Although Italian NPL pools are considered to have uneven cash flows, Fitch Ratings still views the sector as stable and said that the asset class has been performing better than expectations. The rating agency just came out with its fourth edition of the yearly report called Italian NPLs: Market Update and Performance Comparison - 2006. Since the last market update in June 2005, the rating agency reviewed 12 deals, all of which have been affirmed or upgraded.

"For this edition, we highlighted the point that the recoveries on the unsecured nonperforming loans have exceeded our expectations, the main reason being that these unsecured positions are actually not completely unsecured," said Alessandro Gustapane, co-author of the report with Andy Brewer, in a telephone interview. "There is some collateral backing these loans so banks are able to get some recoveries out of the collateral." The report also highlighted the servicer's ability to recover losses from the borrower. "The servicer is playing a more and more important role in NPLs," Gustapane said.

Although only one Italian NPL deal has paid in full, Ulisse 3, and only one new small transaction, Cairoli Finance, was issued since the last report, the weighted average recovery rate - expressed as a percentage of resolved gross book value (GBV) - improved from 58% in June 2005 to 63% in June 2006. This indicates that credit quality of the NPL pools still outstanding is not deteriorating.

In fact, some deals, such as Trevi Finance, Trevi Finance 3 and Quercia Funding, have been reporting recoveries on unsecured loans significantly higher than Fitch's initial base case expectations. Moreover, out of the current total of 16 public Fitch-rated deals in the market, a number of them, such as Intesa Sec NPL, Minerva and Quercia Funding, are close to redemption, says the report.

The timing issue

As for the timing of resolutions, the average length of foreclosures appears to be stable around seven to eight years across Italy, but it varies by region. For example, better performing tribunals are found in Lomnardia, where it can take a mere four years, and there are slower courts in Puglia and Calabria, where the process can exceed 10 years.

In the distribution, or final stage, however, delays are occurring. In addition, because most deals on the market are more than five years seasoned, more positions are advancing to this phase and causing concerns over further delays. "Timing may be the most important issue for Italy because of the length of the foreclosure process," Gustapane said. "What we have seen so far is that in the time since we started monitoring the NPL sector and publishing the report in 2003, we haven't seen any particular improvements in the timing so our timing assumptions are still the same."

Even with the lengthy foreclosure process, though, required recovery rates (RRR) - which Fitch computes by using the amount of rated notes outstanding in each period and then by calculating the level of cash that much be collected by final legal maturity - are indicating that in most deals, there is still a good margin for timely repayment of notes by legal final maturity.

Dwindling deals

The report also notes that the number of outstanding transactions in the market is dwindling, but Gustapane does not see this as a cause for concern. "It is not a concern, it's more of a factual consideration," he said. "The main reason why there were so many deals launched between 1999 and 2001 is because of a tax incentive introduced by the Italian government to securitize. Once this incentive disappeared, then the number of deals was really reduced. But our expectation is to see new deals coming."

As for the status of the market going forward, the report emphasizes that while the sector looks stable, it is important to keep in mind that NPLs often represent uneven and unpredictable cash flows. "What we want to stress is that on one side, NPL performance has been quite stable... but on the other side, we always want to stress that these types of assets are quite volatile and should be treated with some concern," Gustapane said. "Even if performance has been very positive, it does not mean that the situation will keep that way in the future."

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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