Italian NPL market activity stirred awake last week with talks of a $215 million U.S. equivalent transaction dubbed Mutina S.r.l in the February pipeline.

It's testament to both the stability and cheap pricing displayed among many of the existing structures. The key to understanding these deals is recognizing who the servicer is and noting the collateral valuations. "The Italian NPL sector had its fair share of negative headlines during 2002," said panelists at Morgan Stanley's Research Roadshow. "However, it is our view that the overall sector performance has been satisfactory."

There have been three downgrades attributed to poor collateral performance, but the rating agencies have also upgraded 12 of the transactions. In the ICR 5 transaction the downgrade resulted from lower than expected recoveries. The servicer released a revised business plan that outlines slower and lower collections. Nonetheless, an additional $16 million U.S. equivalent in new equity was injected into the transaction to help maintain the rating of the transaction. The senior classes were affirmed but both Fitch Ratings and Moody's Investors Service downgraded the class B, C and D notes.

In the case of Ares Finance 2, business plan collections were 36% lower than expected recoveries, though profitability was still greater than expected at 100.4%. Moody's took negative action on the transaction, downgrading the triple-B and double-B notes, and Standard & Poor's has put those tranches on watch negative.

And in the case of Trevi Finance there has been a $165 million U.S. equivalent draw on the servicer advance facility (SAF). "Some investors have asked us weather this is significant as amortization remains on schedule because of the SAF despite collection being significantly behind business plan expectations," explained Morgan Stanley. "We would argue that this is a cause for concern as the SAF does not fully collateralize the debt." Moody's has taken action on the class A notes and downgraded them to Aa3' from A1' and the class B notes have also been downgraded to Baa2' from A2.' Fitch, on the other hand, affirmed the ratings April last year.

As far as statistics go, it's difficult to overlook the fact that overall performance within the sector has been satisfactory and still these transactions can trade wider than CLOs offering significant pickup for investors willing to take a look at the market. Along with the Mutina transaction, there are rumours that Pirelli Real Estate will launch an NPL deal this spring. And finally, a deal for BP Lodi is rumoured in the works, sources said.

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