Italy could see its estimated 5 billion ($6.34 billion) of healthcare securitization deals executed by several of its southern regional governments tallied up as on balance sheet debt. That's if Eurostat moves ahead with its recent initiative outlined in a letter issued earlier this month. The 5 billion euros would add about 0.5 of GDP to the state debt, which is the world's third biggest in absolute terms.

"In terms of their balance sheet treatment, these transactions are under review by Eurostat," said Phillip Walsh, a senior director at Fitch Ratings, during a teleconference the rating agency held last week. "Eurostat issued a letter last week suggesting that these deals will not benefit from off-balance sheet treatment in the future. It's not clear if that is specific to any one transaction or all transactions in general but there is clearly some work to be done there."

The timing of Eurostat's letter comes amid a boom in healthcare deals. Italian healthcare receivable ABS has become a major asset class. According to a Standard & Poor's report issued earlier this year, some eight deals totaling about 3 billion have been brought to market since 2003. With several deals in the making and investors having more money to put to work, the deal pipeline is swelling. This past quarter saw two deals from the region of Lazio, which leads in terms of volume and issuance. The Italian regions of Abruzzo and Campania are two others that have also undertaken similar healthcare transactions.

Italy's Piedmont region is also looking to launch its healthcare deal for 500 million but the bank said that issuance was conditional on the decision that Eurostat takes on the treatment of these deals.

Under the terms of a typical healthcare securitization structure, the debtors are the regional healthcare units (HCU) termed aziende sanitarie locali in Italian. These units have built up a considerable amount of commercial debt. Although the Italian regions are not legally responsible for an HCU's debt, they are ultimately accountable for healthcare services on their territories, and have tried to address the liquidity problem by providing their respective HCUs with support.

Some regions have given their HCUs cash advances, tapping their own reserves or contracting liquidity facilities in their own names. Others have agreed to become the economic - although not legal - debtors of these commercial obligations through delegation of debt mechanisms. Some regions have also acted as sponsors, devising favorable legal frameworks that allow, and sometimes encourage, the HCUs to renegotiate and refinance their commercial debt with groups of suppliers.

While rating agencies typically classify these securitizations as financial debt for the regions, Eurostat has historically not taken this view. In its letter, Eurostat stated that restructuring the receivables should be considered a financing arrangement. It considers, at this stage, that the debt restructuring involving payables leads to the creation of a new instrument, which should be classified as a loan.

S&P said that the potential public accounting implications of Eurostat's opinion was not of concern because the agency has always included these transactions within the tax-supported debt of their respective regions. But Eurostat's view increases the legal risk that some of these transactions could be declared noncompliant with article 119 of the Italian constitution, which prevents Italian regions from calling on the market to fund operating expenditures. As a result, S&P said last week that it placed its ratings on the Italian Region of Lazio (A-'), Region of Campania (A-'), and Region of Abruzzo (A') on CreditWatch with negative implications from stable amid mounting concern on how these regions will be able to fund their existing and expected structural healthcare deficits.

Heightened pressure

Eurostat's opinion concerning Lazio region is not yet completely clear - as Fitch's Walsh mentioned in the teleconference, the letter did not state which deals it would affect. However, if it affects the billions of euros already raised through securitization, it would heighten pressure on the center-left government struggles to reduce the country's public debt, which was 106.4% of gross domestic product last year. "We understand that the increase in tax rates, as well as the significant cost-cutting measures or the use of other regional resources that these regions are currently discussing with the central government, might not be sufficient to balance the health care accounts in the medium term," S&P said.

Removing the region from CreditWatch will depend on how the Italian government proposes to resolve the structural imbalances and how it plans "to address the legal risk on outstanding securitization transactions through a clarification of the national legislative framework," S&P analysts said.

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

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