The world's largest ever securitization, a much-trailed E4.65 billion ($4.76 billion) transaction for the Italian state pensions agency Istituto Nazionale della Previdenza Sociale (INPS), not surprisingly hogged the asset backed headlines at the end of November, with attention focusing on the tight pricing.

The deal was chopped into three tranches, each worth E1.55 billion and all rated triple-A by the four international rating agencies. The first tranche, with an expected maturity of January 2001, priced at six-month Euribor minus five basis points, while the second, with an expected maturity a year later, pays six-month Euribor minus two basis points. The third tranche with a two-and-a-half year weighted average life pays 11 basis points over the same reference.

However, with the three underwriters Merrill Lynch & Co., Caboto, and BNP Paribas waiving some or all of their commissions for large tickets, the effective yield was often three or four basis points higher.

Sources close to the deal suggested that not much more than half of the paper had been placed, not just because of the tight pricing but because of the time of year that it was launched. "Trying to sell a deal as complicated and unusual as this at the end of November and December was always going to be difficult and we always knew that, but things should be better in the New Year," said one pro at one of the co-leads. He added that it may be necessary to sell it slightly cheaper than the current pricing to clear the deal, though that would not be the case if spreads begin to tighten as expected in January.

Carlo Sirtori, head of capital markets at Caboto, said that 80% of the paper it had sold was placed in Italy, with 50% going to funds, around 30% with insurance firms and the rest to banks and asset managers. Of the paper that Caboto placed abroad, German and Austrian investors were the most keen, he said.

Market experts agreed that even if the investment banks lost money on underwriting the transaction it would be with the intention of ingratiating themselves with the Italian treasury in the hope of winning future business. It also has the added bonus of boosting the bank's positions in the league tables. For Merrill Lynch, for example, it ensures that they will top the European asset-backed league table for 1999, after running neck-and-neck with Morgan Stanley Dean Witter & Co. (who along with Warburg Dillon Read and San Paolo IMI actually structured the deal).

The tight pricing was possible, the three banks argued, because the deal was a quasi-sovereign transaction. "The success or otherwise of this transaction is in the gift of the government, as they can influence the percentage of the contributions that are collected," said a syndicate official at one of the co-leads. "If you make the reasonable assumption that they will endeavour to make the transaction a success, we think the idea of it being priced closer to levels that Italy's sovereign paper trades, rather than as a true asset backed, is legitimate."

From a rating agency point of view, the triple-A ratings were thanks to the huge level of over-collateralization, with a pool of over E40 billion worth of receivables (including penalties and interest) backing the transaction.

Another Italian NPL Deal

INPS was not on its own in the market at the end of November and the beginning of December as issuers paid up to meet their funding needs before the end of the year. Not content with its part in the INPS deal, BNP Paribas was also in the market with its second Italian non-performing loan, this time for regional savings bank Cassa de Risparmio di Firenze (Carifi).

The E129 million deal, called Perseo Finance, was split into a public tranche worth E85 million and rated A2/A by Moody's Investors Service and Fitch IBCA and an unrated E44 million first loss piece that was retained by Carifi. Carifi also provides a commitment of E50 million which is drawn upon if collections fall below a certain level.

The deal parcels around three-quarters of the bank's NPL portfolio nearly 5,000 loans with a face value of E408 million and a net book value of E158 million and will free-up over E100 million of capital.

According to a Carfili official, the bank is likely to take advantage of the option under the Italian securitization law of amortizing the sale over five years and therefore avoiding tax and accounting penalties.

Not Just Juice

Elsewhere, Merrill Lynch closed a E60 million trade receivables transaction for fruit firm Del Monte Group. The deal, rated Aaa/AAA by Moody's and Duff & Phelps Credit Rating Co., packaged its receivables from European sales of canned fruit and vegetables, drinks and concentrates.

Del Monte has closed one private placement in the past, but bankers expect that this deal is likely to be the first in a series, now that the company has swallowed the upfront costs of arranging the deal.

Mortgages in the U.K.

The U.K., meanwhile, saw two mortgage deals the largest securitization of non-conforming mortgages to date and a deal backed by commercial mortgages originated with securitization in mind by Morgan Stanley.

The non-conforming mortgage deal came from Platform Home Loans (PHL), the lender recently taken over by Cabot Square Capital and previously known as the Money Store. The deal, via lead manager Barclays Capital and co-leads Morgan Stanley, Credit Suisse First Boston and Dresdner Kleinwort Benson, refinances Cabot Square's acquisition facility, also provided by Barclays.

It was chopped into a GBP260 million, 2.33-year senior tranche rated triple-A by Moody's, Standard & Poor's Ratings Services and Fitch, a GBP22 million seven-year soft bullet piece rated A1/A+ by Moody's and Fitch. A GBP15 million chunk rated Baa2/BBB by Moody's and Fitch was placed privately, as was another unrated chunk.

The aspect of the deal most remarked upon was the pricing, which at 65 basis points over three month Libor for the triple-A tranche was high even by the recent standards of the sub-prime sector. "There is no doubt that it is cheap particularly as the portfolio has such a low level of arrears compared to the average for these deals but then it had to be to close at this time of year," said a sales source at one of the co-leads.

James Clark, a principal at Cabot Square, suggested that because PHL will be a regular issuer, pricing was not as important as efficient execution. "We don't play the market," he said. "Coming at this time of year was an advantage because it increased the amount of exposure that the deal received it wasn't launched into a crowded market and that is what we wanted."

Morgan Stanley's CMBS is also programatic, as it is the second deal in the European Loan Conduit series of CMBS transactions backed by U.K. and Irish commercial mortgages. It is part of the bank's efforts to introduce the U.S. technique of originating commercial mortgages with the intention of securitizing when a pool of sufficient size is built up.

The work done to explain the first deal in the series in February helped pricing to stand-up relatively well, despite the time of year, according to Morgan Stanley. The E280.36 million senior tranche, rated triple-A by S&P, Duff & Phelps and Fitch, has a five-year average life and pays 55 basis points over three-month Libor. Four other tranches were rated from double-A to double-B.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.