Country-Specific Variations in SME CLOs Trap Excess Spread Differently

Abstract

Since the first securitization of small- and medium-sized enterprise (SME) loans in Europe in 1998, more than EUR 560 billion (estimated) has been securitized and transferred into the capital markets. Although the SME collateralized loan obligation (CLO) sector has weathered the financial crisis that started in 2008, the purpose of SME CLO issuance has shifted from funding and serving as a risk transfer instrument for banks to providing useful liquid assets that can be retained and used for European Central Bank liquidity operations. Despite existing for close to 20 years, SME CLO structures still are not standardized across Europe. Understanding their key structural differences and their effectiveness in different default scenarios is important to investors. The article explains some of the key structural mechanisms and compares their effectiveness under different assumptions.