Almost a year ago to the day, I posted a blog questioning whether CMBS was the answer to Italian bank deleveraging woes. One year on, I am pleased to say that the Italian government (clearly channelling me!) has just reached an agreement with the European Commission to provide for a guarantee mechanism for the securitisation of Italian non-performing loans (NPLs). In effect, the European legislature has given the green light to the deployment of securitisation as a tool to clean up Italian bank balance sheets. In other words, the answer to my question was YES!
This news is a hugely significant, positive sign for European securitisation markets. Hot off the heels of the proposed Securitisation Regulation, by agreeing to this securitisation proposal, the European legislature has once again acknowledged the vital role that securitisation can play for the European economy. Turning more specifically to CMBS issuance, the magnitude of this development will largely depend on the extent to which Italian banks deploy securitisation as a means of off-loading NPL's secured by commercial real estate (CRE). However given the suggested volume of Italian CRE NPLs, the issuance backed by such loans has the potential to be sizeable.
Since the European CMBS market re-opened in June 2011, Italy has been one of the jurisdictional bedrocks of CMBS 2.0 being one of a few countries where there has been a steady flow of deals. The primary driver for this has, to date, largely been attributable to CMBS being used as a means of overcoming those Italian domestic regulations which require institutions purchasing syndicated loans to have a banking licence. With this in mind, the news that the European legislature has given the thumbs up to using securitisation as a means of cleaning up the balance sheet of Italian banks will have the metaphoric effect of throwing fuel on the Italian CMBS fire and thus in the coming year it is likely that we will witness a surge in the levels of primary issuance.
Indeed, such an uptick in Italian issuance should promote increased evolutionary change in the CMBS product, spurred on by a need for structures to accommodate a greater variety and number of non-performing CRE loans. A further consequence of this legislative measure is likely to be the deepening and strengthening of the investor base required to absorb and competitively price CMBS deals. Similarly investors that are already in this space should finally have the justification to put in place the internal resources and infrastructure required to invest in this asset class in real volume. Finally, we may also start to see a contagion effect in the European CMBS market, caused by those investors in these deals also demanding product backed by CRE located in jurisdictions other than Italy.
Considering all of the above, it is therefore quite possible that Italian and European legislators could have in fact hatched a plan that may not only prove integral to the rehabilitation of the Italian banking system, but also be positively revolutionary for the re-emergence of European CMBS issuance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.