Santander Uses ECB Support to Sell ABS on Finnish Car Loans

Banco Santander SA will capitalize on growing interest for asset-backed debt by selling securities based on car loans in AAA-rated Finland.

The bank’s Finnish unit plans to sell about 500 million euros ($630 million) of the instruments by year-end, Pekka Paettiniemi, head of Santander Consumer Finance in Helsinki, said by phone. Demand is underpinned by the European Central Bank’s plan to buy ABS, as well as Finland’s top credit rating, he said.

“There’s more space in the markets for these kinds of products after the ECB’s decision,” he said. “Our credit pool in the Nordic countries is very good on a global standard, the risk levels are low and we know that there will be demand.”

Asset-backed securities are making a comeback after being one of the main sources of instability during the financial crisis. The ECB has pledged to start buying the instruments before the end of the year in a bid to kick-start growth in the single-currency area. Subprime auto ABS have surged in the U.S., helping fuel booming car sales there.

“It’s an asset class whose reputation got tarnished by the financial crisis,” Elisa Newby, head of market operations unit at the Bank of Finland, said by phone. “The ECB is sending quite a strong signal on ABS that there’s nothing wrong with them, as such.”

Risk Concerns

The ECB has yet to make use of its new tool for bolstering inflation. It’s already encountering opposition from Bundesbank President Jens Weidmann on grounds the measure may expose the ECB balance sheet to too much risk, according to people familiar with the talks.

The biggest banks operating in Finland, Nordea Bank AB, OP-Pohjola Group and Danske Bank A/S, have stayed away from the ABS market. OP-Pohjola doesn’t need to repackage its debt to attract more investors, according to Jani Koivula, senior manager at the debt capital markets unit.

“There’s no institutional impediment for a market being born in Finland and the Nordic countries as well,” Newby said. “Finnish banks are strong and households haven’t become insolvent like in many other countries during the last few years.”

ABS Expansion

Santander Consumer Finance sold Finland’s first car-loan-backed notes in 2012 and 2013. Expansion to other ABS products, such as those built on credit-card debt or small enterprise loans, is hindered by the small size of the Nordic market as well as the different currencies in the region, Paettiniemi said.

Difficulty in hedging currency fluctuations is the main reason why loans from several countries aren’t packaged, according to Paettiniemi. Even so, the company “may explore ABS opportunities in credit-card debt, mainly in Norway.”

New car sales in Finland have declined to about 100,000 a year, the lowest in five years. The country has one of the oldest passenger car fleets in the European Union and more cars per capita than the region’s average. An average car in Finland was 13.1 years old last year, compared with 11.4 years in the U.S.

Santander, with a market share of about 30 percent of Finnish car loans, said demand will soon pick up. The aged vehicle stock means the car market may grow 30 percent “reasonably fast,” Paettiniemi said. “At this rate, the car fleet is becoming obsolete,” he said.

The biggest, highest-quality tranche of Santander’s notes is rated AAA by Moody’s Investors Service and Fitch Ratings, in line with Finland’s country rating. Finland losing the top rating would have a “significantly regressive” impact on pricing of the car loan notes, according to Paettiniemi.

“The rating for the securities can’t be higher than the country’s rating,” he said. “As long as we’re a AAA country, we’re in a good position.”

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