The unpaid invoices that the Spanish regional governments owe medical companies have, by all accounts, grown to unwieldy levels. Combined pharmaceutical and medical technology companies are waiting on about €9.7 billion ($13.8 billion) in past-due bills of this nature (see tables below).

Farmaindustria, the trade group for pharmaceutical makers, recently spoke to Bloomberg about plans to securitize these receivables in a bond potentially guaranteed by the central government.

Apart from the difficulties in issuing such a bond given the tone of the fixed-income market in Europe right now, players say there are a host of hurdles to such a solution.

Ignacio Gutierrez, a managing partner at Madrid-based financial advisory Aguila Capital, said the biggest challenge was to answer the question: "How do you figure out when you're going to get paid?"

A similar tack was taken by Jose Tora, managing director at Standard & Poor's in Madrid. "To come up with a view on estimated payment dates for this type of receivable for a certain rating level is quite challenging," he said. "This was the case even before the current difficult economic environment."

Tora added: "Over the last 10 years or so, there were attempts to look into securitizing this type of asset."

Naturally, a full wrap from the central government could obviate the need for investors or ratings analysts to assess those receivables.

Italian Precedent

Indeed a precedent exists in Italy, where a handful of health-care ABS linked to debt owed by regional governments were issued before new accounting rules killed their appeal for issuers in 2005. In those cases, the receivables' performance was beside the point. Roberto Paciotti, senior director of European structured finance for S&P in Milan, said the ratings on these deals were always based entirely on the ratings of the region in question since it provided a guarantee.

Paciotti said it would have been quite complex to rate these transactions based on the expected performance of the receivables, which are actually defaulted. Making assumptions on the timing of the payments under stressed scenarios was exceedingly difficult, not least because the regions themselves were not able to provide sufficient historical information. "Another starting point would be what's available in terms of actual recovery amount," he added, but even this would be mostly unavailable.

The incentive for the Italian regions that did this, which included Lazio and Campana, was to speed up the payment to their suppliers as well as to avoid legal interest that could be incurred by legal action from unpaid suppliers. There was also the advantage of off-balance-sheet treatment.

That advantage evaporated, however, in 2005, when European Commission body Eurostat enacted rules requiring that these kinds of securitizations with sub-sovereign guarantees be booked on the balance sheet.

The pre-2005 balance sheet incentive would probably be likewise nonexistent for Spanish regions.

Still, suppliers are highly motivated to help the regions find a solution.

Farmaindustria declined to comment for this article, but fellow trade group Fenin, whose members produce health-care technology, said that the ABS proposal made sense.

"The delinquencies of the [regional government's health-care authorities] have been constant for the companies belonging to our Federation, but with the crisis this situation has worsened to alarming statistics," said a Fenin official (see bottom table, below). "The companies not only have to face delays in payments...but they must also pay taxes on the unpaid invoices [and] pay their own suppliers and employees."

The payment delays are putting these companies "at risk," the official added, saying that securitization would be a good tool for overcoming these problems.

Aguila's Gutierrez also believed the situation was grave but said that given the unpredictability of flows, securitization was not the best solution. Selling the receivables to distressed funds that specialize in this area would be more feasible. His shop is looking into doing this with other kinds of suppliers owed money by the regional governments. "The size of the problem is so large that you really need international funds," he added.

Commercial Debt, Chronic Pain

Unpaid invoices to suppliers fall under the category of commercial debt, which is not rated by S&P.

"S&P's rating doesn't speak to the probability of a regional government's defaulting on its commercial debt but instead reflects the probability of paying financial debt," said Milan-based Lorenzo Pareja, director of international public finance at the agency. However, the amount of payables is still an important rating metric to assess the liquidity position and budgetary condition of each state, he added.

Even in better times, Spanish regional governments have typically delayed payment on commercial debt, whereas financial debt was given priority.

If commercial debt were to become financial debt, say through a securitization, the rating impact on the deal - and the sub-sovereign entity for that matter - wouldn't be predictable from the existing rating. "We would have to analyze the particular situation," added Pareja.

Though a number of Spanish regions are struggling to pay commercial debt, most are rated above the triple-B category. They have been able to fund themselves through a mix of bank debt and bonds purchased by locals.

Nevertheless, the strains from commercial debt are showing. On Oct. 19 Moody's Investors Service downgraded a number of Spanish sub-sovereigns following the sovereign's demotion to 'A1' from 'Aa2.' Most were hit by one or two notches, but Castile-La Mancha tumbled down five places to 'Ba2' from 'A3'. Unexpectedly large commercial liabilities were one of the catalysts for the drastic move, the agency said.

Even if a securitized deal were fully wrapped by the central government, the surety would not have the same value as before the crisis. S&P and Fitch Ratings also cut the sovereign in October, the former one notch to 'AA-' and the latter two notches to 'AA-'. - FO

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