Italian bank Banco di Sicilia's (BdS) recent E380 million ($369 million) Island Finance (ICR-4) transaction, backed by a E1.4 billion portfolio of non-performing loans, was the first Italian NPL deal to receive triple-A ratings on its senior tranche. It was also the first deal of its kind to receive ratings from all four international agencies.

The deal, arranged by Morgan Stanley Dean Witter, was split into five tranches, four of which were public floating rate issues and one a E40 million tranche, rated double B, that was retained by BdS.

The transaction is the fourth deal in Morgan Stanley's International Credit Recovery series of Italian NPL-backed issues, but the first to be an agency transaction. In the first three deals in the series, the investment bank purchased the assets from the originators before securitizing them.

Morgan Stanley brought in Servizi Immobiliari Banche (SIB) - in which it holds a 26% interest - and wholly owned subsidiary KGI Corso Venezia to act as servicers. "Bringing in third party servicers was the most crucial factor in the structure of this deal," said a Morgan Stanley banker.

"The people at SIB have 14 years experience in this area, understand the local market, and can predict performance based on their own excellent track record. They are highly motivated to recover as much debt as possible, and don't have the borrower relationships that may hinder a bank's ability to do this."

The 3.7 year average life E237.3 million senior tranche priced at 70 basis points over six month Euribor. Pricing on the other public tranches, with ratings going from double-A to triple B, ranged from 115 basis points over Euribor on the double-A second tranche - average life 6.7 years - to 300 basis points over on the 8.5 year average life E28.6 million triple B tranche.

A syndicate official at Morgan Stanley said the difficulties it encountered in trying to price the deal resulted from a lack of appropriate benchmark deals to draw from. "In this case there were three issues we had to overcome to attract investors," the official said. "First, it was an NPL deal and that is problematic. Second, this deal originated from Italy, and third, and most specifically, it originates from Sicily. With those factors in mind, we actually expected the spreads to be much wider."

As it turned out, the senior tranche was three times oversubscribed at launch, the official said. The majority of investors were German and U.K. banks, with a few coming from Italy, France, Spain, Portugal and the U.S.

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