Italy has nurtured the growth of what has become one of the largest markets for non-performing loan securitizations. According to Moody's Investor Services, since implementing its securitization law 130/99, Italy has seen over E31 billion (US$35 billion) of NPL portfolios securitized. A by-product of Italy's extensive campaign has resulted in the development of a more transparent rating methodology that could, in the future, be applied to other NPL markets.

"Due to the fact that we have seen over 25 transactions in Italy, we have been able to develop quite a sophisticated methodology, and there's really no reason why we can't look at countries who are considering developing [NPLs] in their portfolios," said one analyst at Moody's.

Moody's last week published for the first time its rating methodology for the securitization of NPLs. Italy's heavy securitization calendar of NPL assets over the past years has greatly contributed to the rapid growth in the uses of NPL securitization and the technology involved.

Tax incentives introduced in 1997 that allowed Italian banks to amortize NPL-related losses over a five-year period, coupled with the development of Italy's new securitization law 130/99, led to the current fertile issuance levels. Despite the removal of the five-year cushion, Italian banks are still expected to remain active with their securitization campaign. Industry sources have estimated that approximately E50 billion (US$56 billion) of NPLs still remain on banks' balance sheets.

According to the Moody's report, the deals done in Italy fall into three main categories: deals by banks that have sold the portfolio to a third party, deals by banks that retain the equity and servicing in the transaction, and deals where the banks retain the equity but outsource the servicing of the assets to a third party.

But the concept of securitizing NPLs is not rooted in Italy. The first distressed NPL securitizations were actually done in the U.S. as an answer to the savings and loans fiasco of the late 1980s. Italy's recent boom in defaulted loans is traced back to the spike in property values during the 1980s. "The boom in prices was fueled by short-term speculators in both the commercial and residential property markets," reported Morgan Stanley. "By the mid-1990s the bubble had burst and the Italian banks were left with over E50 billion (US$56 billion) of non-performing loans, a large portion of which were real estate-related."

Moody's ratings methodology for NPLs is based on analysis of each borrower and asset details, any available security package and the competence of the servicer. Based on its developed flexible approach largely attributed to the variety of deals that have emerged from Italy, Moody's believes its methodology can be broadly applied to other markets.

As for what's next, analysts at Moody's said there is still some life in Italy, including talk of a new synthetic structure emerging. Japanese banks have similarly expressed eagerness to clear their books of NPLs. "So far, other countries have not securitized NPLs because there's probably not enough of them to securitize," said one market source. "We need to look at countries were NPLs are already present on a bank's balance sheet and in the future, perhaps in an economic downturn, banks might be more willing to employ securitization with a better understanding of how these structures work."

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