Joint Paper - The Benefits of Securitisation - June 2016
Joint Paper - The Benefits of Securitisation - June 2016
Joint Paper - The Benefits of Securitisation - June 2016
We are keenly interested in promoting a safe and The investments are known as “asset backed securities”
growing securitisation market that can benefit the because the securities are “backed” by, and are repaid
real economy in Europe. We think securitisation, from, payments made on the loans (mortgages, car
which in the run-up to the financial crisis of 2008 has loans, corporate loans).
been discredited by the actions of certain players in
the market, can and should be used as a perfectly Europe has a good track record with securitisations,
legitimate funding and capital tool. but there were some bad and overly complex
structures that contributed to the great financial crisis.
Many regulations have been enacted to prevent the
For each loan granted a bank needs two things: cash misuse of the securitisation technique. For example,
to provide to the borrower (funding) and a buffer regulations mandate that those creating the loans
to account for potential non-payment (capital). (originators) keep 5% of the risk of the loans (“skin-in-
Securitisation is a technique that can help a bank the-game”) to make them take care over the long-term
attract funding and strengthen its capital ratios in a performance of their loans.
diversified way. For investors it provides attractive and
diversifying investments without the need to set up The following document explains in more detail how
a complex and expensive client-facing infrastructure. securitisation contributes to risk management and
Instead they can benefit from the lending and servicing investment benefits, with some specific examples.
expertise of (experienced) originators. Securitisation
can be used for a large mix of lending types and
borrowers: from consumers and SMEs to large
corporates and from car loans to renewables financing.
The Benefits of Securitisation 2
Class A
APG
Notes
Servicing
Santander Agreement
Consumer
SC Germany
Germany Issue of
Assignment Auto 2014-1 UG Notes
Auto Loan
(haftungsbeschränkt) Principal and
Portfolio Interest
(“Issuer”)
Principal/
Interest
Santander
Retention
Class B
Santander
Notes
The Benefits of Securitisation 4
2.a Recycling capital for further The sale of the subordinated securities enabled
lending to real economy Santander to achieve SRT at a lower cost than other
alternatives, such as selling new shares.
Santander also uses securitisation to share the risks of
its loan portfolios with institutional investors, thereby For APG, the investment provides an attractive risk-
achieving SRT (Significant Risk Transfer) and allowing us return profile and gives APG exposure to the Spanish
to reduce risk weighted assets and free up capital for consumer loan market without having to invest in
further lending. expensive origination and servicing infrastructure.
Series A Bonds
SANTANDER CONSUMER
Servicing
Agreement
Santander
Auto Loan Portfolio
Santander Retention
Series B Bonds
FTA
EFC, S.A.
Assignment
Santander Issue
Consumer Series C Bonds
Principal /
Principal / Spain Auto Interest
Interest 2014-1
Series D Bonds APG
Series E Bonds
The Benefits of Securitisation 5
2.b Recycling capital for further SRT. This enabled Santander to lower its risk weighted
lending to real economy assets and to free up capital for further lending to the
SME sector.
Santander also makes use of synthetic securitisation
to achieve SRT, such as the Victoria SME transaction The risk sharing structure utilised was the optimal
closed with PGGM’s pension fund client, PFZW, in alternative for Santander for this asset class as a
December 2015. rated, traditional securitisation would be prohibitively
expensive due to the conservative view of SME loans
Using a simple CDS contract between PFZW and and the sovereign cap imposed by rating agencies.
Santander, PFZW provided credit protection on 80% Also issuing new shares or otherwise raising additional
of a € 2.3 billion pool of SME loans to Spanish SME capital would be more expensive than the cost of
borrowers, originated by Santander in Spain. the Victoria transaction. Covered bonds are not
Santander retained 20% of the risk in each of the loans an alternative for SME loans, and because of the
to assure alignment of interests. dual recourse nature of covered bonds, it would be
impossible to achieve SRT with a covered bond.
PFZW collateralised its obligations under the CDS
contract by depositing cash in the amount of the credit For PFZW, the investment provides an attractive risk-
protection limit in a custodian account which invests return profile and gives PFZW exposure to the Spanish
in high quality sovereign bonds which mature on each SME loan market without having to invest in expensive
interest payment date. This eliminates the counterparty origination and servicing infrastructure.
risk that PFZW and Santander would be exposed to.
Cash Collateral
8% Premium
Santander
Retention
Portfolio
SME Loan
Portfolio
The Benefits of Securitisation 6
Cash
Collateral
Securitised Reference Portfolio
Class A 100%
Senior 88%
Tranche Santander
CDS
Premium
Boadilla
2009-1
Glossary
CDS Credit Default Swap, a contract between two parties in which one party agrees to
cover credit losses incurred by the other party.
SRT Significant Risk Transfer, for a bank to claim capital relief for a securitisation of
balance sheet assets, the regulator wants to see that a significant portion of the
credit risk has been transferred to a third party.
Tranches Slices of a securitised portfolio which have different rankings in terms of when the
investors in the tranches will be affected by losses. A first loss tranche investor will
be affected by the first x amount of losses; any additional losses will be absorbed by
the investors in the second loss tranche and so on.
True sale Refers to the fact that the loans are sold by the bank to the securitisation vehicle in
a legal true sale that effectively ring-fences the assets away from the bank.
Synthetic Refers to the fact that loans are not sold to a securitisation vehicle but remain the
property of the bank. The bank hedges the credit risk of the loans by entering into
a CDS or financial guarantee with one or more investors, who agree to reimburse a
portion of the credit losses on the loans.
Financial Guarantee A contract in which one or more investors agree with a bank to reimburse losses
suffered by a bank on a portfolio of loans as the result of credit events, such as
failure to pay and bankruptcy.
SPV Special Purpose Vehicle, a legal entity specifically set up for the securitisation
transaction. In a true sale securitisation, the SPV purchases the loans from the
bank and issues securities backed by the payments on the loans. In a synthetic
securitisation, the SPV does not purchase the loans, but enters into a CDS or
Financial Guarantee with the bank and it issues credit linked notes to investors
who agree to reimburse losses suffered by the bank on the agreed (a referenced)
portfolio of loans.
Interest The interest rate the borrower needs to pay on the loan.
Retention The share of the loan portfolio the bank remains exposed to and which is not sold to
or hedged by the investors.
Premium The premium is the payment (like an insurance premium) that a bank pays investors
to compensate them for taking a portion of the credit risk of the loans in a synthetic
securitisation. The premium is calculated on the maximum amount of losses on the
securitised loans the investors commit to reimburse.
The Benefits of Securitisation 9
Technique of Securitisation
Securitisations
100%
Senior tranche,
AAA rated
Senior tranche,
Min 5% of each loan,
Max of 95%
remains unhedged
retained
Losses on loans
of each loan
by the bank
AAA rated tranche → credit risk
to transfer
to investor
A rated tranche 8%
Expected losses 2% CDS premium 0–8% First loss/
Equity tranche
First loss/
covering first
Equity tranche
Losses up to 8% 8% of losses
(not rated)
0%