Talk about timing. Italy’s third biggest bank, Monte dei Paschi di Siena (MPS) sold the majority of a €1.6 billion securitized SME lease portfolio in January, just as concern over Italian SME lending was at the sharp end of a renewed bout of volatility in Europe. Investors hammered the stocks and bonds of Italian banks, particularly second-tier lenders, while the real wrath was reserved for MPS itself. Its share price dropped by almost a third while the bank was roadshowing the deal.
Italian bank shares had been on a downward trend for months, and when the ECB published its 2016 supervisory priorities in early January, it set off a renewed bout of bearishness. Mention by the ECB of a task force reviewing loans at banks with big NPL problems brought special concern over the fate of Italian banks, which have particularly high levels of bad debt, largely thanks to hard-hit SMEs.
The Italian bank selling frenzy then further intensified – halfway through MPS’s securitization roadshow – after most of the country’s biggest banks (including MPS) published press releases apparently acknowledging they were the part of the investigation.
Nothing new
Fears around the workings of the EU’s new bank-rescue framework have added zest to concern that the banks could be forced to increase levels of coverage to such an extent that their capital levels would fall below regulatory minimums, triggering bail-ins.
John Raymond, European banks analyst at CreditSights, thinks investors have paid too much attention to communications about the ECB’s monitoring of the situation – there’s nothing much new in it, he says.
|
But fund managers covering European financials say bondholders’ confidence in banks has suffered, firstly, from a Bank of Italy resolution procedure in November, in which NPLs were transferred to a bad bank at usually high coverage ratios – and secondly, from the senior bondholder bail-in just before the new year in Portugal. “It makes it even more likely that, at times of stress, the market will sell first and ask questions later,” says one investor. Perhaps not immediately obvious then as an easy time for MPS to do a big new ABS deal – no matter how ardent the European Commission’s efforts to foster SME-backed securitizations.
MPS was at the heart of all the market angst last month because its NPL book is so big: about a third of total loans, not far off €50 billion. Although the bank managed to sell €1 billion of NPLs in December to a securitization financed by affiliates of Deutsche Bank, the lack of any sign of a hoped-for merger that might bring a quicker solution to the bank’s troubles has further sapped confidence.
Greater uncertainty and risk aversion in the senior and subordinated debt markets, however, is pushing bank CFOs towards securitizations and covered bonds. At the same time, says one banker in the syndicate, the ABS market has become something of a safe haven, partly because it is secured and partly because it is governed by a framework less subject to all the legal doubt around senior bank debt.
Tranches
The MPS securitization, Siena Lease, is listed in Luxembourg and split into four tranches. International institutional investors and banks subscribed to the biggest and highest-rated senior tranche, €761 million. That tranche has a weighted average life of one and a half years, paying 125 basis points over the three-month Euribor rate. It is rated AA+/Aa2 by Fitch and Moody’s, and the structure includes a 53% credit enhancement.
Fund managers, central banks and public institutions, and banks, respectively, accounted for 44%, 38% and 17% of participation in the deal, with most from Germany and the UK. Much of the exposure is to manufacturing and real estate, mostly in the richer northern regions of Italy.
|
James Cunniffe, HSBC |
“This is precisely where we’ve seen ABS outperforming – situations in which investors have been able to look beyond broader market conditions and focus on the underlying cash flow and credit enhancement mechanisms,” says James Cunniffe, debt syndicate director in London at HSBC, which was bookrunner of the transaction alongside UniCredit and Intesa Sanpaolo investment banking unit, Banca IMI (MPS structured the deal). “At a time when there was very little or no corporate bond supply, the ABS market was able to price a transaction in a sector under intense scrutiny,” says Cunniffe. Investors feel they are underweight Italian and SME collateral compared with RMBS and auto loan securitizations, he adds.
The MPS deal has not been investors’ only chance to get such exposure, however. The European Investment Bank underwrote an enlarged securitization of bonds from public water companies in the Veneto region last month, according to Euromoney’s sister publication Global Capital. Meanwhile, MPS intends to continue to diversify its funding sources through deals like this; indeed, it securitized a €3 billion SME loan portfolio in August.
