and reporting• Is the system sufficiently robust and does it have the flexibility
to address servicing and reporting requirements ofa securitisation?
• Can necessary data be made available in a timely manner?• Are appropriate operating and management reports generated
to make decisions regarding allocation of servicing resources,front-end pricing, performance triggers and trends, etc.
1.9.3 Collateral analysis phase
In conjunction with the aforementioned review of reporting systemsand servicer collection policies and procedures, an evaluation ofthe collateral portfolio must be undertaken. In order to effectivelyassess the credit quality of a given portfolio, the major ratingagencies typically review historical financials and sufficiency ofasset files. This will include:
Portfolio data analysis• Review of 10 years historical asset performance information;• Analyse a static pool of assets which are isolated over
a static three or five year period. Principal/interest, prepayment,and delinquency/default performance characteristics evaluatedper origination time period.
Asset file review• Review completeness of physical asset files;• Identify all possible source documents and reports.
Ensure saleability of assets• Identify data inconsistencies and deficiencies;• Analyse the company’s charge-off policy.
End-to-End Securitisation Transaction Management
Definition ofobjectives
andconstraints
for theoperation
Review ofasset
originationprocess
Analysis ofhistoricalfinancials
andasset files
Ensurebest
presentationto therating
agency
Financialoptimisation
ofsecuriti-sation
transaction
Financingteam
definitionin charge
of theoperations
On-goingprocedures
definition
Phases of a securitisation
Feas
ibili
tySt
udy
Oper
atio
ns/
Infra
stru
ctur
eRe
view
Colla
tera
lAn
alys
is
Prep
arat
ion
for
Ratin
gAg
enci
es
Stru
ctur
ing
Pre-
clos
ing
Post
-clo
sing
5 Structured finance
49
Operations overview systems, policies, responsibilities of each party
Portfolio performance compare to standard securitisation industry practices
Financial overview funding alternatives, profitability measurement, current funding
sources
Legal overview asset segregation, existing covenants and agreements
Tax implications impact on tax liability, tax advantaged structures
Credit overview rating of individual obligors and portfolio overall, level of
concentration, risk disclosure and risk management policies, and
originator and servicer credit quality
Regulatory overview national, EU or US requirements and impact of securitisation
Strategic business models, risk-reward trade-offs, ways to raise capital
Evaluation Identification and evaluation of alternatives to achieve objectives and
to mitigate weaknesses for key areas such as operations, systems,
cash flow, financial reporting, legal, tax, regulatory, and credit
Table 14: Analysis performed during feasibility study phase
The presentation of the securitisation transaction to the rating agencies is
important for the final rating and consequently the overall enhancement levels.
The Structuring phase focuses on the financial impact of the securitisation
transaction including funding approaches, funding sources, credit
considerations, and legal issues.
During the Pre-closing phase, a financing team, selected by originators and
transferors, coordinates the negotiation of business and pricing terms, and the
presentation to credit analysts. Included tasks are listed in Table 15.
5 Structured finance
50
Assemble financing team Present structure to credit and business
analysts
Prepare legal and disclosure documents Validate data
Finalise deal structure Price transaction
Table 15: Tasks performed during pre-closing phase
After completing the securitisation transaction, issuers are responsible for
certain tasks. The Post-closing phase includes: servicer statement preparation,
investor reporting, internal management and operations reporting, procedures
review/surveillance and related reporting of findings, tax calculations, financial
reporting, portfolio and transaction performance tracking.131
5.3 Effects of securitisation
In short, securitisation provides funding and liquidity by converting illiquid assets
into cash.132 Furthermore, asset securitisation allows the provision of credit to
market processes rather than through financial intermediaries. It “… converts
regular and classifiable cash flows from a diversified portfolio of illiquid present
or future receivables … of varying maturity and quality … into negotiable capital
market paper (“tranches”) …”. The economic reasoning of securitisation
depends on whether the issuer succeeds in making profits and maximising its
shareholder value. Securitisation mainly brings a competitive financial
advantage through efficient asset funding, active balance sheet restructuring,
market-oriented risk management of credit risk and diversified liquidity.133
5.3.1 Benefits associated with securitisation
Basically, securitisation has proven its benefits as an efficient funding and
capital management system helping to mitigate the required minimum level of
131 see PricewaterhouseCoopers (2004) pp.8,9. 132 see Tavakoli (2003) p.14. 133 see Jobst (2006) pp.3-6.
