Market initiatives

European Secured Note (ESN)

Introducing the European Secured Note

In the context of the Capital Markets Union (CMU) debate and building on the success of covered bonds, the EMF-ECBC promoted the ESN initiative as a dual-recourse long-term funding instrument to allow for the financing of asset classes beyond the traditional covered bond collateral types, such as small and medium sized enterprise (SME) loans and green, social and infrastructure assets. As such, ESNs combine existing covered bond techniques and market best practices to establish a new funding solution for lenders and a new financial product for institutional investors – one which remains accessible in a stress scenario, acting as an anti-cyclical measure providing a supply of sustainable private capital finance to the real economy.

This project has gained in importance due to both the launch of the European Commission’s new CMU Action Plan in September 2020 and the potential use of ESNs as a recovery tool. As we move towards a post-pandemic setting, there is clearly an urgent need for a comprehensive, coordinated European response to the economic impact it has had, especially for SMEs on which the European economy depends so heavily.

To recap, in accordance with the provisions of the Covered Bond Directive and as also indicated in the CMU Action Plan, the European Commission must write a report on the potential of the ESN asset class in Europe by 8 July 2024 and may choose to propose a subsequent legislative initiative. Against this backdrop, since September 2020 the ECBC – via its ESN Task Force – has accelerated its work on the ESN concept through dialogue with ECBC member institutions as well as important external stakeholders such as the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and a wide array of other interested parties including investors, issuers, rating agencies and business associations across the continent. The overarching goal of the ESN Task Force is to share intelligence and knowledge via different work-streams, resulting in the definition of concrete proposals, the provision of technical advice and investor education, and allow the sharing of best practices between ECBC members.

In its Report on the European Secured Notes (published in July 2018) the European Banking Authority (EBA) shared the view that ESNs might provide a useful additional source of funding for SMEs, especially for small institutions that do not have access to the securitisation market and/or have difficulty issuing unsecured long-term debt. The ESN Task Force is also aware of other available research such as the Feasibility Study on European Secured Notes prepared by Richard Kemmish Consulting and published by the European Commission in October 2018.

More recently, the ECBC has prepared the ESN Blueprint (April 2021) which highlights areas where a common understanding has been achieved amongst ECBC members and stakeholders from across the EU based on market analysis and best practices. In summary, this Blueprint has three main areas of focus:

  • The Business Case
  • Eligibility Criteria
  • Analysis of Structural Features

As indicated above, ESNs are primarily based on existing and proven covered bond techniques; however, certain aspects pertaining to the SME asset class entail significant differences compared to traditional covered bonds, which are backed by mortgages or public assets. The Blueprint, building on previous work carried out by the ECBC, provides a specific analysis and illustrates certain key structural differences of ESNs compared to covered bonds. Furthermore, the Blueprint also highlights all topics where it is considered that further discussion, research and exchanges of views are necessary with a view to delivering a robust recommendation of this new asset class.

By way of conclusion, the Blueprint states that there is clearly a business case for ESNs. Therefore, the ESN Task Force will continue its work on the specific issues identified to date and on any others which may arise.

In terms of next steps, the ESN Task Force will seek to maintain engagement with the EU Institutions and interested national authorities with a view to promoting the potential of ESNs as a viable, secure and sustainable means to support the financing of SMEs and infrastructure projects. Against the backdrop of the post-pandemic recovery and the urgent need to move to a more environmentally sustainable economic model, the ESN will be a key strategic priority for the ECBC in the coming years.

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