The SCIP will-they/won't-they over Italy's next SCIP deal was laid to rest last week as the Italian government confirmed its intentions to launch the third series this year.
The SCIP deals, short for Societa di Catilarizzazione Immobili Publlici, represent the Italian government's initiative to lower its debt burden while promoting homeownership among Italian citizens.
As reported last week, the latest transaction in the series, SCIP 2, fell short of a full repayment on its soft-bullet A1 tranche, only paying 87% of what was due. Behind this shortfall stands the government's commitment to inject up to 800 million (US$968 million) into the transaction to cover shortfalls attributed to the new discount scheme implemented for certain eligible properties included in the securitization pool (see ASR 3/8).
"That 800 million is like an advance payment for the lower value some of these properties will now come in at. We see it as a conservative estimate because the lower value is not likely to apply to any great majority of the properties," said one market analyst. The lower value factor was introduced earlier in the year. In an effort to stimulate an increase in property sales, the Italian government is offering certain tenants from the non-pregio residential units the right to purchase at offer prices based on cheaper market values prevailing in 2001, rather than in December 2002, as originally planned. But only tenants who expressed their willingness to purchase their residences in writing (to the corresponding public sector entities) before Oct. 21, 2001 are eligible for the new discount on property.
It's not clear just what percentage will be affected by the new law and what percentage of the SCIP 2 portfolio will incur a value reduction but some market reports have estimated that anywhere from 20% to 30% could be wiped off of collections. However, it's unlikely to reach that extent since only a limited number of tenants are eligible for the discount and, of those, an even more concentrated percentage are likely to have the correct paperwork in order to qualify for the discount, said market analysts. "The 800 million put up is in the event that 100% of the non-pregio units do qualify; from a ratings perspective it functions just like cash - extra collateral that will be used to pay back debt," said the source. "Whatever you are left with, the performance of the deal looks slightly better than where it started off."
So why the worry?
Though the cash injection has so far safeguarded the deal from a ratings perspective, it does not alleviate the concern of the below-projection property sales, and this has made investors uneasy, said one market source. From the initial proposal of the discount in February 2004 to when it became law in April 2004, the government halted sale completions in an effort to circumvent any inaccurate offer letters that would potentially be affected by the new decree.
According to analysts at Fitch Ratings, the slowdown in performance is thereby completely comprehended under the circumstances. The agency adds that the overall performance of the transaction is expected to improve in subsequent quarters. Fitch said it considered the potential new value of the portfolio and presently still believes the bonds will return timely interest and ultimate principal by final legal maturity - which is 2007 for the class A1 notes and 2008 for the class A3, B and C notes. "The problem in the last quarter is that the entities just stopped the sales process because of the uncertainty created by the law," said one Fitch analyst. "They just stopped sending letters because of uncertainty now created over pricing and waited for the conditions of the law to sort itself out. But now that the new law has been enacted, we have been assured that the process has started up again. But when it will move to full speed, we can't really say."
So while the new discounts on properties should provide for increased collections going forward, the magnitude of the shortfall adds some ratings pressure going forward. "For future deals, the discounted levels will be there at start and the ratings process will be based on that; we'll revise performance expectations accordingly," the Fitch analyst said. "But for SCIP 2, if it continues to record quarters like the last one, we may have to take a ratings action."
According to figures from BNP Paribas, at this point around 3 billion (US$3.6 billion) was expected in collections. The past quarter collections were recorded at 132 million (US$159 million) compared with the 439 million (US$531 million) collected in the previous quarter. Now that the legal changes have been implemented, proof of performance needs to come immediately, analyst said. Over the next four quarters, at least 2.3 billion (US$2.7 billion) needs to be collected. "Even if the servicers get back to their previous pace of 440 million (US$532 million) per quarter, that would still leave them about 500 million short," reported analysts at BNP. "This would have clear implications for the soft bullet payment of the A2 class as well."
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