5 Structured finance
51
capital and to facilitate risk management.134 Table 16 lists the main differences
between loans and securitised assets.
Loans Securities
Illiquid Liquid/tradable
Collateral valuation subjective and periodic Market determines value
Originator assesses risk Third parties assess risk
Originators’ operating costs high Originators’ operating costs low
Investor market local Investors market national/global
Limited terms and rates offered borrowers Buffet of terms and rates offered borrowers
Table 16: Value added through securitisation135
While benefits and the degree of their importance may vary, the main
advantages of securitisations, the provision a lower cost capital and liquidity,
are common.136
From an economic point of view, the two main objectives are:
i. easing regulatory capital charge, and/or
ii. reducing economic cost of capital.
Mostly traditional, true-sale, transactions are used to achieve the first objective
through a curtailment of the balance sheet growth by moving assets off the
balance sheet. Derivative, synthetic, transactions may qualify for achieving the
second objective by lower bad debt provision though risk transfer.137
134 see Jobst (2002a) p.2. 135 Kendall (1996) p.5. 136 see PricewaterhouseCoopers (2007) p.8-10. 137 see Jobst (2002b) pp.9,10.
5 Structured finance
52
Strategy Dynamic Balanced Defensive
Key motivation Funding growth Liability management De-leveraging
Primary benefit Funding Accessing long term
money
Release of
Regulatory Capital
Secondary benefit Release of
Regulatory Capital
Release of
Regulatory Capital
Long term funding
Assets securitised Core product assets Any suitable portfolio Any suitable portfolio
Use of released
resources
New core product
originated
Any desirable asset
class/portfolio
None
Table 17: Main motives for securitisation in true-sale transactions138
Motives of originating banks differ, as well as the relative importance of various
benefits. Table 17 provides an overview of the main motives for securitisation in
true-sale transactions. The labels “Dynamic”, “Balanced” and “Defensive” are
only rough categories of feasible strategies. The ranking of benefits may also
differ.139
From an issuer perspective, securitisation is mainly an alternative source of
funds. Associated benefits may include shortening the balance sheet and
reducing economic cost of capital. Moreover, securitisation improves the
efficiency of risk management by easing regulatory capital requirements. The
efficient access to capital markets enables lower cost of capital than the
originator’s rating would allow.140 Originators may also use structured finance
vehicles to seek shelter from potential operating liabilities. Finally, structured
finance vehicles can be used for tax management.141
138 GBRW (2004) p.30. 139 see GBRW (2004) pp.29-30. 140 see Jobst (2006) p.4. 141 see Tavakoli (2003) p.14.
5 Structured finance
53
Benefits to consumers-borrowers
1. Lower cost of funds
2. Increased buffet of credit forms
3. Competitive rates and terms nationally and locally
4. Funds available consistently
Benefits to originators
5. Ability to sell assets readily
6. Profits on sales
7. Increased servicing income
8. More efficient use of capital
Benefits to investors
1. High yields on rated securities
2. Liquidity
3. Enhanced diversification
4. Potential trading profits
Benefits to Wall Street (investment bankers)
1. New product line
2. Continuous flow of originations and fees
3. Trading volume and profits
4. Potential innovation and market expansion
Table 18: Benefits of securitisation142
Table 18 provides an overview of benefits of securitisation, broken down by
player. However, benefits of securitisation are closely link to the existence of
imperfect markets. With perfect information, administration and marketing costs
of securitisation transactions would have no counterbalancing benefit.143
5.3.2 Risks associated with securitisation
Securitisation allows separating the risk exposure from the related assets.
