Italy’s NPL plan lets banks use se­cu­ri­ti­sa­tion to clean-up bal­ance sheets... with pos­si­ble losses

Financial Mirror (Cyprus) - - FRONT PAGE -

The Ital­ian govern­ment’s plan for EUR 200 bil­lion of sof­ferenza (“bad loans”) on banks’ bal­ance sheets al­lows banks to use se­cu­ri­ti­sa­tion to help clean-up their bal­ance sheets and stim­u­late credit growth, ac­cord­ing to Moody’s In­vestors Ser­vice.

The rat­ing agency said the plan would help par­tic­i­pat­ing Ital­ian banks clean up their bal­ance sheets and in­crease lend­ing, but if the sale to a spe­cial-pur­pose ve­hi­cle (SPV) is made at a dis­count, they will likely have to recog­nise losses that they pre­vi­ously did not. Moody’s said that the plan will have a lim­ited im­pact in the short term on the re­con­sti­tu­tion of banks’ bal­ance sheets. How­ever, it gives banks the op­tion to re­duce bad loans at some­what im­proved val­ues, com­pared to sales in the mar­ket. This mea­sure will not re­duce bad loans sig­nif­i­cantly this year, but will as­sist in a grad­ual re­duc­tion. As­sum­ing that banks are able to off-load bad loans with­out sig­nif­i­cant cap­i­tal ero­sion, the frame­work will be pos­i­tive be­cause banks would be bet­ter pro­tected from stress sce­nar­ios.

Un­der the govern­ment’s new plan, Ital­ian banks can se­cu­ri­tise their bad loans, sub­ject to cer­tain con­di­tions and on a vol­un­tary ba­sis, and in­vestors in the se­nior notes can ben­e­fit from a govern­ment guar­an­tee.

The guar­an­tee for in­ter­est and prin­ci­pal pay­ment will be priced with ref­er­ence to a bank’s sin­gle-name credit de­fault swaps. To be el­i­gi­ble for the guar­an­tee, the se­nior notes would need to be of in­vest­ment-grade credit qual­ity and at least 50% of the ju­nior notes, and mez­za­nine if is­sued, would need to be sold, in or­der to ben­e­fit from the guar­an­tee and de­con­sol­i­date bad loans, ac­cord­ing to the de­tails of the plan. The struc­ture will be strictly se­quen­tial and all re­turns to the ju­nior note­hold­ers will be sub­or­di­nated to the se­nior notes be­ing com­pletely re­paid. An in­de­pen­dent ser­vicer would ser­vice the se­cu­ri­tised pool. The plan will be avail­able for 18 months and ex­tend­able for 18 ad­di­tional months.

Moody’s said that the amount of

debt that can be raised for the se­nior tranches will de­pend on the com­po­si­tion of the un­der­ly­ing port­fo­lios (for ex­am­ple, cor­po­rates loans or loans to in­di­vid­u­als, se­cured or un­se­cured) and the ex­pected time to re­cov­ery, among other fac­tors.

The govern­ment has pro­posed that banks use se­cu­ri­ti­sa­tion to clean up their bal­ancesheets and trans­fer the credit risks inherent in the rel­e­vant loans into the cap­i­tal mar­kets. Un­der the scheme, losses can­not be trans­ferred to the SPV and em­bed­ded into the ju­nior tranches be­cause banks would have to sell more than 50% of the ju­nior tranche in or­der to ben­e­fit from the sov­er­eign guar­an­tee and de­con­sol­i­date the bad loans.

The plan has lim­ited credit im­pli­ca­tions for the sov­er­eign as the ad­di­tional con­tin­gent li­a­bil­i­ties are lim­ited in size and the ex­pected loss re­lated to pro­vid­ing the guar­an­tees is low. The amount of con­tin­gent li­a­bil­i­ties is lim­ited be­cause the guar­an­tee will only be ex­tended to the se­nior tranches of the bad-loan se­cu­ri­ti­sa­tions and be­cause banks will only sell part of their bad loans. The ex­pected loss for the sov­er­eign re­lated to pro­vid­ing the guar­an­tee is low, as only tranches of in­vest­ment-grade credit qual­ity will qual­ify for a sov­er­eign guar­an­tee.

The to­tal stock of Ital­ian non-per­form­ing loans (NPLs) has in­creased post-cri­sis and cur­rently to­tals about EUR 350 bil­lion in the bank­ing sys­tem. They now rep­re­sent about 18% of to­tal loans and 23% of GDP, up from EUR 236 bil­lion in 2012, and EUR 132 bil­lion in 2009. Of th­ese EUR 350 bil­lion, the govern­ment’s plan would cover the out­stand­ing EUR 200 bil­lion of bad loans.

When as­sess­ing the ex­pected loss on se­nior tranches, Moody’s con­sid­ers loan char­ac­ter­is­tics, in­clud­ing the type of debtor, loan-to-value ra­tio, the type and lo­ca­tion of the as­set se­cur­ing the loan (if any), and the stage of de­fault. The anal­y­sis also fac­tors in other pool char­ac­ter­is­tics, the ser­vicer’s strate­gies and ca­pa­bil­ity, the li­a­bil­ity struc­ture and any ad­di­tional sup­port.

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