Italian health care receivable ABS has become a major asset class. According to a Standard & Poor's report, some eight deals totaling about 3 billion ($3.7 billion) have been brought to market since 2003. With several deals in the making and investors having more money to put to work, the deal pipeline is swelling.
Under the terms of a typical health care securitization structure, the debtors are the regional healthcare units (HCU) termed aziende sanitarie locali in Italian. These units have built up a considerable amount of commercial debt. Although the Italian regions are not legally responsible for an HCU's debt, they are ultimately accountable for health care services on their territories, and have tried to address the liquidity problem by providing their respective HCUs with support.
S&P said that the different regions have approached this in various ways. Some regions have given their HCUs cash advances, tapping their own reserves or contracting liquidity facilities in their own names. Others have agreed to become the economic - although not legal - debtors of these commercial obligations through delegation of debt mechanisms. Some regions have also acted as sponsors, devising favorable legal frameworks that allow, and sometimes encourage, the HCUs to renegotiate and refinance their commercial debt with groups of suppliers. "In this last option, the new creditors (associations of suppliers or financial intermediaries) remain entirely and uniquely exposed to the credit risk of the HCUs, which can differ from that of the region, and which can also vary among HCUs within a region, depending on the HCU's financial situation and liquidity" the S&P report said.
One of the most prolific regions to bring deals to market has been the Italian region of Lazio. In 2004, Lazio issued its Atlantide Series 1 deal, and is likely to close its third deal, Atlantide 3, expected in August this year. Atlantide deals were all done on a principle finance basis. The latest Atlantide deal, which comes in at over 1 billion, is the biggest so far. Typically, under these structures, the HCUs recognize the amount due to various suppliers and make a settlement agreement under which the amount due to various suppliers will be paid in installments. In Atlantide 2 and 3, monolines were brought in to guaranty the triple-A tranche.
There have been other transactions to emerge from that region involving pharmaceutical receivables securitized on a secondary finance basis. These receivables were purchased by some banks, which then issued some of the assets under a securitization structure. A new deal involving pharmaceutical receivables, dubbed Panacea, is slated to come to market later this year.
Simmons & Simmons, which has been involved in many of the deals from the Lazio region, worked on the recently closed Kimono Finance S.r.l. (Mercurius) deal, which was a securitization of receivables owned by pharmacies in the region of Lazio. While the structure included receivables already due to the pharmacist, it also securitized receivables that were to be paid in the future, which the region may not be able to timely pay in the next two years.
Filippo Pingue, head of financial markets Italy at Simmons & Simmons, said that other Italian regions have been active in following the model developed in Lazio by the various suppliers' trade associations that service those regions. The Italian region of Abruzzo has, for example, followed suit with its Cartesio and D'Annunzio deals.
Campania is another region considering an imminent launch of its own version of ABS health care deals. "Lazio in terms of capacity is on top, Abruzzo has done essentially the same in smaller amounts," Pingue said. "Campania is looking to do different things. They are considering a 30-year reimbursement plan for a deal that is 2 to 3 billion in size, but this may be too ambitious and it seems that the central government is now voicing its concern with the length of the deal."
Pingue said that S&P and Fitch Ratings were both investigating the possibility to arrange these deals without the delegated payments made by the region. Since 2003, financial intermediaries have bought renegotiated commercial obligations that do not benefit from delegation of debt from the region. They keep these obligations on balance sheet, with the aim of securitizing them at a later stage, typically when the portfolio grows to volumes that would allow the costs of a structured transaction to be absorbed. "Future transactions in the market could be characterized by the lack of a direct credit link with the region; holders of the notes issued by special purpose vehicles are exposed to the HCUs'- not the region's - ability and willingness to honor the obligations on a timely basis," S&P said.
Capitalia, the fourth largest Italian bank based in Rome, recently acquired over 700 million in receivables from health care suppliers and is considering securitizing some of these assets going forward.
Simmons & Simmons' Pingue was optimistic about other European jurisdictions adopting a similar approach to their Italian counterparts as a solution to their growing healthcare woes. "With the increase of average life expectancy, health care expenditure is a concern everywhere," he said. "In Italy, there are regions that are able to pay in a timely manner like the North but other regions, like in the South, that are unable to. In the North, people utilize more private healthcare. In addition, some regions in the South are burdened by various inefficiencies. We could see the same situation in other countries that have their own version of Italy's South."
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