Eurostat ruling likely to slow government securitisations

New rules issued on government securitisations late yesterday by Eurostat, the statistical body of the European Commission, could slow the sovereign securitisation market, according to industry participants. The rules, which cement the accounting treatment of state securitisations on governments’ balance sheets, will impact both existing and future government securitisations.

The biggest change underlined in the new rules applies to the securitisation of assets that are sold at a discount to the market price. The Eurostat directive states that any securitisation where the underlying assets are sold at a discount greater than 15% of the market price now have to be accounted for on a government’s balance sheet. Eurostat argues that in a securitisation where the sale price is lower than 15% of the market price, the purchaser of the asset bears 'no real risk', and the transaction in effect constitutes a financial borrowing by the government, increasing government debt.

This removes one of the main reasons for a government to issue a securitisation, said Alex Cataldo, structured finance analyst at rating agency Moody’s in Milan. But it will not necessarily halt government securitisations aimed at transferring risk.“The new ruling will make governments look for more sophisticated ways of structuring transactions,” said Alexander Batchvarov, head of international structured credit research at Merrill Lynch.

The Eurostat directive outlines three more specific rulings that are likely to alter government securitisations. First, all transactions securitising future cashflows will, under the new rules, be treated as government borrowing and will have to be recorded as such on a government’s balance sheet.

There have been very few future-flow transactions released to date. An example is the Italian Lotto deal issued last December that securitised future flows from lottery receipts. But Eurostat's moves are likely to diminish appetite for similar transactions in the future.

The other major issue addressed by Eurostat applies to government-guaranteed securitisations. Under the new ruling, state-guaranteed transactions “imply an incomplete transfer of risk” and must also be treated as borrowing on a government’s balance sheet. As with the future-flow securitisations, market participants said this is likely to limit the amount of similar transactions carried out in the future.

Eurostat also stated that government securitisations can only include the initial value of a transaction; all future payments can only impact the government balance sheet at the time they occur.

The new rules will affect the existing debt of governments in Europe. Italy, which is currently the biggest player in the European sovereign securitisation market, will see an increase in government debt of €5.3 billion, or 0.44% of GDP, according to Eurostat. Greece, the second biggest government securitisation market, will see an increase in debt estimated at €3.75 billion, equal to 2.9% of GDP.

But the new rulings are not expected to impact investors in existing government transactions. “Moody’s believes the rules will not affect existing ratings of government securitisations,” said Cataldo.Most believe the rulings are likely to be welcomed by investors. "The new clarification of the rules should be a relief to investors," said Batchvarov.