The consortium of banks arranging an immensely tricky deal for Inps, the Italian state pensions agency, may be forced to rely on a partial government guarantee to get the deal done, according to sources close to the deal.

The transaction which is now expected to be worth Lit8 trillion ($4.35 billion) and should hit the market later this month or in November is part of the Italian government's efforts to collect delinquent pension contributions, often owed by small businesses and individuals. The sources expect that the deal will have a hugely over-collateralized triple-A rated senior tranche and possibly a first loss piece guaranteed by the government. A mechanism for a full or partial government guarantee was included in legislation that enabled the transaction.

Market watchers suggested that a government guarantee would represent something of a defeat for the consortium arranging the deal made up of Morgan Stanley Dean Witter, Warburg Dillon Read and Sanpaolo IMI as the original intention of the transaction was to raise money free from the government's credit in order to avoid breaching borrowing limits set by the European Union as a condition of entry to the Euro currency.

"If it's going to guarantee a portion of the transaction then it may as well have borrowed from the markets directly as that would have been much cheaper," one securitization expert commented. "As it is, a guarantee may well breach [accounting standards] ESA 79 and ESA 95 which means it will count as state borrowing."

However, securitization pros were quick to absolve the Morgan Stanley-led consortium of the primary responsibility for this, pointing out that the government had delayed awarding a mandate until April this year while accounting for the portion of the deal's receipts in its 1999 budget meaning that the deal has to be launched before the market closes down for the year-end.

According to sources, the deal has not been made any easier by the lack of data on the underlying assets and the difficulties of relying on historical data for forward projections.

"Given the difficulties of the underlying assets and the time-scale, to do this completely free of the government's credit was next to impossible," one expert commented.

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