The first synthetic consumer loan transaction has sprung out of Italy, furthering the rapidly expanding securitization market. Finconsumo Banca SPA has launched a EURO350 million purely synthetic transaction, not only marking a first for Italy, but one of the very first for the entire European ring.

Paving the way for more deals of the like, Credit Agricole Indosuez SA, investment banker and arranger of the deal, and Finconsumo will act as sub counter parties that will enter into three credit default swaps. The credit default swaps are referenced to a portfolio of consumer loans, originated by Finconsumo. Rather unique to the deal, the portfolio consists of 99,000 assets and the average size of each asset is about E3,500.

"This is one of the first synthetic transactions referenced to a very granular portfolio, as opposed to usual synthetic CBO or CLO portfolios with less than 150 names and big exposures," said Hernan Quipildor, an analyst with Moody's Investors Service in the Milan office. "In this case, it's a very granular pool typical of any consumer loan portfolio, with about 100,000 loans."

Credit Agricole, as credit protection seller, will make payments to Finconsumo in line with credit events (defaults, for example) that occur within the transaction, thus covering losses suffered by Finconsumo. The credit enhancement on the transaction consists of an equity threshold, excess spread and subordination. "Protection payments will be made only if the losses are above the excess spread and the equity," Quipildor said.

Moody's has provided an A2' rating to the junior credit default swap, Aaa' to the mezzanine "senior credit default swap" and Aaa' to the super senior class. "Our approach is very different from a CLO or CBO," Quipildor said. "We are using a different approach to analyze this portfolio [one that is] in line with consumer loans but accounts for the specificities of credit default swaps, because that is what this deal is about."

Prior to 1999, the Italian market was quite small, as there was no legal framework in place to sustain securizations. However, after the development of Law 130 in 1999 - a law geared solely toward rolling securitizations - the market has blossomed quite nicely. "The Italian market is the second largest in Europe, just after the U.K., and all this development happened only in the last three years from something that was almost non-existent before," Quipildor said. "This fast pace has also allowed for the development of many innovative transactions, and this deal is the next step."

Finconsumo has completed two previous consumer loan transactions that were cash securitizations, not synthetic transactions. This deal marks the third transaction for the company and it is purely synthetic. "It's like a learning process in which you go beyond securitization for funding only, envisioning a strategy that also maximizes capital adequacy requirements," Quipildor said.

According to Quipildor, Finconsumo will raise short-term funds through their interbank platform, medium- to long-term funds through the bond program, and also cash securitizations (traditional deals), and then, in order to face capital adequacy, the bank will look toward synthetic securitizations, as is the case in this transaction.

Market participants are expecting there to be more deals of the like to follow suit in the coming months. While there are no such deals reported to be in the current pipeline, Finconsumo's latest transaction has sparked quite a bit of interest. "I think there will be other deals like this to come to market because in Italy, some financial companies that used to specialize in leases or consumer loans for example, are applying for bank status for different reasons, one of which is to get better interbank rates and K spreads," Quipildor said. "But at the same time, banks have to face capital adequacy requirements, so synthetic securitization would be a good solution."

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