Although the new securities, primarily bonds, will diversify the portfolios of institutional investors, investment in them will be limited due to the measures of the Croatian National Bank (HNB) that restrict banks’ investments in this security, the trend of rising interest rates, and the ‘bull run’ in stocks.
Written by: Lidija Kiseljak
The draft law on securitization is complete, and its adoption is expected to lead to imminent implementation. It is anticipated that banks will be the first to securitize their loan portfolios. According to some estimates, assets worth between 1.5 and 2 billion kuna could be securitized. And although securitization will be important for banks, and later for companies, to raise fresh capital, capital market participants are eagerly awaiting it. Namely, banks will be able to ‘sell’ their portfolios only through securities.
– Bonds secured by securitized assets represent a new combination of return and risk, previously unknown in the market, thus providing a new opportunity for investment and portfolio diversification – says Velimir Šonje, director of Arhivanalitika, adding that this would also reduce the pressure on banks’ financing abroad.
Although pension funds, like all institutional investors, currently find investing in stocks more attractive, they are still looking forward to new securities issued through securitization.
– The new securities will contribute to portfolio diversification, especially since there are few corporate issues – says Goran Kralj, chief portfolio manager of Erste Plavi pension fund, noting that ultimately, investment in such securities will depend on the limitations and attractiveness of each individual security.
Given the greater attractiveness of stocks, these new bonds will likely be ‘second-tier’ instruments. This has been the case with bonds for some time, primarily due to the measures of the HNB that restrict banks’ investments in this security, as well as the trend of rising interest rates and the ‘bull run’ in stocks.
Risks of Securitization
As attractive as securitization may be, it is important to remember that it is a complex and sophisticated financial transaction that can also bring risks, whether commercial or legal, in cases where securitization participants cannot fulfill their previously assumed obligations. For example, how to protect the buyer of a bond issued based on securitized assets from the potential bankruptcy of the initiator, i.e., the entity based on whose securitized assets the bond was issued?
Protection models against such risks can generally be divided into two groups, says Bojan Fras from the law firm Žurić and Partners: mechanisms for separating securitized assets and transactions, and mechanisms for bankruptcy remoteness.
Separation mechanisms, says Žurić, include rules based on which the securitization holders, i.e., special legal entities established to perform securitization tasks, are exclusively authorized to conduct only activities related to securitization, and not others, such as import and export, commercial representation, etc., and are required to manage the securitized assets separately from their own assets.
Bankruptcy remoteness mechanisms in the draft law are represented by the introduction of a statutory pledge right of the securities holders on the part of the securitized assets corresponding to the issued security, which practically excludes the assets that were previously securitized from the bankruptcy estate, continues Žurić. A system for excluding the rights of bankruptcy bodies has also been proposed, i.e., their authority to continue or cease fulfilling certain contracts of the bankrupt debtor, depending on their choice. The purpose of these mechanisms is primarily to protect investors, i.e., purchasers of securities issued for securitization, equally from the risks of the initiator’s bankruptcy and from potential abuses on the part of the securitization holders that could arise as a consequence serving almost exclusively for the payment of securities issued for securitization, which may only become due after a longer period.
