Alain Godard, EIF chief executive, discusses Europe's post-Covid recovery and makes the case for STS securitisations

Q: What are the ways in which the EIF utilises securitisation to further its mission?
A: Central to the EIF’s mandate is, of course, our support to SMEs across Europe. There are naturally many ways or various instruments to achieve that, including securitisation.

By facilitating the execution of securitisation transactions, we provide guarantees to banks and financial institutions, allowing them to diversify their funding sources and to achieve economic and regulatory capital relief through credit risk transfer. Our role when we actually do get engaged with our counterparties through securitisation transactions is to ensure that this additional liquidity or capital and/or provisions that are generated are utilised to provide additional lending towards the real economy and more specifically EU SMEs.

Q: How do you see the SME securitisation/synthetic securitisation market developing going forward - especially in view of Europe’s post-Covid recovery?
A: As a general observation, we are currently experiencing economic growth across Europe. Of course, there are different results from one country to another, yet it is a substantial phenomenon.

Uncertainties at the macro level are not negligible and private investors need to provide certain levels of yield to their clients, so the conversations between banks (protection buyers) and investors (protection sellers) are hampered by the difference in demand/supply expectations. Within this macroeconomic context, SME lending progressively encompasses other avenues apart from the banking industry, such as peer-to-peer, direct lending via credit funds, etc. We also observe an increasing focus towards long-term structured loans or products (although of course this can be specific to certain sectors).

Synthetic securitisations were central to our mandate to support the SME sector last year, stimulating lending across Europe. However, regulations remain punitive for this market - and clearly one of the reasons why this market never came back to its pre-financial crisis form. 

Q: Synthetic securitisations are being included in the scope of the European Guarantee Fund. What prompted the move? What has take-up been like?
A: We actively pushed for synthetic securitisation to be included in the European Guarantee Fund. The move has truly been welcomed and well-received, particularly from banks who wish to work with us and - despite some initial reservations, due to a number of rather restrictive parameters enveloping the execution of these transactions - we do remain optimistic that we can generate sufficient demand to deploy the funds allocated for the securitisation activities.

We act as a protection seller and provide a financial intermediary with protection in the form of a guarantee on a specific risk tranche for a portfolio of existing assets. Essentially, we help increase those ratings from a sub-investment grade to an investment grade.

The EIF has a critical mission to play in this space and it is something we will continue to pursue. EIF has used quite extensively, even before the previous financial crisis, securitisation transactions which have proven to be an effective tool to increase access to finance for SMEs, by creating additional lending capacity for financial institutions through alleviating their capital and risk constraints and we intend to continue doing so.

Q: Does the EIF intend to participate in STS securitisations?
A: We sincerely hope new regulations will help revive this market - one we are already active on - and we entirely support the framework. We are also very keen to encourage the growth of STS securitisations as a way of broadening the acceptance and growing the visibility and benefits of this product. The STS framework is a great initiative, well developed by the policymakers, and provides a big incentive for the protection buyers in the form of a lower risk weight on the senior tranche which is typically retained by the originating institution.

Furthermore, the idea in this market segment is to always attach and channel clear public policy objectives. In the case of the Nordea transaction (SCI 16 September 2021), for example, we generate financial support to relevant SMEs in Finland, Sweden and Denmark, in the context of sustainable development. [The initiative is backed by the EU’s Investment Plan for Europe. Nordea has committed to reach net-zero emissions by 2050 and reduce CO2 emissions from its lending portfolio by 40%-50% by 2030]. 

Q: How do you view the European securitisation market moving forward?
A: I will not go as far as to say that the sector has been placed on a ventilator; however, it clearly lacks a certain momentum and growth. I feel that increased transparency, but also a clear perspective of impact will benefit it.

Many factors will come into play, but we will use securitisation more and more for what I view as thematic impacts - may it be ESG, digital transformation or [something] else. Here at the EIF, we operate within this framework and not only as a countercyclical investor with a mandate to enhance access to finance for SMEs.

Vincent Nadeau