New Trends in the Securitization Market for SME Loans

1
New Trends in the Securitization Market for SME
Loans
IACPM, Boston
Peter Kottek Head of LEMG Germany
2
Agenda
The European Securitization Market
1
New Trends in the SME Securitization Market
2
Optimization in Portfolio Management
3
3
Issuance in the European Securitization Market
EUR bn
Source DB Global Markets Research
4
Issuance by Asset Class, 2006 YTD
Source DB Global Markets Research
5
European CDO Primary Issuance byCollateral Type
Source DB Global Markets Research
6
Country Growth Trends 2005
Source Global Markets Research
7
Development of BBB Spreads
2006 YTD
2005
2004
2003
BBB Spreads
(bps)
Asset Class
62
50
65
130
Credit Card ABS
45
48
63
115
Prime MBS
85
82
85
300
Non Conforming MBS
85
105
95
225
CMBS
140
160
235
300
Managed CDOs
55
60
75
145
SME CLOs
Source Global Markets Research
8
Agenda
The European Securitization Market
1
New Trends in the SME Securitization Market
2
Optimization in Portfolio Management
3
9
GATE SME CLO 2006-1 (I)

• Objectives
• Free-up credit limits on client level
• Full hedging of expected and reduction of
  unexpected loss
• Eliminating the PL volatility effect of loan
  loss provisions
• Transaction features
• Portfolio 2,1 bn, 10 years tenor, first loss
  synthetic CLO
• Whole capital structure sold to investors via
  credit-linked notes, SS CDS
• Minimum rating of assets at inclusion iB
• Single obligor concentration limits iA- and
  above 1,75,
• iBBB to iBBB- 1,2, iBB to iBB- 0,7, iB and
  below 0,3
• Daily replenishment possible
• Reduction of economic capital by more than 90

10
GATE SME CLO 2006-1 (II)
Senior
Super Senior
EUR
1,466.4
million
EUR
1,837.5 million
Senior
Senior
EUR 949.0
mn
EUR 949.0
mn
Deutsche Bank AG
Deutsche Bank AG
First Loss
Deutsche Bank AG
Deutsche Bank AG
30 bps per annum
(AA
-
/Aa3)
(AA
-
/Aa3)
(AA
-
/Aa3)
(AA
-
/Aa3)
Junior Senior
EUR 77.5 million
(

Protection Buyer

)
(

Protection Buyer

)
(

Protection Buyer

)
(

Protection Buyer

)
Class A Notes
EUR
42 million
Class D Notes
First Loss
First Loss
Rated AAA
EUR 11.2
million
30 bps per annum
30 bps per annum
Rated AA/Aa2
Class B Notes
Reference
Reference
Reference
Reference
Issuer Swap
Issuer Swap
Issuer Swap
Issuer Swap
EUR 26.5
million
Class E Notes
First Loss
First Loss
Portfolio
Portfolio
Portfolio
Portfolio
Rated AA
EUR 9.6
million
30 bps per annum
30 bps per annum
Credit Protection
Rated A/A2
Credit Protection
Note Issuance
Note Issuance
Class C Notes
GATE
GATE
First Loss
Class F Notes
First Loss
EUR 7.5
million
Note Proceeds
Note Proceeds
EUR 12.8
million
Rated A
SME CLO 2005
-
1
SME CLO 2006
-
1
30 bps per annum
30 bps per annum
Rated BBB/Baa2
Note Coupon
Note Coupon
Class D Notes
(

Issuer

)
(

Issuer

)
First Loss
Class G Notes
First Loss
EUR 20
million
SPV
SPV
EUR 12.8
million
Rated BBB
30 bps per annum
30 bps per annum
CDS Fixed Payment
CDS Fixed Payment
(

Issuer

)
(

Issuer

)
Rated BB/Ba2
Class E Notes
EUR 15.5
million
First Loss
Class H Notes
First Loss
Rated BB
EUR 49.6
million
30 bps per annum
30 bps per annum
Not Rated
Class F Notes
EUR 73.5
million
Interest from
Interest from
Note Proceeds
Note Proceeds
Privately rated
Note Collateral
Note Collateral
Note Collateral
Note Collateral
Note Collateral
Note Collateral
(DBAG deposit AA
-
/Aa3)
(DBAG deposit AA
-
/Aa3)
(DBAG Deposit (rated AA
-
/ Aa3)
(DBAG Deposit (rated AA
-
/ Aa3)

• Junior and Mezzanine Tranches equal to 8,8 of
  the portfolio volume corresponding to the
  expected and unexpected losses over the life time
  and its economic capital were issued to meet the
  objectives.
• Super Senior Swap was issued to generate RWA
  relief
• DB participate with 1,4 in losses allocated to
  the equity investors.

11
Structural Changes (I)

• Extension of CLO-tenor up to 10 years
• Insurance of accrued interest, partially with
  cap
• Gate 2006-1 4 p.a. based on securitized amount
  for a
• maximum of 3 years
• Split of the equity coupon in risky and
  non-risky part
• Gate 2006-1 absolute Coupon Euribor 13,10
  p.a.
• thereof on Initial 6,35 p.a. on Residual
  6,75 p.a.

12
Structural Changes (II)

• Insurance of overdraft facilities
• Gate 2006-1 Independent on drawing 40 of the
  exposure is secured
• Not to worsen rule no longer used
• ? Hurdles and limits (esp. minimum rating) for
  replenishment based on initial portfolio
  structure
• ? Reduced risk for investors in case of bad
  portfolio migrations
• Increased ability of placing the entire capital
  structure
• ? Release of economic and regulatory capital

13
Increased Risk Appetite

• Securitization of International assets (up to
  now only European)
• GATE 2006-1 German share 81,19 European
  share 8,78 Others 10,03
• Investment grade portfolios
• Minimum rating of assets B (was BB-)
• Acceptance of higher single-obligor
  concentration-limits

(bps)
14
Nearly unchangedAcceptance of Industry Limits

• GATE 2005-1 concentration limits based on the
  SP Industry Group
• First and second largest industry group 15 of
  the Initial Portfolio Notional
• Amount
• Third and fourth largest industry group 11 of
  the Initial Portfolio Notional
• Amount
• All other industry groups 10 of the Initial
  Portfolio Notional Amount
• GATE 2006-1 concentration limits mainly based on
  the SP Industry Group
• Largest industry group 20 of the Initial
  Portfolio Notional Amount
• Largest three industry groups 38 of the Initial
  Portfolio Notional Amount
• Fourth largest industry group 10 of the Initial
  Portfolio Notional Amount
• Fifth and sixth largest industry group 9 of the
  Initial Portfolio Notional Amount
• All other industry groups 8 of the Initial
  Portfolio Notional Amount

15
Agenda
The European Securitization Market
1
New Trends in the SME Securitization Market
2
Optimization in Portfolio Management
3
16
Traditional vs. Active Portfolio Traditional vs.
Active Portfolio Management Approach
Origination
Capital Market
Traditional Approach

• Further Optimization
• Mezzanine - Loans
• Schuldscheindarlehen

17
Advantages of the EnhancedPortfolio Management
Approach

• Optimize balance sheet
• Reduced need for Regulatory and Economic Capital
• No Loan Loss Provisions but Trading Losses
• Risks only remain on Book for short warehousing
  period
• Enlarge flexibility for the bank to realize
  additional volumes in view of
• Industries
• Single obligors