Fitch Ratings put Italy's country AA' ratings on watch negative last week. The Italian covered bond ratings will not be affected by the negative rating action, but some Italian sovereign-related ABS may be at risk.
Since 1999, the Italian government has been involved in 12 transactions under government/ABS
and fully-supported/ABS sub-asset classes. It has issued notes totalling 42.47 billion in the process, backed by assets ranging from social security contributions and future flow lottery revenues to personal loans and loans for research purposes - a hefty program that has not been without its critics.
According to the latest figures reported by the country, its fiscal deficit widened to 4.1% of GDP in 2005 from 3.4% in 2003. "Deficit outturns have been flattered by one-off revenue raising measures (including tax amnesties) in the last few years - such measures are estimated to have reduced the deficit by 0.5% of GDP in 2005," Fitch reported. Budgetary targets are expected to be missed in 2006. Fitch currently expects the deficit to be 4.2% of GDP in 2006, implying a further rise in the debt ratio to just under 107%, the highest of any sovereign rated by the agency in the AA' category.
Eurostat, the European Union's statistical office, has been opposing the government's fiscal program's heavy usage of such one off measures as securitization. But despite introducing several disincentives through rules that brought deals that have direct linkage to the government back on balance sheet, Italy has continued with its securitization agenda.
Deals on watch
Fitch has already placed the ratings of Fondo Immobili Pubblici FIP I on ratings watch negative. The 2 billion deal is secured by a commercial loan on 396 properties in a closed-ended real estate investment fund. Bond payments are primarily made from rent collections received by the Agenzia del Demanio (ADD). The ADD manages Italian public real estate and is ultimately responsible for rent payments. According to analysts at Morgan Stanley, The ADD is able to draw on the central Italian Treasury account of the Republic of Italy to meet its obligations under the lease agreement, and therefore any change in the sovereign rating is likely to alter the rating of the notes.
Fitch also placed the AA' rating of Astrea S.r.l.'s 246.25 million Class A notes on rating watch negative. The Republic is the obligor of every loan in the transaction's portfolio and the rating of the notes is credit-linked to the state's sovereign rating. Astrea issued the Class A notes in June 2002, backed by a cash flow securitization of 246.7 million of loans extended to Italy's public works consortia, regions and the treasury. Fitch has placed the CPG 1 Srl CDO on ratings watch negative as well.
Among other names credit-linked to the country ratings are the ISPA Infrastrutture SpA, an ongoing private public partnership that finances the construction of a high-speed railway link between Turin, Milan, Rome and Naples. "There are a couple of other deals that could be affected as well, particularly among CDOs," a Fitch analyst said.
Fitch expects to conclude a review of Italy's ratings and resolve the ratings watch within the next three to five months. The review will focus on the prospects for a credible fiscal consolidation package being implemented, the current state of public finances and the outlook for medium-term economic growth. "Given that around half of government expenditure is accounted for by interest and social security payments, any credible fiscal consolidation package would likely entail significant public finance reform that may require broad-based political support," Fitch said.
SCIP gets some attention too
The SCIP 2 transaction was also in the spotlight last week but for reasons not directly tied to the Italian country rating. The deal has underperformed due to
lower-than-expected sale prices. According to Fitch, these prices stem from a law passed in 2004, that allows tenants to purchase the properties at their 2001 price. The Italian Treasury expects that most of the properties affected by the law have now been sold, which should lead to some price recovery. Fitch's concern is that there could be more tenants who are still able to purchase at the 2001 prices than initially expected.
But last week's rating action on Italy does not affect the SCIP2's current ratings because the transaction is not credit-linked to the Italian Republic. "It relies on the stability of the real estate markets in Italy and on the servicing capabilities of the contributors and the commercial sales manager," Fitch said.
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