The Italian government is slated to explore new ground beyond its recently priced securitization of loans to Italian state and public entities dubbed C.P.G. Societa Di Cartlarizzazione. But the interest shouldn't stop there, say market sources, who predict a surge of interested municipalities turning to ABS as a viable means of funding.
The e800 million ($881 million equivalent) Societa Di Cartlarizzazione securitization priced a $112 million triple-A piece at 18 basis points over the six-month Euribor; a second, $524 million triple-A piece at 37.5 over; an $85.5 million B piece at 100 over; and a $46 million C piece at 150 over. It marks the 11th publicly rated transaction originated by an Italian government entity.
The Italian government initiative is expected to explode into new territory. Market sources said there is talk of new Italian legislation that would allow the securitization of properties used by the ministry of defence. The deal is slated to be one of the largest CMBS deals to enter the market, perhaps even bigger than the record-setting $7.4 billion SCIP government-owned real estate securitization. It promises to keep Italian issuance at least on par with if not greater than volumes seen last year.
The extensive government initiative is likely to continue milling out new structures. "I don't think there is really a threat of too much Italian paper," said one market source. "And if there is one it will be a natural limit dictated by the assets that are left to securitize and the market appetite."
According to a Merrill Lynch report, it's likely that more countries will opt for securitization as a funding alternative going forward. On the sovereign level, Greece and Spain have already employed securitization as a financing tool. "The assets used in government-related securitization to date are quite diverse, emphasising the versatility of the securitization mechanism as a funding instrument [and] the amount of financing received can be quite substantial," reported one analyst.
A Eurostat initiative to clearly define the accounting treatment of these deals resulted in the implementation of a series of regulations last year. These have largely been accepted as a fair and successful attempt to standardize government reporting.
Initially, regulations that brought deals supported by a government guarantee and future flow structures not attached to a pre-existing asset back on balance sheet stirred negative reactions from sovereigns that in the past used this market to mark-off debt levels. The reaction for the most part has been to adapt to changes and no deals have been broken as a result.
"We shouldn't forget that in many instances the use of securitization has gradually grown, in particular for municipals," said one market source. "Setting up these structures can take time, and many regions seem to have initially encountered problems. For example, four years ago certain municipalities in Southern Europe looked at this but did not have the proper systems in place to get it off the ground."
Several deals have been executed on the municipal level, and Italy has emerged as a leader. According to Merrill Lynch, European public sector bodies have issued $56.3 billion equivalent of asset backed securities and structured bonds since 1995. Of these, about $1.1 billion equivalent have been issued by municipalities.
"Municipals have a executed a number of deals, but if you look at what the sovereigns have securitized, the possibilities on a regional level could be endless, " said one source. "Germany is talking more about a private finance initiative similar to the one in the U.K., and Spain has been talking heavily about its utilities. The biggest hurdle is that many regions still need more education," the source continued.
To be sure, the biggest challenge new entrants face is setting up the proper systems to accurately monitor assets. Regions will need to provide extensive data about assets' past and future performance. In some cases, securitizations might require transaction-specific regulations, which ultimately require extensive understanding of how the process works.
