PGGM synthetic sends message to regulators

Author: Lizzie Meager | Published: 18 Jan 2016
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In a move to get the oft-criticised asset class back in the spotlight, Dutch pension fund PGGM and Santander last week agreed to a €2.3 billion ($2.5 billion) synthetic securitisation.

The deal, also referred to as a risk-sharing agreement, will see PGGM sell credit insurance against a portfolio of small and medium enterprise (SME) loans originated by Santander.

“We hope this deal and similar ones demonstrate to the regulators that this isn’t some esoteric complex alchemy,” said Steve Gandy, head of debt capital markets solutions at Santander. “It’s a useful way of distributing credit risk in the banking sector to institutional investors, which helps us continue to lend to a very important sector of our client base.”

Unlike a true sale transaction, in which loans are bundled up and sold to a special purpose vehicle (SPV) with notes then issued by the SPV, Santander has entered a credit default swap with PGGM. PGGM therefore agrees to cover potential losses incurred on the portfolio, reducing Santander’s risk weight assets and freeing up valuable regulatory capital. 

“Synthetics have really been playing catch-up with the main track,” said Richard Hopkin, head of fixed income at the Association for Financial Markets in Europe (Afme). “Their public image has a bit further to go than mainstream securitisation, but the debate is moving on now.”


  • On January 11 2016 Dutch pension fund PGGM and Santander agreed to a €2.3 billion synthetic securitisation or risk-sharing agreement;
  • The deal highlights both parties’ position on the asset class, which they believe is a vital tool to free up capital and continue lending;
  • The EBA voiced support for senior synthetic tranches on SME portfolios, but market participants think its scope should be extended.

A bad rap

Much like mainstream ABS, synthetic securitisation earned itself a bad name during the crisis because a small number of players abused it, according to Hopkin.

The structures created and deployed during that time were overly complex and ultimately meaningless, but Hopkin argues that better quality synthetics that free up bank balance sheets and make way for more funding are healthy.

"This isn't some esoteric complex alchemy"

“I don’t think the name is particularly helpful actually,” added Hopkin. “It’s really no different from a guarantee and can be useful in all sorts of asset classes where achieving a true sale proves difficult.”

Because many SME loan agreements prohibit any future sale, introducing a synthetic element can give the originator a valuable method of transferring risk in the absence of a true sale.

SMEs are at the heart of Europe’s many economic initiatives, as the continent’s over-reliance on banks limits the funding available to help businesses grow.

Simple, transparent and standardised

Certain high-quality, simple ABS structures have been put forward for preferential treatment by organisations like the European Banking Authority (EBA) and the Basel Committee. This took shape last year in the form of the simple, transparent and standardised (STS) securitisation initiative.

But for the more complex, opaque structures, synthetics included, it hasn’t been such an easy ride. The EBA did not mention synthetics in its first response to the Commission in July 2015, but it did acknowledge their value in a December statement.

Steven Gandy, Santander
Steven Gandy, Santander
The statement voices support for the extension of STS capital requirements on certain senior synthetic tranches of SME portfolios. Both Hopkin and Gandy say that while the move is certainly a step in the right direction, the proposal errs too far on the side of caution.

“If everyone agrees that the goal is increasing the depth of capital markets in Europe, and that synthetics can help with that, why limit use of them to SMEs?” said Gandy. “That makes no sense to me.”

In the same report, the EBA estimated synthetic issuance to have reached €60 billion in 2015. Many such deals are often not made public, making PGGM’s decision to issue a press statement all the more noteworthy.

STS is predominately focused on improving the information investors have access to. “And unlike in the cash market, investor protection isn’t really an issue because the market is mainly made up of a small number of big players writing big tickets,” added Hopkin.

See also

Saving EU securitisation

Can securitisation prompt European growth?

A new securitisation regime: will the dust ever settle?