German SME participation rights: Safety in numbers
Bankruptcy of Nici shows vulnerability of small German SME securitizations.
It is a familiar refrain from many a rating agency analyst: you cannot structure against fraud. And the insolvency for which German toy firm Nici AG filed on May 16 looks like it might be just that – director and founder Ottmar Pfaff has resigned amid rumours of accounting irregularities and unauthorized payments.
The development is bad news for two recent SME securitizations that reference the company: Commerzbank’s A199.5 million CB MezzCap transaction, which was signed in March, and Capital Efficiency Group (CEG)’s Preps 2004-2 SME CLO (which has already been hit by payment errors). The immediate impact was, however, far worse for CB MezzCap, whose D and E notes were immediately placed on Creditwatch Negative by Standard & Poor’s. The Commerzbank deal references 35 credits whereas the CEG deal has 67 and this serves to emphasize, if emphasis were needed, the importance of granularity in asset pools.
But CB MezzCap was not unusual in having just 35 names: Preps 2004-1 had 34 and HEAT Mezzanine 1-2005 via HSBC had just 32. All these deals are securitizations of participation rights (Genussrechte), the payment of advances under profit participation agreements.