SMEs must consider real asset securitization to close financing gap

News and opinion on finance

As both developed and emerging market economies struggle to recover from the first phase of the Covid emergency, finding new ways to channel financial support to small and medium-sized enteprises becomes ever more urgent.

The World Bank points out that SMEs account for 50% of employment globally, but are less likely to be able to obtain bank loans than large firms. Instead, they rely on internal funds or cash from friends and family to launch and initially run their enterprises.

The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium-sized enterprises (MSMEs) in developing countries, have a total unmet financing need of $5.2 trillion every year, equivalent to 1.4 times the current level of the global MSME lending. 

In developed markets too, the inability of banks to provide sufficient lending to bridge SMEs through the lockdowns soon became evident in the second quarter of 2020.

Banks aren’t good at lending to SMEs at the best of times. They made it clear that regulations forbade them to overburden companies with loans they couldn’t repay and pressed governments to guarantee higher proportions of such emergency credit.

Work in progress

Even government guaranteed loans are still supposed to be repaid, though, and count as debt that now prevents banks from providing additional new credit to revive businesses as they try to open up again.

Discussions are underway between banks and the UK Treasury over reprofiling some of these loans, so borrowers only have to repay principal when tax records show they are sufficiently profitable.

That’s a work in progress. SMEs are fighting to conserve cash. Meanwhile, the search is on for new providers of finance and for new ways to bring SMEs to the public and private capital markets.

Moody’s points to the emergence of new non-bank lenders in Europe, not just fintechs and neobanks, but also the likes of PayPal, Amazon and Klarna, that can often supply merchants with working capital at short notice based on insight into their business cash flows.

It remains to be seen how sustainable this trend is, however.

While the technology-driven underwriting process enables quick credit decisions and improves transparency for borrowers, the extensive use of alternative data is relatively untested over a longer period of time, especially in recessionary conditions

 -Silvia Baumann, Moody’s

“While the technology-driven underwriting process enables quick credit decisions and improves transparency for borrowers via simple contract terms, the extensive use of alternative data is relatively untested over a longer period of time, especially in recessionary conditions,” says Silvia Baumann, senior analyst at Moody’s.

The growth of non-bank lenders may be broadening funding sources for SMEs, however companies’ overall debt burdens are also increasing while their debt-service capacity remains stretched and uncertain.


Commenting on data from the UK Federation of Small Businesses on SMEs cutting jobs as the furlough scheme winds down, Douglas Grant, director of Conister Finance & Leasing, says: “According to The City UK, it is estimated that businesses may build up £100 billion of debt by next March, which they would be unable to repay, with 780,000 SMEs in danger of insolvency. It is imperative that SMEs have a tripartite level of support from government, alternative and traditional lenders working together to identify and protect the more resilient sectors such as infrastructure, technology and renewables, ensuring their existence is guaranteed.”

As well as new lenders, the search is on around the world for new types of SME finance.

Mohamed El-Masri,

In July, Maksab, a blockchain platform built to connect SME issuers and their advisers to global capital markets investors, including holding companies, family offices and high net-worth individuals, launched in Dubai. It provides business-plan and deal-document templates to SMEs and their advisers and hopes to make private capital raising more efficient.

“Deals that would usually take eight to 12 months to close, can now take weeks or even days,” says Mohamed El-Masri, founder of Maksab. “The platform creates an opportunity to widely address the significant funding gap that SMEs are facing.”


Another way for some SMEs to come to the capital markets is through special purpose vehicles raising debt secured against real assets.

Since the great financial crisis, the large investment bank arrangers of securitization deals have turned away from smaller transactions.

“The leading investment banks compete hard on simple, transparent and standardized securitizations mainly of financial assets – mortgages, consumer finance, CLOs – in benchmark size of around $1 billion,” says Scott Levy, chief executive of Bedford Row Capital Advisors. “But the only issuers that can present large portfolios of such assets tend to be other banks.”

Bedford Row Capital specializes in arranging smaller deals of $50 million to $250 million, secured against real assets including property, commodities, leases and others.

Scott Levy,
Bedford Row Capital

Levy tells Euromoney: “Most investment banks now tend to describe such assets as exotic, even though the technology for raising finance against them and their cash flows through bankruptcy-remote structures is hardly rocket science.”

Bedford Row Capital was established four and half years ago with the vision of taking a merchant-bank approach to arranging smaller senior secured deals for companies, setting them up with trustees and custodians while cutting costs through standardized legal documentation.

“Securing debt against solar panels or mining assets or commodities has been branded a niche or specialist activity,” Levy tells Euromoney, “but the techniques are the same as for large, simple benchmark deals. And there is so much scalability and efficiency in taking a programme-based, standardized approach to structuring these transactions and their underlying documentation.”

Secure risk

Levy offers an example: a $60 million deal for Sustainable Capital, to finance a high-performance computing business in Sweden running on 100% renewable energy sources.

He says: “It operates in a nuclear power station that was built but never commissioned and that stands close to renewable power and water-cooling, which is essential for such an operation. The security is the leased high-performance units that supply businesses with cloud-based computing capacity.”

Without secured finance, the company would have had no chance to raise debt.

“The alternative was equity,” says Levy. “So, while these deals are certainly in the high-yield space, with coupons of anywhere from 6% to 9%, investors get yield with underlying security over assets and cash flows while the issuer doesn’t have to pay 20% for private equity.”

Securing debt against solar panels or mining assets or commodities has been branded a niche or specialist activity, but the techniques are the same as for large, simple benchmark deals

 -Scott Levy, Bedford Row Capital

Who are the buyers for these kinds of deals?

Levy says: “It is smaller banks, insurance companies, institutional investors, even corporate treasurers with spare cash to invest that want to earn a return on it with adequate security.”

He continues: “When we started four and half years ago, we thought we would mainly work on property deals, at a time when anything beyond residential mortgages – even assets as plain vanilla as student accommodation – was dubbed exotic. But the new trend is very much to short-dated structures. In the search for yield, many investors would rather avoid extending duration now and want secured credit risk instead. So, trade finance is one big source of secured, self-liquidating assets.”

The company hopes to raise up to $250 million through CP Funding, a multi-originator pool for financing against grain shipments.

“If you sell a shipment of grain, there’s a buyer waiting who will pay for it when it reaches port and is unloaded,” Levy says: “For the time it’s at sea, it is insured, its value can be gauged at the market price and investors can capture a discount to that from producers who want cash up-front ahead of the grain reaching its destination.

“By working with different originators selling to different destinations, we can provide investors with preferred maturities, for example many want 30 days.”

Between scarce bank debt and high-cost equity, there are other ways to finance SMEs.