A new court ruling issued last week on the repossession of a lease asset may add some pressure to the popular Italian lease securitization structure.
Opinions vary on the extent of damage, but industry players are treading lightly, awaiting reaction from the rating agencies. According to market sources, at least one deal, Italese Finance 2003-1 S.p.A., which was expected to launch last week, has been postponed until implications of the ruling are better understood.
"In its ruling the Supreme Court granted the liquidator the option to either step into the lease contracts or alternatively terminate them, repossessing the leased assets," explained Sarah Barton at Morgan Stanley. This is the first time the Italian court has ruled that the liquidator of a bankrupt leasing company has the right to repossess a real estate asset leased under a leasing traslativo contract, said sources. The name of the leasing company involved in the ruling is Parinvest Srl.
Despite the fact that the current case has nothing to do with securitization directly, industry sources are questioning how the rating agencies will react now that a legal precedent has been set, intensifying the probability of repossession. In the past, the probability of a repossession occurrence was low enough that tranches had reached a triple-A rating. "The first thing to emphasize is that the rating agencies have always been aware of the risk that the liquidator of a bankrupt leasing company may, because of the nature of Italian bankruptcy law, be able to terminate existing leasing traslativo contracts," analysts at Dresdner Kleinwort Wasserstein reported.
Fitch Ratings and Standard & Poor's have both issued initial reactions to the ruling. In separate commentaries issued last week, each agency indicated that it will look into the impact, if any, this might have on lease securitization structures. Fitch said that the ruling could potentially change the way these deals are approached because, in the past, ratings were based on the assumption that adequate economic disincentives would dissuade the liquidator from terminating contracts.
On an optimistic note, Chris Ames at BNP Paribas noted that a situation like this one is less likely to occur today, particularly because in 1993 the Unified Italian Banking Code placed all lease companies under the supervision of the Bank of Italy. The leasing company under the ruling went bankrupt prior to this date. Ames explains that under the new supervision directive, the Bank of Italy can choose administration or liquidation as its course of action.
"As the Bank of Italy has a responsibility toward stability in the credit market, it is unlikely that they would approve of, or pursue the kind of action that resulted in this case," he said.