Last Tuesday after months of negotiations, Italy finally reached
an agreement with the EU regarding a solution to the Italian
banks' non-performing loans problem with a scheme that has been
confirmed does not constitute State aid.
Broadly, rather than create a "bad bank", it has been
decided that the Italian government will guarantee senior tranches
of securitisation ABS backed by NPLs.
Details of the scheme are described in a press release published
by the Italian Ministry of Finance on 27 January 2016 and are
summarised below. It is expected that a Decreto Legge will be
passed in the coming weeks converting the proposal into law.
State guarantee of senior ABS backed by NPLs
The scheme envisages a State guarantee for asset-backed
securities issued as part of a securitisation transaction whose
underlying assets are non-performing loans.
The guarantee will only cover the most senior tranche of notes,
and the mezzanine and junior tranches must be fully subordinated to
such guaranteed senior tranche.
Guarantee fee will increase over time
A fee for the guarantee will be payable to the Treasury being an
annual percentage of the amount guaranteed. The European Commission
is satisfied that this does not constitute State aid as the
guarantee will be charged at market prices calculated on the basis
of single name credit default swaps on Italian issuers with a risk
level equal to that of the guaranteed securities.
The guarantee fee will increase over time, both to cover for the
higher risk associated with longer duration of the bonds and to
create an incentive for early recovery of the underlying debt.
The price for the first three years is expected to be calculated
as an average of the mid-price of three-year benchmark CDS for
issuers with a rating equal to that of the guaranteed tranches. In
the fourth and fifth year the price will increase after the first
step up (5-year CDS) and from the sixth year onwards the guarantee
will be fully priced (7-year CDS). In addition, after three years
there will be a supplemental incentivizing premium (which increases
over time) to offset the lower rate paid at the outset.
Investment grade credit rating
The guaranteed ABS must have an investment grade credit rating
from at least one independent rating agency accepted by the
Eurosystem. The rating analysis will therefore include projections
on the cash flows, analysis on the credit quality of the underlying
loans, tranching of the different classes of ABS and the ability of
the servicer appointed by the issuer to recover the underlying
The ABS issuer will be required to appoint an external
independent servicer to recover the underlying debts (rather than
the originator bank) in order to prevent conflicts of interest.
Although the final details of the scheme will not be known until
the legalisation is finalised, indications are that this could help
to alleviate the serious problem of non-performing loans on the
balance sheets of Italian banks, which are estimated to make up
around 17% of total loans, as compared with the EU average of
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
A trustee in bankruptcy's rights to obtain a possession order and order for sale against a bankrupt's property will not be suspended indefinitely even where there are exceptional circumstances.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).