Issuer: RHG Nord
Size: e65 million
Arranger: Rabobank International
Issue date: September 17 2003
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European securitization volumes continue to rocket upwards. According to figures compiled by the European Securitization Forum (ESF), new-issue activity totalled e95.1 billion in the first half of 2003, up 56.7% on the same period last year.
But it is established asset classes and traditionally active jurisdictions that are fuelling this growth. European mortgage-backed securities issuance increased by 110%, while non-mortgaged-backed asset-backed securities grew by just 9.7%. And collateralized securitization issuance in the UK accounted for 41.3% of the European total – by far the largest single contributor, with Italy in second place. First-half deals using new asset classes in Europe’s underperforming jurisdictions were harder to find.
So it is encouraging that a German originator has come up with one of the year’s most innovative deals so far, albeit with the aid of a Dutch bank.
On September 17, RHG Nord (Raiffeisen Hauptgenossenschaft Nord AG), one of Germany’s largest agricultural cooperatives, closed the securitization of a e65 million portfolio of agricultural receivables. RHG Nord and seven of its subsidiaries will sell receivables to Rabobank International’s Erasmus CP conduit. Erasmus will fund the purchase with asset-backed commercial paper in the US and/or euro markets.
Farming cooperatives grew up in the 19th century, when farmers banded together to sell their produce. Today, RHG Nord supplies feed, seed, fuel, building supplies and agricultural equipment to thousands of farmers in north Germany, and buys the foodstuffs that they produce.
The large number of farmers selling to the cooperatives, and the seasonal nature of their business, ought to have made securitization a popular funding option for these buying agencies. Farming is an established industry and, with so many customers, a cooperative should be able to chart and predict default rates with a fair degree of accuracy. But this deal is the first to involve a wide range of agricultural receivables.
“To some extent it’s a surprise that a deal like this hasn’t been done before,” says Rüdiger Litten, a partner at Norton Rose Vieregge, Rabobank’s legal advisers. “Farming hasn’t been a focus for many investment banks. But now, when some of the new and trendy businesses have suffered a little, people turn to the more old fashioned, substantial industries. Real estate is now a focus for the securitization industry, for example.”
Agricultural receivables create tricky structuring and regulatory problems. The biggest stumbling block is the unpredictability of farm incomes, which depend on several variables, not least the weather. With farmers taking subsidies and support from municipal all the way up to EU level to combat this uncertainty, a chunk of the receivables in this deal are effectively guaranteed by public entities.
“Subsidies make this a very interesting asset class, because collateral is required from the public sector,” says Litten.
Also, cooperatives will often accept payment in kind from farmers. If farmers do use agricultural commodities to settle debts to the co-ops, an investor will still want its receivables in cash. “The last thing a bank wants is a mountain of grain arriving in its back yard that it then has to resell,” says Litten. “To cover that risk, we had to put in a mechanism for the originator to compensate the investor with cash, and to adapt the originator’s accounting system to that mechanism.”
Complex tax RHG Nord’s deal has also helped tackle some specific German securitization issues. It follows guidelines on true sales set out last year by IDW, the German accounting standards review association. And AKV Coface is providing credit insurance. Standard & Poor’s rates the deal A-1+, and Moody’s rates it P-1.
“More and more of the famous German Mittelstand companies that generate lots of receivables can now turn to securitization as a new form of financing,” says Litten, although some problems, particularly those surrounding German tax law, still have to be dealt with. A new tax law has exempted German-resident SPVs from trade tax on bank receivables. Non-bank originators now want the same treatment. “We have a terribly complex tax system, and it is sometimes hard to say precisely what is taxable in a deal,” says Litten.
Rabobank will be pleased to have got such a novel deal away, given its stated aim of becoming the world’s number one bank in the food and agribusiness sectors. It recently agreed to buy Lend Lease Agri-Business in the US for about $72 million. RHG Nord is an established client of Rabobank International’s Frankfurt branch. Relationship manager Kirsten Kemme and London-based head of securitization Sarah Mason led the deal.
