European SME covered bond market to expand

Following issuances in Turkey and Germany of covered bonds backed by loans to small and medium-sized enterprises (SMEs), growth in SME-backed covered bonds (SME CBs) is gaining traction in Europe, Moody's Investors Service said in a new special comment.
Moody's expects that SME CBs will feature in other European markets such as, for instance, Italy, Spain and France and believes that there are three main reasons why SME CBs are gaining traction as a new funding tool for European banks.
Firstly, the lack of bank financing and the current relatively low level of investor demand for SME asset-backed securities implies that SMEs will need to find alternative funding sources. Secondly, the rating agency has observed an apparent current market preference towards secured debt instruments, and lastly the regulatory treatment of covered bonds has thus far been favourable.
Moody's said that solid SME performance is critical to achieve sustainable growth in most economies worldwide, and that European politicians and economic authorities — both at national and supranational level — have promoted credit availability to SMEs.
At the same time, central banks and policy makers have differentiated covered bonds from other bank debt instruments. For example, Moody's noted that the proposed EU Directive on the restructuring and resolution of credit institutions may exempt covered bonds from sharing losses.
Central banks have also played a highly proactive role providing liquidity and have treated covered bonds favourably as collateral against other asset classes.