Balance sheet risks are converted into marketable securitised debt through
142 Kendall (1996) p.13. 143 see Jobst (2002b) p.7.
5 Structured finance
54
complicated financial structures. This influences the security’s credit (or asset)
risk, market risk, liquidity risk and operational risk (see Figure 12).144
Figure 12: Fundamental investment risks in asset securitisation145
Holders of fixed income assets commonly face interest rate risks or risks
associated with fluctuations in the market value of these assets. Holders of
structured products deal with additional risks specific to such investments. For
holders of mortgage assets, the prepayment risk creates uncertainty with
respect to the timing of cash flows. This makes securities collateralised by
mortgage products difficult and expensive to hedge.146
Many other problems arise from delinquencies and charge-offs, inaccurate
investor reporting, and bad publicity.
Reputation risk is of qualitative nature. Bad reputation may result in poor
underwriting and risk assessment. This leads to increased costs and decreased
profitability. Effective measures for controlling reputation risk are a sound
144 see Jobst (2006) p.11. 145 Jobst (2006) p.12. 146 see Fabozzi et al. (2007) p.16. ! "#!
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Credit RiskStructural Risk
Legal Risk
Market Risk Liquidity Risk Operational Risk
Interest rate risk:
• reinvestment risk (! interest rate term structure)
• interest rate differential (base risk)
Currency risk
Reference portfolio:
• degree of diversification & asset correlation
• asset granularity
• domicile of assets
Structural provisions:
• internal (credit enhancement through overcollateralisation or excess spread)
• external (counterparty risk of third-party guarantee)
• security design: senioritisation and tranche specification
Liquidity risk:
• balance sheet-based liquidity risk: prepayment risk (! maturity mismatch)
• market-based liquidity risk: high trading costs and loss of market power of issuers due to low market volume in primary/secondary markets
Agency cost of:
• adverse selection
• ex ante/ex post moral hazard
• principal-agent problem
Fundamental legal framework & compliance:
• trade law
• tax law
• national/international supervisory regulation
Implementation of legal claims:
• corporate law
• insolvency law
• private law
Data availability:
• confidentiality & data disclosure
• banking laws
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5 Structured finance
55
business plan and a comprehensive, effective risk management and control
framework.
Long-term impacts of the envisaged securitisation on operations, profitability,
and asset/liability management are to be analysed in order to assess the
strategic risk. Long-term resource needs need to be in line with projected
volumes of planned securitisation transactions.
The transaction risk arises from inefficiencies associated with servicing, such as
processing problems of the transaction, inefficient collection of delinquent
payments, inaccurate performance reporting to the investor. To reduce the
exposure to transaction risk, adequate staffing, skill levels, and capacity of
systems is required to deal with planned type and volume of transactions.
The liquidity risk arises from probability that large asset pools require balance
sheet funding at unexpected or inopportune times. As part of day-to-day liquidity
management, all outstanding should be monitored and plans of future funding
requirements should be aligned. In addition, funding alternatives have to be
assessed.
The compliance risk is related to respecting laws, rules, regulations, prescribed
practices, or ethical standards. Non-conformance may lead to fines, civil money
penalties, payment of damages, and the voiding of contracts resulting in a
diminished reputation, limited business opportunities, lessened expansion
potential, and lack of contract enforceability.147
5.3.3 Effects on SME financing
Increasing internationalisation of business and use of capital markets promote
asset securitisation as efficient corporate finance method for non-financial
enterprises. In this relation the main motives are both funding at competitive
capital cost and proactive management of balance sheet growth. While
especially large companies have replace traditional on-balance sheet debt and
equity finance by securitised debt, SMEs still largely depend on bank lending
147 Office of the Comptroller of the Currency (1997) pp.33-49.
5 Structured finance
56
and private equity. Low turnover, weak public disclosure of accounts and high
monitoring effort hamper the access to capital markets. At the same time,
decreasing margins in interest-based deposit business and the new regulatory
capital standards outlined in Basel II (see 3 The Basel Capital Accord) put
pressure on banks’ lending policy. This affects primarily risky borrowers, such
as SMEs tend to be, who suffer both, increasing borrowing cost of traditional
lending and difficult access to capital markets. In addition, technical barriers to
entry like critical amounts securitisable asset exposure and excessive start-up
costs hinder SMEs to access capital markets without the support of financial
institutions.
