Italy is bracing itself for a boom year in structured finance. "There are already signs that 2001 will be the year of explosion for Italian securitization," says Silvio Angius, executive director responsible for Southern European Securitization at UBS Warburg, who expects it to be much bigger in terms of volume and number of transactions. "As originators and investors are getting more familiar with securitization techniques following the 1999 Law, a large number of transactions will be brought to the market."

Of the US$3 billion of new issues in the European ABS market in January 2001, two RMBS transactions worth US$841 million were Italian: Upgrade and Orio2.

Furthermore, Alain Debuysscher, vice president and senior analyst at Moody's Investors Service, expects the most spectacular changes to be in the nature of the transactions. "Until recently, the Italian market was dominated by non-performing deals thanks to a preferential tax and accounting treatment intended to help banks clear their balance sheets of bad loans, and the fact that Italian banks usually keep a large amount of non-performing loans on their balance sheet. This made Italy quite unique in the global securitization market, on par with Japan.

"In May 2001 the special accounting treatment for non-performing loans will terminate, so the non-performing flow is expected to decrease and to be replaced by performing assets", Debuysscher added.

In early February, the Palazzo transaction broke new ground by being the largest performing mortgage deal from Italy to date and the first to incorporate a commercial and residential split. It priced at the tight end of the price talk, reflecting the investors' interest on the Italian market.

The Italian securitization market was the most active in continental Europe in 2000 following the enactment of Law 130/99, making securitization much easier. Italy's first securitization of non-performing assets took place in 1999.

Increased activity from

the public sector

Following the trend set by the Italian Treasury in 2000, cash-strapped Italian regions are expected to become major players in the structured finance market and banks are starting to target them.

In February, the region of Lazio sold E500 million (US$ 445 million) of bonds backed by funds committed by the central government with respect to healthcare. The regions of Tuscany as well as Lombardy are expected to follow.

In its 2001 budget the government has assigned L16 trillion (US$7.4 billion) to be paid to the regions over the next three years. The regional administrations will use them to eliminate deficits built up when the state was responsible for all local health spending.

Regional administrations are said to be looking also at other assets which could be used to back sales.

Uncertainty over the

legal framework

Last fall, a ruling by the Italian Supreme Court (Corte di Cassazione) on an application of the 1996 Usury Law threw the market into turmoil over concerns for the banking sector. In order to address this impact, the government issued a decree-law at the end of December, which is subject to parliamentary approval within 60 days.

Because of the uncertain legal framework, transactions now include specific dispositions to minimize the possible impact of the ruling.

In the Orio 2 transaction, for instance, Banca Popolare di Bergamo (BPB), the originator, committed to indemnify and hold harmless the transaction against any and all losses, costs or liabilities which may be incurred by the Italian SPV as a consequence of claims brought against it, on the grounds that interest paid since the loans origination is to be held usurious.

If any loan in the future has a rate that becomes usurious, BPB as servicer will reduce the interest due on the loans to a non-usurious rate. And the swaps have been structured so that the swap counterparty will indemnify the structure against any reduction of interest collected on the loan portfolio.

The Italian 1996 Usury Law prohibits lenders from applying interest rates above the usury rate set quarterly by the Italian Treasury. According to the Court ruling, the usury law might be applied to loans made before 1996, stating that any fixed-rate mortgage set over 9.75% before 1997 could be regarded as "usurious," requiring banks to cancel the contracts and pay back all interest payments received. The December emergency decree overruled this act, stating that a rate could be considered usurious only if it is superior to the rate set by the Treasury at the time of the contract.

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