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