While early repayments on Italian loans have been a relative nonissue in the past, a new law in the works under the Italian Bersani Decree could provide more incentive for borrowers to pay off loans early. The new regulation, if put into effect, would eliminate early repayment charges on loans made after Feb. 2. The decree has 60 days from this date to become law.
According to a report written by Royal Bank of Scotland analysts, the treatment of currently outstanding loans is still under discussion. Terms for these loans may be renegotiated and prepayment fees could shift to a new schedule set by the Italian Banking Association. What those fees will be is still anyone's guess, but the Italian banking association must keep charges at reasonable levels, RBS analysts explained.
Still, early reaction to the possible changes has market players anticipating a creep upwards in existing Italian RMBS CPRs, which are presently averaging in the low single digits. "Prepayments have proved relatively low in Italy compared to other jurisdictions, likely in part due to early redemption fees," said Chris Greener, director and ABS senior credit research analyst at Societe Generale. "We expect their removal will result in higher prepayment speeds for future transactions, securitizing loans originated from now onwards."
If prepayment fees are removed and subsequently lead to increased prepayments, it would impact many issues marked above par. "As prepayments will likely increase, it will reduce a bond's average life," Greener said. "However, Italian prepayment fees tend to be around 1% to 2%, which while meaningful, their removal is unlikely to cause a stampede to refinance. Any impact is likely to be more significant for senior notes, as junior notes are typically redeemed as part of a cleanup call."
Rating agency perspective
Alex Cataldo, vice president and senior credit officer at Moody's Investors Service, said that early prepayment options were not something taken into consideration when existing RMBS deals were rated, and he did not expect that a change in the law would have any effect on the ratings. However, for banks that hold on to the equity pieces of these structures, a rise in prepayments could mean less cash over the term of the deal.
"Under Italian procedure, changes could be made before the decree passes into law, creating even more uncertainty as to the final outcome," RBS analysts said. "Whether Italians will want to borrow at higher rates to compensate for the imbedded prepayment option remains to be seen; however, we expect that older, subordinated bonds with large price premiums may come under pressure as a result."
According to a Moody's report on the Italian RMBS market, volumes increased by 56.7% to 15.3 billion ($19.9 billion) in 2006 compared with figures in 2005, which registered at 9.8 billion and exceeded the record level of 10.9 billion achieved in 2003. The rating agency also said that securitized assets in some of the Italian RMBS transactions are becoming more complex, reflecting an increasingly competitive and growing market, consumers' preference for more product optionalities (i.e. flexibility in payment plans) and higher consumer indebtedness. - NC
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