Securitised asset refinancing by corporations (“corporate securitisation”)
Indirect: Multi-seller ABCP programmes sponsored by financial institutions facilitate
funding of selected assets on a short-term basis
Direct: Companies themselves securitise own payment claims, such as long-term
revenues from entire operations, particular line of business (whole business
ABS) or defined project cash flows (project ABS)
Securitised asset refinancing by banks
Banks securitise medium-term and long-term SME credit exposures in large scale asset-backed
transactions, so-called SME CLOs
Table 19: ABS techniques involving SME-related payment claims
Two forms of securitisation, CLO and Asset Backed Commercial Paper (ABCP)
programmes, offer the required flexibility in terms of security design, underlying
asset type, and disclosure requirements for SMEs (see Table 19). Originators
sell assets like trade receivables, consumer loans, mortgages as well as lesser-
known asset classes, such as auto rentals and revenues from whole business
and project finance. Financial institutions use ABCPs for refinancing their own
lending activity and sponsor multi-seller ABCP securitisation programmes for
5 Structured finance
57
funding corporate clients. Both enable banks to extend loans to corporate
customers. In particular SMEs benefit from cost efficient funding through ABCP
programmes.
ABCP programmes have usually lower overall refinancing costs compared to
conventional on-balance sheet external finance, such as bank debt and
standalone off-balance sheet funding, like project finance ABS and whole
business ABS. The cost reduction is achieved through the diversification effect
of pooling individual assets and the resulting higher rating classification of
ABCP programmes. ABCP have become popular especially in countries with
restrictive bank lending.148
5.3.4 Effects on European economy
Günter Verheugen reckons that „micro, small and medium-sized enterprises
(SMEs) are the engine of the European economy. They are an essential source
of jobs, create entrepreneurial spirit and innovation in the EU and are thus
crucial for fostering competitiveness and employment”.149
On average, European enterprises are smaller than American and Japanese
ones. In the European Economic Area (EEA) and Switzerland 99% of all
enterprises are SMEs and 93% of all employ less than ten employees.150 Given
these figures, vitality of SMEs plays a crucial role for the European economy.151
However, SMEs frequently face troubles in obtaining capital or credit. Basel II
and greater sensitivity to the effects of economic cycles have made banks more
reluctant to lend to SMEs with low equity ratios.152
Despite increasing trends observed globally, securitisation activities increased
particularly in Europe during the decade after the introduction of the euro.
Factors such as the further integration of European financial markets and a
148 see European Commission (2003a) pp.7,8. 149 Günter Verheugen cited in European Commission (2003b) p.3. 150 see European Commission (2002) p.4. 151 see GBRW (2004) p.6. 152 see Kreditanstalt für Wiederaufbau (2003) p.16-18; GBRW (2004) p.6.
5 Structured finance
58
move to a more market-based financial system change the role of banks related
to lending from “originate and hold” to “originate, repackage and sell”
Furthermore, this increases the supply of lending because “…securitisation
provides banks with additional flexibility to face changes in market
conditions…”.153 Today, the two main markets for SME securitisation in Europe
are Germany and Spain.
So far, securitisation has been relatively ineffective in distributing risk
associated with lending to SMEs. However, developments related to Basel II
may help increasing efficiency of the risk transfer process. This development
and the flexibility of securitisation as a gateway to capital markets may indeed
aid SMEs access to finance.154 From a broader economic point of view,
securitisation entails a risk sharing mechanism, which mitigates disparities in
the availability and cost of credit, thus improving overall market efficiency. Debt
securities issued in securitisation transactions are generally less risky than the
original credit risk of the underlying because of diversification and a variety of
incorporated security mechanisms.
153 see Altumbas et al. (2007) pp.7-9,24. 154 see Kreditanstalt für Wiederaufbau (2003) pp.21,22,52-58.
6 Conclusion
59
6 Conclusion
Previous Sections explain various characteristics typical for SMEs, related
difficulties in accessing finance, possible effects of Basel II on SME financing
and some financing alternatives. Finally, various forms of structured finance
products are reviewed, involved parties discussed and the benefits and
drawbacks associated with asset securitisation assessed. Overall, one can say
that securitisation has proven its benefits as efficient funding and capital
management method.
