PARIS: French banks tested the waters for securities backed by loans to small and medium-sized companies on Friday, issuing 2.65 billion euros ($3.7 billion) in notes as part of a pilot project encouraged by the Bank of France.
The issue will be closely watched by the European Central Bank as it looks for ways to revive lending to the small and medium enterprise (SME) sector, with banks reluctant to extend loans because of tighter capital rules.
While large companies can count on tapping markets to get cheaper longer-term funding, smaller firms rely largely on funding from banks, where rates charged on medium-term loans have been running at about 2.8 percent, according to the Bank of France.
The French Banking Association (FBF) said BNP Paribas, Societe General, Credit Agricole, BPCE Group and HSBC France participated in the deal, with notes of maturities up to three years being issued through a special purpose vehicle.
Further issues will follow in the coming weeks, the FBF said, adding that the notes increase liquidity in the financing available for small and mid-sized firms while offering high-quality collateral to capital market participants.
Outstanding loans to SMEs at French banks amounted to 361 billion euros in February, up 0.8 percent year-on-year, according to Bank of France data.
At the initial stage of the project, the underlying loans backing the notes will remain on the balance sheet of the banks that extended them.
The loans used for the notes bear the highest rating from the Bank of France, which divulged its usually undisclosed ratings for this project.
One source said that the banks do not intend to sell the notes to investors at first, although that could change if the notes become eligible as collateral for ECB repo operations, which is a likely prospect.
Currently, securities bundling loans from SME's make up a fraction of the 180.8 billion euros in securitised products issued in Europe last year, the Association for Financial Markets in Europe.
President Francois Hollande's government wants to ensure SME's have access to affordable credit, as it is counting on a revival in corporate investment to underpin a tentative recovery in the euro zone's second-biggest economy.
The ECB is eager to revive the market and its president, Mario Draghi, wants to convince the world's financial elite to give it more lenient regulatory treatment at a G20 meeting this weekend in Washington.
One problem in the past has been that there are not always credit ratings available for small and mid-sized firms, which are necessary to ensure coherence in the quality of the loans backing securitised products.
The French experiment resolves that issue by using the Bank of France's internal ratings, a technique which could be used in other countries such as Germany or Spain, where the central banks have similar ratings systems.
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