Industry players have for sometime expressed interest in new insolvency legislation due to take effect over the next year in Spain and Italy. They are hoping that it could facilitate the use of corporate securitization structures. However, market optimism could be dampened by the latest talk that the new legislation may not be as bondholder-friendly as expected.
On the corporate side, Spain has already seen corporate-style deals for its flagship airline Iberia, which launched a series of equipment enhanced trust certificates (EETCs). However, despite this, insolvency legislation is still hindering the use of U.K.-styled hybrid, whole-business deals. Nonetheless, market participants have been optimistic about the strong desire from Spanish corporates to securitize their account receivables through bond issuance. According to a Merrill Lynch report published earlier this year on municipal and government-backed securitizations, Spain has talked heavily about the possibility of securitizing its utility sector.
Italy took an even greater stride towards developing a U.K.-style, whole business structure by launching its first-ever "whole-business"- like deal this year, Romulus Finance. Industry sources said the Romulus securitization of Aeroporti di Roma unearthed the potential for utility-style or concession-based whole-business securitizations in Italy (see ASR 3/10/03). Italian legislation was expected to incorporate new laws that would make executing corporate hybrid deals easier to structure.
At this year's Barcelona ABS conference in June, there was once again talk of the new law. In the U.K., bondholders are allowed to seize collateral and benefit from cash flows when a company declares bankruptcy. The main problem under Italian law is in the servicing realm. In that country, the servicer is required to be a bank or financial intermediary. For corporates, this means another cost consideration.
But there is optimism that legislation in Spain and Italy could take a turn towards incorporating insolvency laws that are not so bondholder specific, and, further, that the new laws would reduce the strength of the bondholders' claim over the ring-fenced assets securitized under a whole-business structure. "The relative rights of secured and unsecured creditors are greatly influenced by the insolvency regimes of individual European countries, together with their respective security and contract law structures," explained analysts at Standard & Poor's. "For corporate securitizations, in particular, these factors determine the level of protection that secured debt holders enjoy in an insolvency scenario. They are also important in determining debt tranche sizing and the level of ratings that can be assigned to these debt tranches."
The new laws are expected to come into force in 2004. In S&P's view, this legislation may prove to be more supportive of corporate rehabilitation and to protect the interests of all creditors over the interest of secured creditors. This means that, in the event of insolvency, bondholders who have a claim over the ring-fenced assets will ultimately have less claim over the ring-fenced assets specific to the securitization. "The new Insolvency Law will not be helpful for whole-business securitization at all, although it may prove helpful for traditional securitization structures," said one industry source.