Clarified accounting guidelines for regions of Italy are starting to spur locally guaranteed securitizations throughout the country. Bankers are pointing to last month's PRIMA deal from the region of Friuli-Venezia Giulia as one of the first to be structured with the on-/off-balance sheet distinctions in mind (see ASR 5/31).

The 51 million (US$61.4 million) transaction, led by Dexia Credipop, is backed by revenues resulting from the sale of 123 real estate properties sold by the region to the issuer. Standard & Poor's allotted the single-tranche offering a 'AA' rating based on the government guarantee provided by the region of Friuli. This is the first time assets of this type have been secured by a local authority in Italy, a bank spokesperson confirmed.

The Friuli deal is structured similar to the state-originated SCIP deals. The main difference is that this deal is backed by a state-provided guaranty instead of a guaranty from the central government, sources familiar with the deal said. Because all of the assets are limited to the region of Friuli, arrangers believed that, without the guaranty, marketing the deal would be difficult. Sources added that the relatively small transaction size was also a factor in the decision to avoid a pure senior/sub structure.

PRIMA pays a semiannual fixed-rate coupon of 3.68%, with bullet repayment in 2008, unless the issuer has sufficient funds to repay 100% of the original principal after 3.5 years (from close).

Although the guaranty allowed the deal to achieve the same rating as Friuli, Eurostat regulations prohibit securitization deals backed by a government guaranty from being accounted for as off-balance sheet debt. "We structured the transaction with the Eurostat regulations in mind," said a spokesman with the bank. "It will be treated as debt by the region but won't go on the books as direct debt. Only the guarantee will have to be put on the books."

Setting up these structures on a regional level can take time, sources said. In the past, ambiguity over how these deals would be treated from an accounting standpoint caused some issuers to pass on the securitization option. At the end of last year, Italy implemented similar rules to the Eurostat ruling (see ASR 7/15/2002) that would be applied to deals executed on a regional level. "We've worked on this deal for some time now but awaited the enactment of a state law that dictated how these deals would be treated," said the spokesman. "We hope now that a major part of these issues have been solved."

Given the constraint put on public finance, it's likely that more deals of this nature will follow. It could mean that more of these smaller diversified asset class securitizations will start appearing. Dexia plans to execute a similar deal for the region of Venice by the third quarter this year. "[Several regions] are looking at their poorly managed assets and trying to get value out of these holdings that have been badly managed up until now," said one market source. "Securitization is looked at as a faster way to privatize and mobilize what has been in the hands of public management."

The Dexia deal might be trickier to replicate since it requires a true transfer of assets. Other regions might consider securitizing assets such as healthcare receivables. "These are much easier to structure and much easier to monitor than real estate assets," said one source. "We've already seen one from the region of Sicily and are expecting one by the end of this year."

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