Unlocking SME finance through market-based debt

Abstract

meetings of the OECD Committee for Financial Markets (CMF) and the OECD Working Party on SMEs and Entrepreneurship (WPSMEE) and benefitted from comments by delegates and OECD Secretariat staff. It also profited from discussions held with private sector participants at an OECD Financial Roundtable hosted by the CMF in April 2014 (Nassr and Wehinger, 2014). This work contributes to the report on "New approaches to SME and entrepreneurship finance: broadening the range of instruments" which is part of the OECD-wide "New Approaches to Economic Challenges" (NAEC) project. The authors are grateful for comments received but are solely responsible for any remaining errors. The cutoff date for regulatory changes and information was end-December 2014. This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Small and medium-sized enterprises (SMEs) are key contributors to economic growth and job creation. The current economic and financial crisis has reduced bank lending and has affected SMEs in particular. Capital markets will have to play a bigger role in financing SMEs in order to make them more resilient to financial shocks. This article reviews the spectrum of alternative market-based debt instruments for SME financing. It focuses on securitisation and covered bonds and also addresses issues regarding small/mid-cap bonds and private placements. It reviews the current state of the market for these instruments and identifies associated risks; analyses the barriers for issuers and investors alike; and provides best practices and high level recommendations to help alleviate barriers without hampering the overall stability of the system.

Unleashing the Export Potential of SMEs in Greece

“…The growth model in the years prior to the crisis was based on bank lending, concurrently with the development of the domestic financial institutions and the credit expansion of the system (Bank of Greece, 2014). Heavy reliance on bank lending is consistent with the dominance of micro-enterprises in the total SME population of the country, as small local firms often lack awareness of alternative financing instruments, or skills that can allow them to tap the capital markets or other sources of financing (Nassr and Wehinger, 2015a).…”

“…Simple, transparent and standardised securitisation 3 of SME loans (and other liabilities such as leasing) can be seen as a market-based shortcut to indirectly foster SME financing, 'unclogging' the bank lending channel by transferring SME credit risk partially from originators to investors and achieving capital relief. 4 Securitisation creates headroom in banks' balance sheets and allows them to further on-lend to small, heterogeneous and mostly local SMEs (Nassr and Wehinger, 2015a). This instrument can be even more relevant in the case of Greece in the medium term for as long as it takes for alternative financing instruments to develop, and also given the traditionally heavy reliance of local SMEs on bank financing.…”

“…Although allowing the posting of SME securitisation as collateral with the ECB was undoubtedly beneficial given the collapse of the interbank market, some industry players believe that such policy had a detrimental effect to the revitalisation of the 'real' securitisation market. Retention rates are especially high for SME securitisation across Europe, as compared to securitisation more broadly (Nassr and Wehinger, 2015a).…”

“…In line with the recent European Commission Securitisation initiative, see http://ec.europa.eu/finance/securities/securitisation/index_en.htm Securitisation of SME loan portfolios, which could be undertaken after the resolution of legacy non-performing loans, will allow banks to continue to originate the bulk of small loans, leveraging on their expertise, infrastructure, local presence and relationships, while keeping some "skin in the game" to ensure robust origination practices are followed (Nassr and Wehinger, 2015a). The experience of systemic banks with securitisation techniques, having executed several shipping portfolio securitisation transactions, as well as official sector support 5 can allow for smooth execution of such transactions.…”

Making the business environment more supportive of productivity in Belgium

“…Such instruments would allow SMEs to access capital markets directly without obtaining a credit rating or preparing a prospectus (HLEG, 2016). High quality securitisation of SME loans (and other liabilities such as leasing) can be used as a market-based shortcut to indirectly promote SME financing, without the complete disintermediation of banks (Nassr and Wehinger, 2015). Private placements also offer an alternative to public corporate bond issuance, providing a source of funding without the need for a formal credit rating or reporting requirements common for other capital market debt products (OECD, 2015c).…”