Domestic monoline wraps SME risk in Finland
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Domestic monoline wraps SME risk in Finland

Monoline wrap for pool of SME risk; firms pay up for five-year tenor.

Finland’s 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 & Poor’s. Garantia is a monoline credit insurer with a concentration of credit and guarantee insurance business in Finland.

Finland’s prime minister Jyrki Katainen

Although the Garantia initiative is a constructive and encouraging prototype, it is important to recognize that it is more a controlled experiment than a genuine test of the capacity of the capital market to accommodate SME risk, for several reasons. Small volumes
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 bond’s 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 world’s leading peat industry company and one of Europe’s 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 November’s multi-issuer bond looks like small change.

Vapo’s 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, Vapo’s role was at least partly to give credibility to the structure.

Unkind nit-picking
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. Garantia’s Tiainen, who joined from HSBC last May to work on the multi-issuer initiative, says that November’s 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, Swedbank’s Wahlsten says that the experience of November’s 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.

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