Italian securitizations of non-performing loans are quietly popping back on to the radar screen as analysts predicted, following the boom of 2000 and 2001 when approximately E2 billion and E4.79 billion was issued, respectively.
Since the implementation of the Italian Securitization law in 1999, according to Moody's Investors Service, a total of E20.7 billion in NPL portfolios has been securitized. The rapid development of the market is largely attributed 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 - considerably easing the immediate negative impact a securitization might have on financial results. With that benefit ending, some market sources are less bullish on their volume projections.
"I don't believe we will have a similar boom in the future, because the tax benefit played a key role in [early] NPL securitization growth," said one market source. "I'd expect spot issuances, with at least four or five per year."
Italian banks continue to hold a considerable number of NPLs on balance sheet - roughly E49 billion worth, according to the Bank of Italy - that still need to be addressed. Although the tax incentive is no longer in place, securitization is still considered an attractive alternative means of financing, offering banks the ability to enhance the collections profitability of their NPL portfolios by making structural changes to the servicing platform.
"The usual arguments of both alternative financing and capital relief (according to Basel 2) are also, in my opinion, two important drivers for NPL transactions development," said one market source.
Three deals have appeared in the market so far this year, starting with ICR 7, which priced in March. Palazzo Finance Tre S.r.l. and BCC Securis are currently marketing two securitizations backed by Italian NPLs. The main originators in the E600 million Palazzo deal are Italfondiario and Banca Monte dei Paschi di Siena. There is also a small pool of loans originated by Banca Agricola. The E80 million BCC deal is originated by a cooperative of 24 small Italian banks.
It's likely that there will be more than one type of NPL originator going forward.
For example, both large and small-to-medium banks could originate NPL deals, a market source said. The larger banks would be inclined to access the market to alleviate some of the risk and capital charges associated with their large NPL portfolios. The small-to-medium banks, through the aggregation of several small portfolios, are motivated by "the potential image gain reachable through securitization, which is actually an Italian fashion these days," a source said.
As the market grows, so has the monitoring process. Moody's notes that each of these deals has unique structural characteristics requiring unique monitoring techniques, but adds that in all NPL transactions, the role of the servicer is key in maximizing recoveries and timing to recovery.
Going forward, analysts expect established structures generally to be replicated by new entrants into the market. "However, some new structures might come to life, such as synthetic NPLs where the risk taken by the investors is artificially created by referencing an NPL portfolio," said one source.