Decision-makers of SMEs are typically owner-managers. In particular small
enterprises are family businesses. In this respect, sustainability and long-term
independence are considered as superior to short-term profit. Basel II will
further lead to higher credit spreads due to the growing importance of credit
ratings. This puts further pressure on SMEs that have commonly low equity
ratios.
Considering increasing costs of traditional borrowing, as a result of shrinking
margins in interest-based deposit business and the effects of Basel II, asset
securitisation seems a promising funding alternative, especially for SMEs. In
particular Continental European SMEs still heavily rely on traditional bank
lending and SME securitisation has been largely limited to indirect securitisation
transactions lead by banks. Dried up traditional funding of riskier borrowers,
such as SMEs tend to be, might further encourage SMEs to consider asset
securitisation to meet funding needs. In future, smaller corporation may
participate in securitisation transactions arranged by banks, which is already
quite common in capital markets-based financial systems. SMEs may benefit in
particular from such cost efficient funding through ABCP programmes
sponsored by financial institutions. Considering the continuously changing
structure of the financial environment and the significant economic importance
of SMEs in Europe, it seems safe to say that asset securitisation will soon join
ranks with traditional debt finance.
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61
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Appendix
Appendix
71
Annex I: Summary of U.S. small business Size Standards155
Construction
• General building and heavy construction contractors: $33.5 million
• Special trade construction contractors: $14 million
• Land subdivision: $7 million
• Dredging: $20 million
Manufacturing
• About 75 percent of the manufacturing industries: 500 employees
• A small number of industries: 1,500 employees
• The balance: either 750 or 1,000 employees
Mining
• All mining industries, except mining services: 500 employees
Retail Trade
• Most retail trade industries: $7 million
• A few (such as grocery stores, department stores, motor vehicle dealers
and electrical appliance dealers), have higher size standards, but none
above $35.5 million.
Services
• Most common: $7 million
• Computer programming, data processing and systems design: $25
million
155 U.S. Small Business Administration.
Appendix
72
• Engineering and architectural services and a few other industries have
different size standards.
• The highest annual-receipts size standard in any service industry: $35.5
million
• Research and development and environmental remediation services: the
only service industries with size standards stated in number of
employees
Wholesale Trade
• For small business Federal contracts: 100 employees, and the firm must
deliver the product of a small domestic manufacturer, as set forth in
SBA’s nonmanufacturer rule, unless waived by the SBA for a particular
class of product. For procurements made under the Simplified
Acquisition Procedures of the FAR and where the purchase does not
exceed $25,000, the nonmanufacturer may deliver the goods of any
domestic manufacturer.
• For loans and other financial programs: 100 employees is applicable for
all industries.
Other Industries
• Divisions include agriculture; transportation, communications, electric,
gas, and sanitary services; and finance, insurance and real estate.
• Because of wide variation in the structure of industries in these divisions,
there is no common pattern of size standards.
For specific size standards as of January 1 of each year, refer to the size
regulations in 13 CFR §121.201. SBA's Table of Small Business Size Standards
includes all changes and modifications made since January 1 of the most recent
year.
Appendix
73
Annex II: Relationship of SMEs and banks in Europe156
Table 20: Percentage of SMEs with credit lines, by number of banks and sectors in
Europe-19157
Table 21: Percentage of SMEs with credit lines, by number of banks and size class in
Europe-19158
156 European Commission (2003) pp.22-28. 157 Source: ENSR Enterprise Survey 2002. 158 Source: ENSR Enterprise Survey 2002.
