New securitization-friendly legislation was recently implemented in Portugal, which allows the state and social security authorities to securitize a variety of receivables, paving the way for Portugal's first government-related deal.

Industry sources are comparing the initial 1.7 billion (US$2 billion) securitization of tax and social security claims to Italy's Istituto Nazionale della Previdenza Soziale (INPS), which has raised approximately 12.4 billion through securitizing delinquent social security contributions owed by companies, self-employed people and agricultural enterprises. The INPS debut was the first securitization that specifically aimed to improve a European government's GDP ratio to comply with EU fiscal discipline as outlined under the Maastricht criteria.

"There have been at least four deals done under the INPS series, and while this deal looks similar, you would have to look at the advance rate; under the Sagres structure, the ratio of liabilities to assets is 15% - an incredible amount of overcollateralization," said one market analyst. According to Standard & Poor's, which rated the class A1 and A2 tranches from the initial 1.663 billion Explorer 2004 Series 1 issue from the Sagres vehicle AAA', it's the first deal to issue its note via a sociedade de titularizacao de creditos (STC).

It basically means that several issues can be launched via the established vehicle. Unlike past securitization funds that required issuance of units through an SPE, STCs are authorized to issue notes directly, said analysts. "The structure, however, won't necessarily function like a master trust where you could expect a series 2 from the same issuer tomorrow; if one of the Portuguese banks thought they could do as well then they would be authorized to employ the same vehicle," said one source. "It's not set up for a specific originator."

The portfolio of assets will be approximately 11 billion (US$13.3 billion), but the notes issued via Citigroup will equal 1.6 billion (US$1.94 billion). The sale is expected to help reduce the country's budget deficit to below 3% of its GDP, falling in line with Maastricht regulations. According to industry reports, Portugal's deficit reached 4.1% of GDP in 2001.

"It's the main reasoning behind the deal," said one market source. "It works fine for the government because they are able to refinance the deal; they could use it to pay down some of the government debt as a one-off measure - how it falls is line with the Eurostat guidelines, though, is not completely clear."

Eurostat implemented a series of guidelines defining the use of securitizations for government debt that made it more difficult for governments to report the debt being securitized off-balance sheet. Under the new regulations, sovereigns are required to report transactions on their balance sheet if (1) the deal is guaranteed by the government; (2) if it is a securitization of future revenue not generated from pre-existing assets; or (3) if the sale price to the SPV at the time of the initial sale is more than 15% below market value or estimated market value.

But according to industry sources, Eurostat is understood to have approved the transaction as off-balance sheet because the deal does not grant any type of guarantee and the assets are sold at a price complying with the guidelines. However, market sources are skeptical that the government is planning to implement any significant securitization program going forward.

"We're not expecting to see any follow-ups in the short term," said one market source. "There is a chance that there might be other government-related transactions, but it's unlikely to be another Italy - it's all very preliminary, and I think people are happy to see that Portugal has finally gotten this type of deal off the ground."

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