Still a relatively new asset class, government-related securitizations in Europe have accumulated only a spotted history since the first transaction launched in 1999, with just over EURO12 billion in volume to date; however, in the coming months the Italian Treasury alone is ready to match that volume, starting with a planned EURO10 billion securitization program.
In fact, analysts contend that government-initiated transactions - considered to be effective and efficient methods of addressing issues of debt relief and budget reduction in many countries - are now so integral to the economy that they may be the driver for expedited changes in several securitization laws.
In addition to Italy, countries such as Greece, Austria, France and Germany are currently prepping similar deals, sources say, using the proceeds to fund a variety of state-run projects.
According to Scott Rankin, executive director and vice president of the combined European Securitization Forum and Bond Market Association union, the Italian government is at the forefront of the effort to get existing securitization laws reformatted in order to accommodate future structures.
Last week the Italian Treasury introduced the first EURO3 billion of a planned lottery securitization. The deal, Societa par la Cartolarizzazione dei Crediti e dei Proventi Pubblici a Responsbilita Limitata (SCCPP), came into the market in three triple-A-rated bullet tranches that range in tenor from one year to three years.
First triple-A lotto deal, risks
The structure is a true sale of lottery receivables that consists of all the net revenues generated from the Lotto and Superenalotto lottery games, which are the two largest games in Italy, with a 71% market share in 2000.
According to Fitch, the state is obliged to run both games through the Ministry of Finance and the economy; however, private company Lottomattica was given concession to run Lotto and Sisal was given concession to run Superenalotto.
The state, as the administrator of each game, must notify the operators as soon as a breach of any of their obligations occurs. "If the breach is not remedied within the 30-day grace period, the State has the right to terminate the concession," explained Fitch.
There is also state undertaking in place in order to ensure that there is no disruption longer than one month. According to a Dresdner Kleinwort Wasserstein report, a risk exists in the Lotto game in the event that prize winnings exceed gross revenues, in which case the state would make up the shortfall for prizewinners to ensure continuation of the game.
The triple-A rating relies on the fact that if such a scenario were to arise the state could step in and performs the role of operator in a worst-case scenario.
And while it's not the first lotto securitization on the scene it is the only transaction that has earned a triple-A rating.
The transaction is structured to pierce the sovereign ceiling', thus achieving the triple-A rating. Unlike last year's Ariadne Greek lotto deal - which was rated based on the Hellenic government's policy to unconditionally make up on shortfalls on payment dates - the Italian deal utilizes the state undertaking and warranties to ensure that the game will continue. Dresdner said: "Investors are reliant on the generation of sufficient future receivables and the structural mechanisms in place."
On its tail is another planned real estate securitization program expected to be EURO3 billion to EURO5 billion in size, which is due to come to market sometime early in 2002.
Greece and others
While Italy accounts for 73% of the government-related securitizations issued thus far, Greece represents 27% of the activity. In fact, to date the only transactions originated in the country have come from this sector and there seems to be no relenting, mainly because the Greek securitization laws facilitate government initiative.
On the heels of it September Atlas securitization, Greece is in the market again with a EURO355 million securitization receivables due from the European Organization for the Safety of Air Navigation (Eurocontrol) for the provision of air traffic control services in the Hellenic Republic.
Like the three preceding government securitizations, this deal is based on the single-A rating of the state. Here the Hellenic Republic ensures the payment of any shortfall between available issuer funds and the amount of the notes outstanding once the deal reaches maturity.
The state also undertakes payment of any shortfall between available issuers funds and the amount of interest due on payment date. "Under the terms of the undertaking the state explicitly commits to make up any shortfall if on any payment date underlying cash flows are insufficient to cover amounts due on the notes and transactions expenses," explained Dresdner.
The primary motivation for such deals in Greece and elsewhere has been elimination of debt burden. According to analysts, securitization allows a country/region to obtain off-balance sheet funding; depending on the state of its finances it can use the proceeds to either pay down debt or at least control the rate at which it continues.
Prior to joining the Euro the countries had to first meet and now must sustain a budget deficit that was at maximum 3% of the GDP. Securitization has provided an outlet to get the number down. Going forward it's likely that countries will continue to turn to securitization as a means to reduce debt burden, said the Dresdner report.
Lower Austria is already in the market with a EURO2.5 billion deal backed by claims under state-subsidized housing loans granted by the state of Austria to private individuals, housing co-operatives and local authorities.
According to numbers provided by the OECD and Dresdner, France has an expected budget deficit of 2.8% in 2002, making the country a likely candidate for government-related securitizations. Dresdner also adds that Germany, who continues to face the breakdown of its fiscal system, may opt to use the market to fund projects such as expenses incurred while hosting the 2006 Football world cup.
