The German True Sale Initiative is causing much excitement in the securitisation industry. And for good reason: many believe it could kickstart Germany's structured finance market and transform it into a European power house over the next few years.
Germany's True Sale Initiative (TSI), the details of which were first announced in April, has been met with something approaching universal acclaim. Michael Raynes, head of Deutsche Bank's securitised products group, speaks for the broader banking community when he says that he is convinced it will inject new impetus into a market that has hitherto been what he calls "Europe's sleeping giant" in terms of activity in the true sale segment of the securitisation arena.
Germany's market for true sale securitisations has remained dormant principally because of the existence of a trade tax (Gewerbesteuer) on special purpose vehicles (SPVs) that has made structures other than synthetic securitisations uneconomic.
According to figures published by Dresdner Kleinwort Wasserstein, Germany accounted for just 5.4% and 7.5% of European funded securitisation in 2001 and 2002, respectively, and for only 2% of issuance by July 2003.
The tax impediment to true sales, which bankers say was never targeted specifically at the securitisation market, fell away at the start of this year when Germany's finance minister, Hans Eichel, initiated legislation exempting SPVs from the trade tax.
That in turn paved the way for the launch of the TSI, the bare bones of which as well as of its formal structure have been well documented. Originally presented by a sextet of Commerzbank, Deutsche, Dresdner, DZ Bank, HVB and KfW, the aim of the banks is to "pool loan portfolios in a newly established company and to place them in the capital market". Since then an additional seven banks have committed their support to the TSI, including Citibank, which is the first non-German bank to have signed up to the initiative.
The principal objectives of the TSI are clear, if multifarious, with one of the most important being the pressing political need to allow banks to expand their lending capacity, especially to smaller and medium sized enterprises (SMEs).
Dieter Glüder, senior vice president of asset securitisation at KfW in Frankfurt, says that the question of whether or not Germany has been suffering from a credit crunch has been hotly debated.
He believes that the conclusions of this year's Siemens Financial Services study, which suggested that German companies were facing an acute liquidity crisis, is probably an exaggeration; but he does concede that bank lenders have become considerably more selective and demanding in their provision of credit to the German corporate sector.
The grim figures speak for themselves. At the press conference accompanying the unveiling of the TSI, mention was made of a recent survey which found 45% of SMEs reporting that bank funding criteria had been tightened, and that 30% of those respondents had been unable to access credit.
That is not much of a recipe for re-igniting activity in a sluggish economy, and as one of KfW's principal mandates is to foster financial support for SMEs, it stood to reason that it should play a leadership role in an initiative that ought to free up more bank credit lines.
"We are convinced that if we can succeed in getting the true sale of SME loans into the market in a highly liquid format it will be beneficial to the primary distribution of loans to SMEs, which is the main reason why KfW was so committed to the launch of the programme," says Glüder.
Already, Glüder says that positive indications are emerging to suggest that the initiative will help promote the increased flow of bank credit towards SMEs. He says that Commerzbank, for one, has publicly announced its commitment to increasing its allocation of credit to SMEs.
Freeing up bank lines for the medium sized companies that politicians hope will act as the motor for longer term economic recovery is all very well - but not if it only invites German banks to repeat previous mistakes and distribute uneconomic loans to weak credits.
Fortunately, analysts appear to be convinced that this is profoundly unlikely.
"The TSI will free up lending capacity, but I am certain that the banks won't be using that capacity to lend at uneconomic margins," says Tobias Grün, director of financial institutions at HSBC. "So will the taps be opened for credit to Mittelstand companies? I believe not, unless those companies are willing to pay a much higher margin for their finance."
So much for what the TSI may do for the corporate sector. The other, related part of the equation is what it will achieve for the banking industry, which analysts believe will be considerable. "Up until now synthetic securitisations have only given banks capital relief, but no funding," says Grün.
"True sale securitisations will give them both, which is absolutely key to the whole initiative."
Fair enough. But why should banks need to establish a formal platform supported by the KfW imprimatur in order to achieve this objective? After all, with the tax deterrents to true sale securitisations now out of the way, there is no reason why banks should not issue transactions independently, rather than via the new initiative.
Indeed, analysts believe that a number of those German bank issuers that have been highly successful in developing their own securitisation programmes will look to use the tax waiver to build upon existing platforms.
