Over a year has elapsed since the expiration of the tax incentive that has propelled the monumental growth of Italian non-performing loans, but market participants find that instead of the flame completely dying down, there is still some incentive that continues to capture interest in securitizing NPLs.

According to Standard & Poor's, the total volume of publicly rated transactions in the Italian CMBS market now amounts to more than E8billion - driven, to date, almost exclusively by NPLs. In the past, the tax incentive allowed banks to spread losses resulting from the securitization of NPLs over a five-year period (see ASR 9/10/01).

"Since the enactment of law 130/99, many issues in the Italian securitization market have been backed by NPLs; the evolution has seen many of the issues now being backed by performing residential mortgages - the tax provision on the securitization of non-performing portfolios surely affected the volume of issuance," said Roberto Paciotti, associate director at S&P.

The tax incentive gave banks an opportunity to boost balance sheet returns and optimise their fiscal position, but smaller banks largely drove the market. The securitization of NPLs now progresses with a smaller number of larger-sized transactions, said Paciotti. "In the future, we will probably continue to see more of these larger originators in the market."

The hefty portfolios these larger banks propose to bring to market may largely explain why they chose to wait until now to jump in. Large portfolios mean more work, but now that investors are comfortable with this asset class, they may show adequate appetite for the upcoming larger issues to justify the extra effort. "What we can assess based on the calls that we have received from potential arrangers interested in our approach is an interest in securitizing quite big portfolios of NPLs [from the larger banks]; hardly any of the smaller banks are involved," said Paciotti.

Performance ratings

S&P assigned ratings to 10 NPL transactions, six of which closed in 2001. The most recent of the transactions, Island Finance 2 S.r.l, which was backed by a pool of NPLs originated by Banco di Sicilia SpA, closed in March 2002. The largest NPL to date has been International Credit recovery (6) S.r.l., a E1billion transaction which closed in the final quarter of 2001. "The performance of the Italian NPL market to date has been in line with, and in many cases has exceeded, Standard & Poor's expectations," according to the report.

In the past two months, four deals have had tranches upgraded by Moody's Investors Service prompted by better-than-expected performance. These include Perseo Finance, Theano Finance, Anteore Finance and Quadriolfoglio Series 2001.

Ares Finance 2 recorded low recoveries in its first collection period, which prompted Fitch Ratings to put all outstanding tranches on ratings watch negative despite the fact that collections were more or less in line with its base case scenario. Trevi Finance 2 also fell behind on collections during this period.

Business plan executions depend on how aggressive servicers are, so collections vary from deal to deal. According to Dresdner Kleinwort Wasserstein, while performance below the servicer's business plan is likely to extend the weighted average life of the notes, it may not necessarily impact their rating provided that performance remains consistent with the rating agencies base case.

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