Small and medium-sized businesses are the backbone of the European economy. But many of them are casualties of the economic downturn sparked by the COVID-19 pandemic, losing clients, suppliers and financial liquidity because of the sudden interruption in trade. Even healthy small companies are finding it hard to pay wages and bills, let alone to invest for the future. In most cases, they depend on bank support to stay afloat. 

There are many ways banks all over Europe can help small and medium-sized enterprises (SMEs) weather the storm. One of them is to increase their ability to lend by setting up risk-sharing initiatives with the European Investment Bank, the EU bank.

That’s the route chosen by Santander Bank Polska Group, Poland’s third-largest lender by assets. In the face of the growing impact of the pandemic on Polish SMEs, the bank introduced government-backed programmes to support SMEs, granted three- to six-month credit holidays, automatic deferral of overdrafts, extensions of loan collateral, and exemptions from fees and commissions.

Then the Polish lender went a step further.

In July 2020, Santander Bank Polska Group and the European Investment Bank Group announced a risk-sharing operation that securitises a PLN 2 billion (about €450 million) portfolio of leasing receivables belonging to the Polish bank’s subsidiary Santander Leasing.

“Leasing is a very important financial tool for small business in Poland,” says Krzysztof Kowalewski, Finance Director of Santander Leasing. “Many companies rely on leasing to use and replace their machinery or vehicles of all types.”

Mr Krzysztof Kowalewski

In Poland, SMEs make up 99.8% of businesses; generate 52.9% of economic value-added and 67.1% of employment.

Synthetic pandemic support to Polish SMEs

In a synthetic securitisation such as this one, the credit risk of a portfolio is allocated to tranches with different risk profiles. While the first-loss tranche typically represents the expected loss of the portfolio, the size of the mezzanine tranche is designed to cover the portfolio’s unexpected loss.

The expected loss is typically covered by existing provisions in the bank’s accounting, but the bank is required to hold capital in reserve against the unexpected loss. The European Investment Bank Group’s guarantee on the mezzanine tranche frees this capital for more lending to SMEs. In addition, a guarantee on the senior tranche can maximise the capital released and the lending capacity for the bank.

In the operation, the European Investment Bank and its specialist SME subsidiary, the European Investment Fund, guaranteed a mezzanine and a senior tranche on a share of Santander Leasing’s portfolio. That released capital that Santander Bank Polska Group has agreed to use to expand its lending and leasing to SMEs and mid-caps.

The European Investment Bank’s mezzanine guarantee has the backing of the European Fund for Strategic Investments, the financial pillar of the Investment Plan for Europe, a joint initiative of the European Investment Bank and the European Commission to promote investment in the European economy. The senior tranche has been subscribed by EIF under its own risk.

The EIB Group’s financing to SMEs in Poland in 2019 was €1.98bn, or approximately 36% of its total financing in Poland

A partnership for pandemic support to Polish SMEs

The EU bank and the Polish bank know each other well.

“We have a very fruitful, ongoing relation with the EIB Group, dating back to 2010,” says Pawel Kołodziński, Head of the Corporate Development Office at Santander Bank Polska.

The Polish bank started cooperating with the EIB Group with pure funding projects for its SME and midcap customers. Then the two partners developed risk-sharing initiatives to provide guarantees on portfolios of large corporate exposures. This cooperation eventually lead to securitisation transactions.

“When we structured the first securitisation two years ago, we approached the EIB, because we were looking for an international partner to leverage our knowledge of the local market,” says Kołodziński. “When the COVID-19 pandemic occurred, it was just natural to talk to each other.”

This is the third securitisation operation between the two partners in less than two years and the first signed during the COVID-19 crisis. For all transactions, the released capital must be deployed by Santander to support access to finance for SMEs and mid-caps, irrespective of the types of assets present in the portfolio securitised.

• In December 2018 Santander Bank Polska Group securitised a selected portfolio of consumer loans with a partial focus on providing new loans and leases for climate action;
• A transaction signed in 2019 also securitised consumer loans, but required on-lending to micro-enterprises and promoted gender equality in business;
• The 2020 transaction referenced a portfolio of leasing assets and the new lending responded to the COVID-19 outbreak.  

As a combined result of these three operations, Santander’s new lending amounts to PLN 10.3 billion, supporting around 110 000 SMEs and 1.7 million jobs in Poland.

Smooth and efficient

“It has been a great achievement to accomplish three securitisation transactions in just two years,” says EIF representative Georgi Stoev. “The mutual trust and understanding that we have built together is a huge asset, allowing us to move speedily on new operations, which can have wider positive implications for the Polish economy.”

Stoev adds, “This transaction with Santander Bank Leasing was also the first securitisation the EIF and the EIB have done with a leasing company after the outbreak of the crisis in March, which indicates our commitment to keeping the securitisation market open in Poland, even in a challenging moment for capital markets.”

“The operation we signed in June was right on time to help Polish SMEs cope with the pandemic”, says Loreto Alonso San Antonio, who led the operation for the European Investment Bank, together with Guillaume Piat. As they both acknowledge, “the whole process was very smooth and efficient, thanks to the cooperative relationship we enjoy with Santander Bank Polska, the reciprocal knowledge and the commitment of the teams involved”.

Mr Pawel Kołodziński