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Appendix
74
Table 22: Percentage of SMEs, by maturity period for the largest bank loan and sector in Europe-19159
Figure 13: Reasons for dissatisfaction with the most important bank, by enterprise size
(in percent), in Europe-19160
159 Source: ENSR Enterprise Survey 2002. 160 Source: ENSR Enterprise Survey 2002.
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Appendix
75
Table 23: Most important reason for changing a major bank account, by size class (in
percent), in Europe-19161
Table 24: Most important reason for not obtaining additional bank loans, by size class (in
percent), in Europe-19162
161 Source: ENSR Enterprise Survey 2002. 162 Source: ENSR Enterprise Survey 2002.
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Appendix
77
Annex III: Main distinctive features of equity, debt and hybrid
capital
Equity Hybrid capital Debt
Liability At least to the capital
share
Only to the extend of
convertible
No
Profit participation Aliquot on profits and
losses
Profit-related interest No
Asset participation Aliquot Option No
Voting rights Yes, as a rule Possible No
Time limit No Temporary equity Yes, as a rule
Collateral No No Loan security
Drain on finances Not fix, only dividends Low interest
payments
Fix interest payments
Tax burden Tax on profits Interest payments
deductable
Interest payments
deductable
Table 25: Main distinctive features of equity, debt and hybrid capital163
163 see Grabherr (2001) p.32.
Appendix
79
Annex IV: Standard & Poor’s credit ratings definitions164
Investment Grade
AAA Highest rating; obligor's capacity to meet its commitment is extremely strong.
AA Only small difference to ‘AAA’; obligor's capacity to meet its commitment is
very strong.
A Obligor’s capacity to meet its commitment is still strong.
BBB Weakened obligor's capacity to meet its commitment.
Non-Investment Grade165
BB Obligor's capacity could be inadequate to meet its commitment.
B More vulnerable to nonpayment; obligor's capacity or willingness to meet its
commitment is likely to be impaired.
CCC Currently vulnerable to nonpayment; in event of adverse conditions, obligor is
not likely to have the capacity to meet its commitment.
CC Currently highly vulnerable to nonpayment.
C Currently highly vulnerable to nonpayment; perhaps bankruptcy.
D Payment default.
Plus (+) or
minus (-)
Plus (+) or minus (-) may be added to 'AA' to 'CCC' to show relative standing
within the major rating categories.
NR No rating or insufficient information
Table 26: Standard & Poor’s long-term issue credit ratings definitions
164 see Standard & Poor’s (2008) pp.3-5. 165 also called Junk Bonds; are regarded as having significant speculative characteristics.
Appendix
81
Abstract: English
The financial sector has changed significantly during recent decades. Higher
competitive pressure and a greater concentration of banks have diverse
impacts on lending practices. The new Basel Capital Accord, Basel II, is
supposed to harmonise international capital requirement standards in banking
and to enhance the financial system’s security and solidarity. Such changes in
the financial environment may have substantial effects on the access to finance
of small and medium-sized enterprises (SMEs), which generally tend to face
significant problems in accessing equity as well as debt.
Decision-makers of SMEs are typically owner-managers. In particular small
enterprises are family businesses. In this respect, sustainability and long-term
independence are considered as superior to short-term profit. Basel II will
further lead to higher credit spreads due to the growing importance of credit
ratings. This puts further pressure on SMEs that have commonly low equity
ratios.
Considering increasing costs of traditional borrowing, as a result of shrinking
margins in interest-based deposit business and the effects of Basel II, asset
securitisation seems a promising funding alternative, especially for SMEs. Many
financial institutions issue securitised debt on various asset classes. However,
in particular Continental European SMEs still heavily rely on traditional bank
lending and SME securitisation has been largely limited to indirect securitisation
transactions lead by banks. Dried up traditional funding of riskier borrowers,
such as SMEs tend to be, might further encourage SMEs to consider structured
finance to meet funding needs. In future, smaller corporation may participate in
securitisation transactions arranged by banks, which is already quite common in
capital markets-based financial systems. SMEs may benefit in particular from
such cost efficient funding through Asset Backed Commercial Paper (ABCP)
programmes sponsored by financial institutions. Considering the continuously
changing structure of the financial environment and the significant economic
importance of SMEs in Europe, it seems safe to say that asset securitisation will
soon join ranks with traditional debt finance.
