Italy's first public securitization of non-performing loans and the first transaction to make use of the new Italian securitization law hit the markets recently. The deal, arranged by Paribas and Finanzaria Internazionale for Banca di Roma and called Trevi Finance, is expected to be the first in a series of non-performing loan transactions as Italian banks take advantage of the new law and the power of securitization to clean up their balance sheets.

The deal is worth a total of E1.412 billion ($1.44 billion), though only the top two, single-A rated tranches, together worth E775 million were publicly offered. Of the deal's other three tranches C1, C2 and D Banca di Roma aims to sell the C1 and C2 pieces, each worth E206.5 million, with its own guarantee and a liquidity provision. The first loss D chunk, worth E224 million, will be retained.

The transaction, which decreases Banca di Roma's bad loans to total loans ratio to 8.66% from 11.86%, is backed by a pool of loans with a net book value of E1.595 billion (the gross value was E2.643 billion) of which around a third are first lien mortgages, 77.6% of which are residential. The rest of the pool is made up of unsecured loans made to corporates and individuals.

Even though investors were required to put in a lot of work to understand an asset class that they have not seen before, the two offered tranches were snapped up largely because of the relatively generous spread of 140 basis points over six-month Libor for the E620 million, three-year average life A tranche and 240 over for E155 million B chunk, which has a six-year average life.

Both pieces were sold out, largely to funds, insurers and banks in Italy (about 35%), Germany (about 30%) and the U.K. (about 20%) with the balance going to France, Switzerland and the Benelux countries. In total over 40 investors participated.

"We sat down with Paribas for quite a long time because we've never really looked closely at anything like this before, but there are likely to be many more of these deals and it is worth doing the work, particularly as getting into a new asset class early is rewarding. Plus the historical data they and Banca di Roma provided is pretty convincing and the spread is hard to resist," said a London-based investor.

The investor added that because holders of the two senior tranches are protected not only by the subordinated notes but also by a E310 servicer advance facility provided by the issuer, they will be repaid even if only 30% of the value of the assets is recovered as opposed to an expected 55% after five years.

Adrian Carr, Paribas' head of ABS syndication, explained that Paribas put in a lot of work with investors, but said that the more investors learnt, the more content they became.

"A non-performing loan deal in Italy is a challenge, but once investors analyzed the structure, tested the historical data and ran the cashflow models, they became highly comfortable with the transaction," he said, adding that the deal proves it is possible to take a pool of non-performing Italian loans and structure a securitization which allows at least half the portfolio to reach investment grade.

Securitization pros at rival firms were quick to praise the deal as an impressive opening for a new and complicated asset class. "You can quibble about how much of the deal has been sold free from Banca di Roma's credit, but they've got it done, and they've opened a new asset class and educated a lot of investors. The market should be pleased," said one head of a European ABS team.

Market participants certainly will be pleased if, as expected, a rash of similar Italian deals make it to market. Both Fonspa and Banca Intesa, for instance, are working towards deals backed by non-performing assets and rumors suggest that they are unlikely to be alone.

Not that the market is likely to be confined to Italy. Certainly banks in Spain and France are examining similar transactions and even banks in northern European countries are considering following suit, according to market sources. MD

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