Italian non-performing loans might not experience the boom enjoyed in past years because, at the moment, there is little incentive for banks to tap the securitization market (see ASR 6/16/02). Still, reasonable growth in the sector and evolving NPL structures should keep issuance alive, according to Fitch Ratings analysts, who predict a revival as early as this year.
So far, a lack of incentive has curbed growth - banks don't have the same impetus to bring these loans to market as they did five years ago. The rapid development of the Italian NPL securitization market was largely due to the critical mass of NPLs on banks' balance sheets, and a favorable tax environment that allowed banks to amortize NPL-related losses over five years. The latter considerably softened the immediate blow a securitization might deal to financial results.
Having lost the tax incentive, banks have been reluctant to bring these deals to market. The last public deal in the asset class was a 79.35 million ($96.13 million) securitization of two portfolios serviced by Pirelli & C Real Estate and originated by Localto and CFT Finanziaria, via Dresdner Kleinwort Wasserstein in April 2003.
But a rising level of NPLs coupled with the introduction of International Accounting Standards this year could revive issuance. According to the Bank of Italy, total NPLs on Italian banks' balance sheets increased to 53.8 billion in December 2004, from 50.6 billion, in December 2003. For banks that may have previously opted to keep the loans on balance sheet, the new accounting standards introduced the prospect of writedowns on these loans.
Fitch analyst Alessandro Gustapane said that given these new accounting standards, new transactions are most likely to take the form of "principaled securitizations", where an investment bank or a real estate fund will purchase an NPL pool from an originating bank and will then securitize it, retaining a subordinate interest. Gustapane said that timing is just a question of how long it takes these funds to reach the critical mass needed to bring deals to market.
Lately, there has been a lot of movement in acquisitions of Italian NPLs, creating the potential for new issuance. Morgan Stanley has been buying Italian NPL portfolios since 1996 and securitizing them via its ICR program. Sources report that the bank recently acquired an additional 400 million of NPL exposure. Additionally, Centrobanca sold 107 million of its NPLs to special purpose vehicle Teriscore, which is expected to issue the notes via a WestLB-led securitization program.
Earlier this month, Italian banking group Banca Intesa said that it had sold 9 billion of NPLs to Merrill Lynch and Fortress Investment Group. Merrill and Fortress also bought an 81% share in Intesa Gestione Crediti, the bank's NPL servicing unit. Gustapane said that he expected this capital to eventually come via the securitization market.
"The market is performing well and it is evolving," said Gustapane. "Servicers and real estate funds are working hard to improve the sector conditions." He added that the current reorganization process - such as the establishments of advanced NPL platforms, strategic joint ventures, introduction of alternative resolution strategies - "is creating the ideal conditions for a further expansion of the market in the near future."
Italian NPL deals continue to perform in line with expectations, added Fitch analysts. Since the publication of Fitch's latest market update in May 2004, many Italian NPL deals have been paid in full: Ariosto, ICR6, Palazzo Finance Tre, Perseo Finance, Theano Finance and Ulisse 2. Argo Finance One, which has 6.3 million outstanding on its class B notes, should be paid in full by its July 2005 payment date.
Fitch said the weighted average recovery rate, expressed as a percentage of resolved gross book value, declined slightly to 58% in May from 61% a year ago, which is in line with expectations. This is mainly attributable to the fact that the NPL pools are more vulnerable to natural adverse selection as they are worked out, leading to recovery deterioration. However, this weakening in performance was offset by the consistent reduction in the rated notes outstanding. On these grounds, deals such as Quercia Funding and Ares Finance 2 were upgraded, despite the slowdown in collections.
And analysts said that servicers have introduced alternative resolutions to the workout strategies that aim to speed up the recovery process. Special servicers acting in Italy, SIB-Morgan Stanley ("SIB/MSP-CV" rated RSS2+'/'CSS2+'), Italfondiario (rated RSS2+'/'CSS2+') and Societ Geastione Crediti/Archon Group Italia's ("SGC/AG"rated RSS2+'/'CSS2+') were the first to adopt alternative strategies such as real estate owned structures, subprime lending or cash payment plans. There has also been some movement with servicers to set up joint ventures. "The sector is much more mature and any new NPLs will be much better managed than in the past," Gustapane added.
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