Between 1999 and 2003 the growth in the Italian market reached unprecedented levels, and it emerged as one of the strongest markets in Europe. But the growth in the market has been largely dominated by state-related asset securitizations, lease receivables, NPLs and consumer and mortgage loans. How much is too much? As investors begin to complain of indigestion, Italian players vouch that Italian securitizations have begun to move into phase two of the game.

One of the areas that the Italian market is exploring is how best to import the master trust structure. No master trust transaction has been completed to date, and the only thing the market has seen that resembles a master trust is a bills receivables deal executed by Telecom Italia in 2001 under the Law 130/1999, through a vehicle called TI Securitization. However, that's all set to change and market sources are expecting the first master trust issuance by the end of 2003, from an Italian bank. Two serious inquiries have been received by law firms Allen & Overy and Clifford Chance.

Presumably the master trust structure under the Italian securitization law would function similarly to that of the U.K. master trust structure, despite the fact that there are no existing trust laws under the Italian law. "It would function like an EMTN program," said Francesco Dissera, director of asset-backed finance at UBS Warburg. "You would select a mortgage program of say of up to E3 billion ($3.5 billion) and your initial issue (first issue) would be $500 million issued under a law 130 SPV. The next year you would issue $600 million using the same selection criteria of the mortgages and, most importantly, the same legal framework of the first issue: transfer, warranty and servicing agreement will not change over the life of the EMTN, despite the repeated issuance."

The main concern for investors is that, under a master trust, all notes are ranked parri passu, meaning that all investors would suffer from the rating performance of any of the notes issued from the master trust.

Some originators are eyeing up the master trust because it cuts costs dramatically - especially legal and rating agencies fees. An originator would just have to issue one "big" prospectus for the whole life of the program, and the prospectus would be updated in certain sections, at each separate issue. Meanwhile, the transfer agreement, servicing agreement and all of the warranties are valid for the life of the transactions issued under the trust.

The legal structures vary depending on the size of the initial portfolio sold into the Law 130/1999 SPV, explained Dissera. "If the Italian bank decides to transfer an initial portfolio in excess of the first issue, another possible structure could foresee two SPVs filed under the securitization law 130," he explained. "One would act as the assignee of the entire portfolio, which would be bought back, in part, by the originator and the second SPV would allow the flexibility needed to access the market on a regular basis."

The master trust has not yet been approved by the Bank of Italy but market participants and lawyers said it's likely not to encounter any regulatory problems, adding that the reason the Italian market has been slow in developing its first master trust is simply because all new structures take some time to develop.

However, some of the major Italian players still need convincing that the master trust will function properly. Giacomo Corsini, the head of international finance solutions at MPS Finance, said that ABS had become a significant component within their lending business, and that the finance arm was committed to Banca Monte dei Paschi di Siena's mission to access a more global market through ABS.

Monte dei Paschi has established a "family" of deals that access the market with more or less the same features, like the Siena mortgage program or the Ulisse 1, 2 and 3 series of nonperforming loan securitizations. This provides the market familiarity with an established product; however, the key difference between the MPS efforts and master trusts is that for each issue a separate SPV must be established.

And what else...

In the last 12 months, market sources said it's become increasingly difficult to place Italian paper at the right price for originators because investors are full, particularly in the area of Italian leases. According to Standard & Poor's, in 2002 Italian lease receivables ABS volume reached E6.8 billion ($8 billion). But the current increase in this paper has not been matched with growing investor appetite.

Aside from the overabundance, lease receivables are otherwise performing well - with advances in credit scoring and collections systems, the originating institutions can handle the leverage that they have and in more difficult economic times these transactions are expected to exhibit the ability to sustain a higher occurrence of defaults. According to Dresdner Kleinwort Wasserstein's report on the sector published earlier this year, analysts expected the lease market to grow to E7 billion ($8.2 billion) this year, which could expose spreads to further pressures. Analysts said that on a relative value basis, this could create opportunities if the transactions sustain performance levels.

Even without the hefty volumes pumped by lease receivables, Italian issuance is still expected to reach record levels, as other assets start picking up. Excluding CDO and RMBS, issuance in Italy is counted as the largest and most diversified market to date. "One of the first transactions we rated was a portfolio backed by 100% of unsecured, non-performing loans - it signalled that this was going to emerge as a special market," said Alex Cataldo, assistant vice president and analyst at Moody's Italia, at the Barcelona Global ABS conference Italian ABS session. He added, however, that "The market started off as nonperforming and is now a performing market where a great deal of vanilla issues are completed." Going forward it's likely that leasing deals and nonperforming loan securitizations will take a back seat.

The Italian treasury is slated for yet another year of hefty issuance but speakers at the Barcelona conference said that it is likely that, along with these jumbo issues, the advent of securitizations on the regional level will also take off. "Take a look at government debts owed to specific regions - regions can securitize these assets from a AA counterparty," said one speaker.

And still on the agenda are corporate law securitizations, that up to now have proved tricky to execute under the current securitization law. The use of this tool not only provides corporates with better financing, it also promotes the company to a larger investor base. "The main problem is the servicing of the transaction," explained Simonetta Andriolo a partner at Zini & Associates Studio Legale. Under law 130, the servicer is required to be a bank or financial intermediary. For corporates, this adds up as another cost consideration.

Law 130 also requires publication of transactions in the Official Gazzette, which can be another problem for revolving structures, so small Italian companies prefer the conduit route. But until the law reads more corporate user-friendly, it's likely that smaller companies will continue to access the conduit market under the factoring law 52.

However, Ivane Thiebault, director at Bank One, said that using law 52 - even though it does offer these smaller players a certainty of execution - also means that these companies lose access to the international markets. But Thiebault added that the historical data for these deals is less than what is required in public term transactions and there is no systematic need for rating agency involvement, which translates into saving time and money. So far the biggest asset class are trade receivables, but market participants say that the market won't be limited to only this. Panelists also mentioned ongoing talks, on the possibility of the creation of an Italian structured covered bond


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