Finlands prime minister, Jyrki Katainen, has long been calling for the development of innovative ideas to provide SMEs with easier access to funding. So he would no doubt have approved of a refreshing initiative launched at the end of November by Finnish insurance company Garantia and six local companies, aimed at giving SMEs access to the bond market.
The five-year multi-issuer transaction was led by Swedbank for Vapo, Lahti Energia, Insta Group, Teknos Group, Hartela-yhtiöt and Myllyan Paras. The bond was fully guaranteed by Garantia, which has a rating of A- with a stable outlook from Standard & Poors. Garantia is a monoline credit insurer with a concentration of credit and guarantee insurance business in Finland.
|Finlands prime minister Jyrki Katainen|
The first of these is that the volumes involved are extremely small. The bond, which was placed entirely with Finnish institutional investors, raised just 42 million, with underlying borrowers being allocated between 5 million and 10 million each.
Second and perhaps more important, none of those investors was taking exposure to any of the underlying SME borrowers themselves. At Swedbank in Helsinki, senior vice-president of debt capital markets Christine Wahlsten says that as the principal and coupon were both 100% guaranteed by Garantia, investors were buying into the A- rated risk of the insurance company, rather than into the unrated risk of the recipients of the bonds proceeds. That was reflected in the pricing of the fixed-rate bond, which was offered at a spread of 120 basis points.
Even if the investors in the Garantia bond had been taking exposure to the underlying credits, the degree to which they all conformed to the stereotype of SMEs is a moot point. Jenni Tiainen, business development manager at Garantia, says that the idea was to assemble as wide a cross-section of Finnish SMEs as possible. The transaction certainly achieved that objective. The six include a housebuilder, a paint maker, and the leader in the Finnish pasta products market. They come from different regions of Finland, and four of the sextet are family owned.
The participating companies in the multi-issuer curtain-raiser are, however, hardly corner shops, with most generating turnover of between 50 million and 400 million. Indeed, it is hard to see how one of them can claim to be an SME at all. According to its website, Vapo is "a leading developer of bioenergy in Finland and the Baltic region, the worlds leading peat industry company and one of Europes largest sawmill industry companies." In 2012, these activities generated over 650 million in revenues and employed well over 1,000 people. In 2011, the company even issued a 100 million six-year bond. So its 10 million share of Novembers multi-issuer bond looks like small change.
Vapos finance director, Erik Nieminen, says that he was delighted with the outcome of the transaction, which he says offered an opportunity to diversify away from the bank market at a reasonable cost. The precise cost is hard to analyse, because the fee paid by the participating companies is being kept under wraps. Nieminen says that it was comparable to the cost of bank funding, but that a more important consideration was the five-year maturity, which is pricey in the bank market.
Those involved in the transaction acknowledge, however, that there was also an element of good citizenry about the participation of Vapo, which is half-owned by the Finnish government. In other words, Vapos role was at least partly to give credibility to the structure.
It is unkind, however, to nit-pick too much about a structure that is clearly a prototype for SME funding rather than the finished article. Garantias Tiainen, who joined from HSBC last May to work on the multi-issuer initiative, says that Novembers transaction is intended as the first in a series, and that future transactions will not necessarily use the same guarantee structure.
That implies that the really interesting test will come if and when the basic template is enlarged, offering more liquidity to a wider investor audience, and when the underlying credits are lifted out of the cocoon of a 100% guarantee. Encouragingly, Swedbanks Wahlsten says that the experience of Novembers initiative suggests that there would be no shortage of demand for a structure of this kind. "The feedback we had from investors was that many of them would be prepared to take SME risk in the form of a partially guaranteed issue," she says.