Securitization: Sovereigns window-dress national finances

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Germany's deal shows how corporate techniques are firming up government balance sheets

A spate of sovereign ABS deals suggests that European governments are handling their balance sheets in a manner more associated with corporates as they struggle to stay within European Union borrowing limits. 

The highest-profile recent deal came last month from Germany, a €8 billion, three-tranche securitization of future pension contributions from its privatized post and telecoms companies. Arguably this is not an ABS deal at all, but a series of cashflow sales.

The seller is Bundes-Pensions-Service für Post und Telekommunikation eV (BPS-BT) which collects contributions from Deutsche Telekom, Deutsche Post, and Deutsche Postbank and makes pension and medical assistance payments to their retired employees. Special legislation compels the state to make up any shortfall between the payments BPS-BT makes and its income from the successor companies.

"This is a full recourse deal," says one banker involved. "It uses a receivables purchase agreement where the BPS-BT guarantees the performance of the payments and is kept liquid by the operation of the relevant law."

The deal was rated triple-A by Moody's, Standard & Poor's, and Fitch. "The law is the key," says the banker. "There is no explicit guarantee."

The existence of a guarantee puts a sovereign ABS deal within the Maastricht Treaty's deficit definition. "Eurostat is aware of the German deal and the ministry of finance is of the opinion that it is Eurostat-compliant," says the banker. So is avoiding a government guarantee the standard way of keeping Eurostat happy? "It's one way," is the terse comment of another banker who worked on the German deal.

Investors understandably see the deal as a look-through to the sovereign. The five-year tranche priced at four basis points above swaps, and the 10- and 15-year tranches at 9bp and 11bp respectively above. For comparison's sake, the five-year tranche was approximately 25bp wide of Bunds (10bp over KfW) or around 15bp tighter than a pure ABS print. The extra spread over KfW is explained by the lack of an explicit guarantee and the fact that it is 100% risk-weighted. Most investors were interest rate buyers.

Sovereigns would prefer to avoid accusations of window-dressing national finances through ABS but they are all keenly looking at this financing option. In some transactions the actual process of securitization brings about efficiencies that would not otherwise occur. Agence France Trésor is looking closely at possible opportunities. Hungary has already mandated a €3 billion issue. The Kingdom of Belgium is planning a €300 million ABS deal – its first – backed by delinquent tax receivables for the fourth quarter.

"The Belgian state is clearly behind the transaction, collecting the revenues and sponsoring the deal," says Cécile Houlot, of JPMorgan's structured finance group, which is arranging the deal. "If there's a guarantee, Eurostat will consider it state debt. The criteria are clearly listed in its ESA 95 rulebook on government debt." Nevertheless, Belgium's will be a real ABS deal in that the key is the amount of receivables recovered. "It's really about the asset, but as in any asset-backed deal, the sponsor is important," says Houlot.

Earlier this year, Italy was forced to refinance SCIP II with a €4.4 billion deal after collection rates on the MBS failed to stay on track. And Fitch recently placed Portugal's €1.7 billion Explorer securitization of delinquent tax and social security receipts on negative outlook when recovery rates fell short of projections.