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New Synthetic Securitisation Instrument is Approved by the European Commission

New Synthetic Securitisation Instrument is Approved by the European Commission

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The European Commission approved the creation of a new synthetic securitisation product under the EU State aid regulation. The new product is in the form of guarantees on synthetic securitisation tranches to help companies affected by the COVID-19 outbreak in the 22 participating Member States (i.e. Austria, Belgium, Bulgaria, Croatia, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Lithuania, Luxemburg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain and Sweden). The product is under the European Guarantee Fund and managed by the European Investment Bank Group (EIB Group). The dedicated budget is EUR 1.4 billion, however, it is expected to mobilise at least EUR 13 billion of new lending to companies affected by the COVID-19 outbreak.

Synthetic securitisation is a financial technique, whereby an issuer identifies a pool of existing assets (e.g. a portfolio of loans) which are hold on its balance sheet, it creates tranches with different risk or reward profiles against that pool, and subsequently transfers a part of the risk originating from the pool by buying protection on a specific tranche (for example by getting a guarantee on the relevant risk tranche) from a protection seller. Finally, the originating entity pays a premium to the protection seller.

By the new instrument, the EIB Group will endorse a financial intermediary with protection in the form of a guarantee on a specific risk tranche for an existing portfolio asset. Nevertheless, the portfolio needs to fulfil certain requirements in terms of maximum size and contain only performing exposures. Due to the provided guarantee, the financial intermediary will be charged with a subsidised guarantee fee by the EIB Group.

The financial intermediary will have to pass on the financial advantage which is originating from the transaction to the ultimate beneficiaries of the instrument. The financial intermediary will be obliged to use regulatory capital freed up to create a new pool of assets to meet the liquidity needs of SMEs, while complying with certain conditions in terms of riskiness, volume and maturity of the new loans. The aim of new instrument is to support originate new, riskier lending to SMEs.

By Krisztian Brody, Attorney at Law, KCG Partners Law Firm

KCG Partners at a Glance

KCG Partners is a Hungarian business law firm providing a comprehensive range of legal services to international and local clients seeking local knowledge and global perspective. The firm comprises business-minded lawyers with sector-specific expertise, creating value for clients by applying a problem-solving approach and delivering innovative solutions.

The firm has a wealth of knowledge in corporate law, M&A, projects and construction, energy, real estate, tax, employment, litigation, privacy and forensics, securitization, estate planning and capital markets.

To address clients’ regional and international concerns, the firm maintains active working relationships with other outstanding independent law firms in Central and Eastern Europe, whilst senior counsel Mr. Blaise Pásztory brings over 40 years’ of US capital market and fund management experience.

KCG Partners Law Firm is the result of the teamwork of passionate and talented lawyers guided by the same principles and sharing the same values: 

  • Our most valuable asset is our people. They are the engine of our business and the key to our success.
  • We push boundaries by looking for innovative solutions that can empower our clients to achieve greater results.
  • We place our experience, commitment and professionalism to your service.
  • We are driven by our vision to shape and lead the Hungarian legal market and become a first choice law firm in our practice areas.

Firm's website: http://www.kcgpartners.com