S&P: U.K., French, and German Banks Differ Widely on Recovery Rates for European SMEs, Says Report

LONDON (Standard & Poor's) June 22, 2004--U.K., French, and German banks
achieve widely differing recovery rates on loans to defaulted small and midsize enterprises (SMEs), according to a report published yesterday by Standard & Poor's Risk Solutions. This is significant: recovery on SME loans is a potential source of competitive advantage among banks, as they have considerable flexibility regarding how they deal with defaults.

The report, titled "New Research Reveals Pivotal Factors Driving Recovery Rates for European SMEs," outlines the main findings of a detailed study carried out in conjunction with Professor Julian Franks of the London Business School. The study, believed to be the most comprehensive ever conducted regarding defaults by European SMEs, is based on an analysis of more than 8,000 defaulted companies in the U.K., France, and Germany, with data provided by 10 leading banks in the region.

"Our study provides the first real benchmark for banks in the major European markets to assess how effective they are at recovering loans to defaulting SMEs," said Aidan O'Mahony, European head of Standard & Poor's Risk Solutions. "It is also important for helping them comply with the Basel II
capital adequacy rules, which look not just at the probability of companies
defaulting, but at the likely loss for a bank in the event of default--known
as loss given default."

The research confirms that U.K. banks benefit from a more creditor-friendly environment than their continental European counterparts. It shows that U.K. banks recover an average of 75% of the debt owed by defaulting SMEs, compared with 61% for German banks and 53% for banks in France. The average time taken to recover proceeds is also much shorter in the U.K. (0.9 years, compared with 3.6 years in Germany and 2.5 years in France), so the discounted recovery rate is significantly higher among U.K. banks.

"Loans to SMEs represent a major part of banks' portfolios in Europe, accounting for up to 30% of their lending book. Yet understanding of the credit risks posed by this sector is rudimentary," said Arnaud de Servigny, managing director at Standard & Poor's Risk Solutions. "This study will help banks anticipate and measure the potential losses they can expect on SME loans."

Differences in the level and quality of collateral demanded by banks when lending to SMEs are vitally important, the study shows. Such differences account for variations in recovery rates not only between countries, but also
between banks in the same market, because collateral matters much more than
seniority in the SME market in ensuring repayment after default.

Interpreting what constitutes a default under Basel II can be a matter of individual judgment for banks, and defining precisely when a default should
be triggered will have an impact on recovery rates, and therefore on competitive positions. Recoveries also depend on the extent to which banks
manage the recovery process, from early warning signals of distress to bankruptcy.

Finally, the study suggests that recovery of SME loans is not related
to industrial sectors and that the link to the economic cycle is unclear. "The
level of dependence on the business cycle is only indirect in that it is
typically not affected by normal cycles, however a shock on the property
markets would be important, especially in Germany and the U.K.," said Julian
Franks, professor at the London Business School and a member of Standard &
Poor's European Academic Council.

The report is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system. Alternatively, call one of the following Standard & Poor's numbers: London
Ratings Desk (44) 20-7176-7400; London Press Office Hotline (44) 20-7176-3605;
Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-
5916; or Moscow (7) 095-783-4017.

The detailed study by Standard & Poor's Risk Solutions on recovery
rates is part of a wider strategy of conducting empirical research and
developing risk models that will assist banks to understand, measure, and
manage their credit risks. For a copy of the study, titled "A Comparative
Analysis of the Recovery Process and Recovery Rates for Private Companies in
the U.K., France and, Germany," call one of the Standard & Poor's numbers
listed above.

If you are in the U.S. and need a copy of the full report, please contact Marc
Eiger on 212-438-1280

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