Having extended the principal repayment for its A1 class, which hit soft maturity last week, the Republic of Italy's SCIP 2 is starting to look like one of global securitization's most tragic comedies, considering how far from course the deal has swayed. According to research from Deutsche Bank Securities last week, residential property disposal payments into the trust for the first three months of the year were 4% of projections. Cumulatively since closing, residential disposal payments are 21% of the plan.

Last week, Reuters reported that the Italian government does not intend to issue a third SCIP series, which would have launched this year, securitizing a some-odd 2 billion portfolio of properties. Other wire services refuted that claim, citing persons in the Italian Treasury who still believe the third series is underway.

SCIP 2 closed in December 2002, structured in five classes totaling about $6.69 billion (U.S. equivalent at the time), or 6.637 billion. While the performance (or lack thereof) had been closely documented throughout 2003, the magnitude of this deviation from expectations may still surprise some. The deal was led by JPMorgan Securities.

To help with this initial principal repayment of the A1 class, the Italian Treasury injected SCIP 2 with an 800 million subordinated liquidity facility just this month, which proved insufficient to fully pay down the 1.5 billion notes that came due, though covered about 90% when combined with cumulative collections. This is possibly the first time that a European soft bullet structured "generic" securitization has extended, Deutsche Bank notes. The firm expects that the A3 class, which is scheduled to pay

out in April 2006, is subject to significant extension risk.

According to published reports, the still triple-A rated A1 notes (rated to final maturity of April 2006) will receive the balance of their principal at the July payment date.

Most observers consider this situation the result of administrative "bottleneck" delays in the collections, processing and sales of the underlying properties, combined with several country-specific developments, such as the restructuring of the auction process for commercial properties. On top of this, the underlying properties are selling for less than was anticipated, which has been exacerbated by the February Law Decree 41/2004, which calls for residential properties to be sold at their October 2001 market values if the tenant had indicated an intention to purchase the property before that time (see ASR 3/8). Residential properties make up the bulk of the SCIP portfolio. This decree and its impact on SCIP 2 is one of the reasons that the Italian Treasury approved the 800 million liquidity line.

Prior to last week's shortfall, classes A1, A2 and A3 had actually tightened in the secondary market since January, following the general trend seen in the ABS market and the expectation of government support. Spreads moved in both directions throughout the week, following the partial redemption.

"The secondary market appears to be pricing in the influence of the Italian Treasury, namely that the seller is thought of as ready to do whatever's necessary in order to preserve the credit and ultimate payment profile of the notes," Deutsche Bank analysts write.

All three major agencies have expressed concerns with the increasing debt burden of the Italian government, standing at 106% of GDP in 2003.

SCIP 2, which is short for Societa di Cartolarizzazione Immobili Publlici, is the second securitization for the Republic of Italy meant to stimulate home and business real estate ownership. The deal is backed by rental streams and property sales from a portfolio purchased by SCIP from several public social entities.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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