Banks Not Business to Gain From French Bond Plans: Euro Credit

Apr 02, 2014 5:42 am ET

April 2 (Bloomberg) -- Bank of France Governor Christian Noyer’s plan for packaging business loans into bonds to boost financing for small- and medium-sized enterprises will begin this month. The real beneficiaries will be the banks.

The program will allow lenders including BNP Paribas SA and Societe Generale SA to turn into cash the 362 billion euros ($499 billion) of business loans they’ve already made that are sitting on their balance sheets. They’ll do it by bundling the debt into securities and pledging them as collateral at the European Central Bank or in the interbank market.

“The Bank of France is trying to kill two birds with one stone by helping banks access liquidity by collateralising portfolios of SME loans and encouraging them to increase the level of financing to SMEs,” said Fabrice Susini, global head of securitization at BNP Paribas in London. “However, the primary and most important goal is boosting bank liquidity.”

French lenders are facing a health check from Europe’s central bank this year and are boosting stocks of easily saleable assets after experiencing a liquidity squeeze during the financial crisis. SMEs employ 63 percent of private sector workers and are central to economic growth in France where President Francois Hollande is struggling to secure a sustainable recovery and reduce unemployment.

France’s gross domestic product rose 0.3 percent in the fourth quarter of 2013, after declining 0.1 percent in the previous three months. More than 10 percent of the nation’s labor force is without work, with jobless claims rising to a record 3.3 million in January, according to the Labor Ministry.

Pool Loans

Under Noyer’s proposals, the Bank of France will create a private company to pool existing loans made by lenders into bonds that are eligible for use in repurchase agreements.

“This initiative is about how banks get funding and using securitization to access central banks,” said Michel Fryszman, head of ABS investment at AXA Investment Managers, which oversees about 550 billion euros. “It’s not related to investors. What we are talking about is a new tool in banks’ funding box.”

The Bank of France’s program, which has been more than a year in the making, comes as the ECB is working on measures to improve the flow of credit to businesses to boost growth. Policy makers are promoting a functioning market for asset-backed securities, which could enhance banks’ capacity to lend by transfering existing loans from their balance sheets.

Banks create the securities by bundling loans into bonds that are sold to investors or pledged as collateral for central bank funding.

Immense Benefit

Europe’s ABS market plummeted after the securities were blamed for deepening the worst financial crisis since the Great Depression. Sales of the debt totaled 73.8 billion euros last year compared with 323 billion euros in 2007, according to data compiled by JPMorgan Chase & Co.

European initiatives to promote lending to SMEs will spur an increase in ABS issuance by as much as 15 percent this year, according to Barclays Plc. The biggest growth area will be notes secured by loans to SMEs, which will reach 7.5 billion euros, compared with 980 million euros in 2013, according to the London-based lender.

The benefits of a functioning securitization market would be “immense for the economy”, said Manuel Trojovsky, an analyst at UniCredit Bank AG in Munich. “Issuers will ultimately benefit from lower funding costs and a diversification in funding, investors will get access to more high quality investments and SME borrowers would stand to gain a lot from expanded access to credit and lower credit costs.”

Growth Area

The European Commission last week called for measures to revive the market for asset-backed debt. Promoting securitizations that are good quality and less risky could help get financing to companies, according to Michel Barnier, the EU’s financial services commissioner.

“SME deals can be a growth area and we have already seen a trickle of deals,” said Olivier Renault, the London-based head of structuring and advisory at StormHarbour Securities LLP, which arranged a securitization in January of SME loans originated by Portugal’s Banco Internacional do Funchal SA.

France will find it easier to implement a bond program than other countries because its central bank has better information on the quality of assets backing securitizations, Citigroup Inc. analysts said in a March 14 report. Bank of France rates all loans originated by French lenders, something not all central banks in Europe currently do.

A Bank of France spokeswoman, who asked not to be identified citing company policy, declined to comment on the bond program.

Funding Tools

Securitization is one among a number of tools being considered by European policy makers to help channel new funds to the real economy. The Spanish government proposed legal amendments last month that would allow banks to sell covered bonds backed by loans to small businesses, while the European Commission has cited a need for a liquid and transparent secondary market for corporate bonds to help SMEs get financing.

Notes issued by France’s securitzation vehicle will be closer to covered bonds than ABS because they are dual-recourse securities with a claim on the borrowing institution and on the loans if the issuer runs into trouble, according to Didier Harnois, SocGen’s head of group loan collateral management in Paris.

“There’s a lot of interest in the SME asset class from investors, but they have a lot of questions about how to get comfortable with the risk,” said BNP Paribas’ Susini. “When you are looking at portfolios as small as 50 to 300 loans to companies with an annual turnover of 50 million euros or less that have no public debt and no public rating, there is a greater challenge to make the transaction understandable to capital market investors.”

--With assistance from Mark Deen in Paris.