Portugal's newest ABS structure analysed

Author: Danielle Myles | Published: 19 Jul 2012
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Portugal’s asset-backed securitisation (ABS) market opened on Tuesday after a five-year hiatus. The return deal prioritised reserve fund replenishment, removed counterparty risk, and used an exposure portfolio mechanism to cover set-off risk.

Banif Bank’s €158.3 million series A notes issuance is the first to be placed with investors since the financial crisis, and shows how banks can use ABS to source finance beyond the European Central Bank’s (ECB) repurchase programme.

While the ECB requires a single form of collateral, Banif’s notes are backed by auto loans, auto leases and consumer loans.

“To the extent issuers have mixed pools, this is definitely an attractive alternative, and that’s one of the reasons why Banif went for this transaction,” said Alejandro Gonzalez-Ruiz of StormHarbour Securities, joint arranger and joint lead manager on the deal.

The four-tranche deal was structured to enhance the series A notes – the only rated tranche.

Placing the reserve account above the three bottom tranches in the cashflow waterfall shortened the notes’ average life and boosted their credit rating.

Counterparty risk was removed entirely by taking out the cap included in Atlantes Finance No 4. The notes’ short life makes it likely they would be repaid before a basis increase occurred, which is when the hedging through a swap or cap would be useful.

“We eliminated the cap as there was no reason to link the rating of the notes to the counterparty when it wasn’t adding any value from a credit enhancement perspective,” said Gonzalez-Ruiz.

Rating agencies’ concerns over Portuguese bank insolvencies, and the possibility of deposits being used to set-off loans being securitised, also needed to be accounted for.

“The rating agencies have been very concerned about set-off risk and have been demanding Portuguese banks create a set-off reserve requiring a huge amount of liquidity – it can be up to 20% of the whole deal,” said Gonçalo Reis Martins of Sociedade Rebelo de Sousa, local counsel to the co-arrangers.

For its first securitisation deal in Portugal – Caixa Economica Montepio Geral’s Pelican Mortgages No 6 which closed in February 2012 – StormHarbour created a separate exposure portfolio populated by loans that could replace the asset pool.

Banif wanted to place the majority of assets into the securitisation, which required a modification of this exposure portfolio. The bank’s set-off reserve was funded with cash, but it has the ability to be replaced with new loans and leases as the bank originates them.

“With this additional enhancement regarding covering the set-off risk, and given the success in placement, the deal could open up a new avenue in the market for Portuguese banks,” said William Smithson, also of Sociedade Rebelo de Sousa.

As ECB funding becomes less effective, the deal could pave the way for other Portuguese banks to use the structure, he added.

On the band wagon

In itself, the Atlantes Finance No 5 deal doesn’t signal the recovery of Portugal’s ABS market, at least in the short-term. However it is an encouraging sign of investor confidence in the country’s credit intuitions.

“The positive from this issue is that it signals a change in the market in that there is still appetite for Portuguese risk,” said Uria Menendez partner Pedro Ferreira Malaquias.

Market observers are not convinced that a wave of similar issuances will follow in the immediate future. The biggest banks are unlikely to take the time, and pay the fees and coupon, required by this deal to raise €160 million, local lawyers said.

“We are talking about a risk that is bearable, short-term and comes with a good price,” said Ferreira Malaquias.

However they do think it will spark banks to think of ways to gain funding through securitisation beyond the ECB, as well as other capital markets. The domestic retail bond market is emerging as an unlikely source of alternative source of private finance.

This week Portugal Telecom doubled its retail bond placement on account of high investor demand. Corporates are placing direct bonds in the retail market, said Filipe Lowndes Marques of Morais Leitão Galvão Teles Soares da Silva & Associados.

“You see a lot of that at the moment in Portugal, and I think banks are also jumping on that bandwagon,” he added.

This is despite similar debt being impossible to place overseas. “The foreign perception is very different to the national perception,” Lowndes Marques said.

Tear sheet

Banif Bank sold €158.3 million of Atlantes Finance No 5’s series A notes, rated A- by Standard & Poor’s, on July 17 to foreign investors. The series B, C and S notes were not rated or placed with investors. The series A notes were listed on the Lisbon stock exchange and are governed by Portuguese law.

Co-arrangers StormHarbour Securities and Banif Investimento were represented by Sociedade Rebelo de Sousa on Portuagese law and K&L Gates on foreign law.