Appendix
83
Abstract: Deutsch
Der Finanzsektor hat sich über die Jahrzehnte signifikant verändert. Stärkerer
Wettbewerb und eine konsolidierte Bankenlandschaft haben diverse
Auswirkungen auf die Kreditvergabepraktiken. Die neue Baseler Eigenkapital-
Vereinbarung, Basel II, soll die internationalen Standards für die
Kapitalanforderungen an Banken harmonisieren und die Sicherheit und
Solidarität des Finanzsystems stärken. Diese Veränderungen in der Finanzwelt
können substantielle Auswirkungen auf den Zugang zu Kapital von kleinen und
mittleren Unternehmen (KMU) haben, wobei KMUs ohnehin tendenziell
Probleme haben Eigenkapital wie auch Fremdkapital aufzubringen.
Die Entscheidungsträger von KMUs sind typischer Weise Eigentümer-
Unternehmer. In der Regel sind kleine Unternehmen Familienbetriebe.
Diesbezüglich genießt Nachhaltigkeit und langfristige Unabhängigkeit eine
höhere Bedeutung als kurzfristiger Profit. Basel II wird wegen der zunehmenden
Bedeutung der Bonität von Unternehmen zu größeren Credit Spreads führen,
was KMUs aufgrund der allgemein schlechteren Eigenkapitalausstattung weiter
unter Druck setzt.
Berücksichtigt man die steigenden Kosten der traditionellen Kreditvergabe, als
Folge von schrumpfenden Margen des Einlagengeschäfts und den
Auswirkungen von Basel II, erscheint die Verbriefung von Forderungen
besonders für KMUs eine vielversprechende Finanzierungsalternative zu sein.
Viele Finanzinstitutionen emittieren verbriefte Forderungen auf verschiedenste
Kategorien von Aktiva. Dennoch vertrauen besonders Kontinentaleuropäische
KMUs noch immer sehr auf die traditionelle Bankenfinanzierung während KMU-
Verbriefungen größten Teils auf von Banken geleitete indirekte Verbriefungen
beschränkt sind. Die sich immer schwieriger gestaltende traditionelle
Kreditvergabe an riskante Kreditnehmer wie viele KMUs wird möglicherweise
KMUs ermutigen strukturierte Finanzprodukte als Finanzierungsalternative in
Betracht zu ziehen. Kleine Unternehmen werden vielleicht an von Banken
durchgeführten Transaktionen teilnehmen, wie es bereits in marktbasierten
Finanzsystemen üblich ist. KMUs könnten von kosteneffizienten
Appendix
84
Finanzierungsformen wie Asset Backed Commercial Paper (ABCP)
Programmen besonders profitieren. Berücksichtigt man die sich permanent
verändernde Struktur der Finanzwelt und die beträchtliche Bedeutung von
KMUs in Europa, dann wird aller Voraussicht nach die Bedeutung der
Forderungsverbriefung jene traditioneller Finanzierungsformen erreichen.
Appendix
85
Curriculum Vitae
Personal Information Name Philip Chlupacek Date of birth 28 September 1979 Place of birth Vienna, Austria Nationality Austrian Education Oct 1999 – Jan 2006 Studies of Business Administration at Oct 2005 – Jan 2006 The University of Vienna, Austria Mar 2008 – May 2009 Majors Bachelor: Management Master: Finance, Operations Management Sept 2004 – May 2005 Studies of Commerce at The University of Birmingham, UK Scholarship with Merit Major: Business Management & Organisation Sept 1998 – May 1999 Military Service, Austria Sept 1990 – June 1998 High School in Vienna, Austria Professional Experience July – Aug 2003 European Central Bank Mar 2006 - Feb 2008 Frankfurt am Main, Germany Organisational Planning Dec 2004 – May 2005 National Express London, Birmingham, et al., UK Management of Rail Replacement Service 1998 - 2004 Tennis Instructor (self-employed) Vienna region, Austria Sept 2002 Bank Austria – Creditanstalt, Vienna
Treasury Operations Sept 2001 Capital Invest, Vienna Stock Fund Management Aug 2000 Geyer & Geyer Steuerberatung, Vienna Accounting May 1999 Creditanstalt, Vienna Customer Service Languages
German, English, Spanish, French, Latin