"A number of German securitisation programmes, such as HVB's Geldilux or Deutsche's Haus series, have been well received by investors," says Ganesh Rajendra, director and head of European securitisation research at Deutsche Bank in London. "So I would expect banks such as HVB and Deutsche to find cash securitisations a compelling funding proposition going forward."
The economics of true sale transactions look compelling enough, according to Rajendra. "In the current market, cash deals tend to price much better from an issuer's perspective than synthetic transactions," he says.
"A good comparison for illustrative purposes is the pricing of the Spanish ICO cash securitisations relative to the KfW Promise partially-funded synthetic deals. The Spanish SME triple-A five to seven year tranches are pricing in the mid-20s, compared with the mid-40s for comparable Promise tranches."
Bankers do not believe that the advent of the TSI signals the end of synthetic securitisations in Germany. Iain Barbour, global head of securitisation at Commerzbank Securities, believes that there will be a dual role for synthetic securitisations and true sales now that the tax deterrent has been swept aside. "For those banks with relatively low costs of funding - of, say, below 10bp - synthetics will continue to be the optimal solution in terms of cost of execution," he says. "For the others, there is no question that a true sale structure will become more compelling from a pure cost perspective."
But Barbour adds that funding costs in isolation should not be the only consideration. Access to liquidity will also be an important attraction for banks exploring the new opportunities that cash securitisations will bring.
"German banks have been discovering that a reliance on Pfandbriefe or MTNs or deposits is not necessarily the best way of ensuring that they have access to the broadest depth of liquidity," he says. "True sales will give them an opportunity to pursue a more diversified funding strategy, and will provide a welcome complement to existing financing sources even for those banks that enjoy tight costs of money."
One critical element of the TSI will be the injection of some much needed standardisation in the German ABS market, the benefits of which should not be underestimated.
"From investors' point of view it is not desirable to have new structural features in every transaction," says Gerald Ruecker, co-head of FIG German debt capital markets at BNP Paribas in London.
"That simply slows down the process of issuance. But if you have the sort of standardisation which worked so well in the Jumbo Pfandbrief market it will encourage the rapid development of a relatively liquid market."
The potential for standardisation of ABS issuance to reach well beyond the banks involved in the initial stages of the TSI - and to include non-German as well as German players - appears to be embedded in the initiative's gameplan.
"We have always said that the TSI will be open to banks that want to deliver portfolios for securitisation even if they are not shareholders in the TSI," Glüder says. "We have made it clear that we should be open to all banks that are interested in selling their portfolios via the TSI."
Others agree that the liquidity arising from the standardisation that will be created by the TSI project will be pivotal to its success and sustainability.
"The TSI will encourage the sort of programmatic issuance that is common in the US but which has only been developed in a handful of UK residential mortgage issues," says Raynes at Deutsche Bank. "Investors in Europe are clamouring for liquidity and will be prepared to pay for what they perceive to be more liquid transactions."
Inevitably, the creation of an initiative with the potential to securitise upwards of Eu200bn of assets is not free from teething problems, uncertainties and even controversies, although one of these appeared to be cleared up very swiftly.
Shackles of NPLs
This was the suspicion aired in some quarters that the TSI would act as some cunningly devised plan to free German banks of their non-performing loans (NPLs). KfW was adamant from the start that this was out of the question, and its pledge that the TSI will not function as a 'bad bank' has been strengthened by KfW's insistence that it will act purely as a co-ordinator of the project, rather than as a guarantor for any TSI issuance.
"One thing that seems apparent is that KfW will not provide a wrap or guarantee of any form, which contrasts with the Spanish ICO securitisations where the government has provided an explicit guarantee covering about a portion of funded liabilities," says Rajendra at Deutsche Bank.
"So it seems clear that KfW's role is that of a lead sponsor of the initiative, rather than as a guarantor of the securitised bonds."
Glüder confirms this observation, saying that for KfW to provide explicit wraps or guarantees would be counter-productive. As he says, one of the principal objectives of the TSI is to provide a disciplined, liquid and correctly priced secondary market for German SME risk. Wrapping issues with a KfW guarantee would defeat that particular purpose.
The TSI's official target is to launch its first transaction by the end of this year, which has prompted scepticism in some quarters that all the administrative and technical challenges raised by so ambitious a programme will be addressed within the next two to three months.
Glüder says that his "troops" are working round the clock in a number of different groups to iron out a number of potential difficulties, although he adds that as a number of these can only be resolved by external authorities, the precise timing of the inaugural transaction is out of the TSI's hands.