United States: Decree Passed Introducing Government Guarantee Scheme For Italian Securitisations Of Non-Performing Loans

On 10 February 2016, decree no. 18/2016 (the "Decree") was passed which, following the agreement reached with the EU late last month, sets out the details of the Italian government guarantee scheme for senior tranches of securitisation ABS backed by NPLs.

It is hoped that the scheme will help to alleviate the serious problem of nonperforming loans on the balance sheets of Italian banks, estimated to make up around 17% of total loans, as compared with the EU average of 6%.

This Finance Law Alert is an update of our newsletter published on 1 February 2016 entitled "Italian Finance Ministry announces Government guarantee scheme for Italian NPL Securitisations".

State guarantee of senior ABS backed by NPLs

The State will provide an irrevocable, unconditional, first demand guarantee for asset-backed securities issued as part of a securitisation transaction whose underlying assets are non-performing loans. The scheme will initially be available for 18 months, extendable by further decree with the prior approval of the European Commission.

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. To qualify for the guarantee scheme, the NPL seller must be an Italian bank; the Decree therefore appears to preclude guarantees for NPL securitisations where the portfolio has already been sold by the originator bank to a third party purchaser.

The purchase price of the NPLs may not be higher than their net book value (gross value net of adjustments).

Making a claim under the guarantee

Noteholders may call under the guarantee following failure by the issuer to pay interest or principal, at any time up to nine months after the final maturity date. Before making a demand under the guarantee, the noteholders must, acting through the representative of the noteholders, make a written demand to the issuer for the unpaid amounts. Following the expiry of 30 days without payment by the issuer, the noteholder will have six months to call under the guarantee.

The guaranteed amount is payable by the State within 30 days of the demand. No interest or other expense may be claimed under the guarantee over and above unpaid amounts owing under the senior notes.

Guarantee fee will increase over time

The State will charge a guarantee fee being an annual percentage of the principal amount outstanding of the guaranteed senior tranche.

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 calculated as an average of the mid-price of three-year benchmark single name CDS over the six months prior to the issuance of the guarantee.

The Decree specifies three "baskets" of Italian corporate and bank issuers including Enel, Eni, Unicredit, Telecom Italia, Intesa Sanpaolo and Assicurazioni Generali. The rating of the issuers in each basket correlates with the rating assigned to the senior tranche. Any such issuer which is downgraded, shall be excluded from the relevant basket.

In the fourth and fifth year the price will increase (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 premium which also steps-up at the five year mark.

The guarantee fee is paid by the issuer in accordance with the payment waterfall described under the heading "Priority of Payments" below.

Investment grade credit rating

Issuance of the guarantee by the Italian State is conditional upon the senior tranche receiving an investment grade public credit rating from at least one independent rating agency accepted by the Eurosystem. Where two credit ratings are required, the second may be from a rating agency registered under Regulation (EC) No. 1060/2009 (the CRA Regulation).

As an alternative to a public rating, the issuer may obtain a private rating addressed to the Ministry of Economy and Finance from an independent rating agency accepted by the Eurosystem.

Off-balance sheet treatment

The guarantee will also be conditional upon the seller bank owning less than half of the junior notes issued under the securitisation, or in any case, that the receivables are recognised as not being on its balance sheet under applicable accounting rules.

Independent servicer

The ABS issuer will be required to appoint an external independent servicer to recover the underlying debts which does not belong to the same group of companies as the originator bank, in order to prevent conflicts of interest.

Swap and Liquidity

The Decree provides that the ABS issuer may enter into a swap agreement to mitigate interest rate risk and/or a liquidity line so that it can meet its senior expenses on each payment date, including interest on the senior notes.

The senior notes and (if issued) mezzanine notes will bear interest at a variable rate payable in arrears quarterly, semi-annually or annually, calculated on the relevant tranche's principal amount outstanding. The Decree provides that payment of interest on the mezzanine notes (if issued) can be made conditional upon performance targets relating to recoveries on the underlying portfolio being met.

Priority of Payments

The Decree sets out the payment waterfall in accordance with which the issuer's available funds deriving from the loans forming the collateral (net of amounts payable to the servicer) will be distributed on each payment date, as follows:

  1. Taxes
  2. Fees and costs of the issuer's service providers
  3. Fees and interest on the liquidity line (if any) 4. Guarantee fees
  4. Amounts under the swap agreement (if any)
  5. Senior note interest
  6. Principal under the liquidity line (if any)
  7. Mezzanine note interest (if issued)
  8. Senior note principal
  9. Mezzanine note principal (if issued)
  10. Interest, principal and additional return on the junior tranche.

Accordingly, early repayment of principal of the notes may occur in accordance with the waterfall, subject to the availability of funds

Next steps

The Decree came into force on 15 February 2016 on publication in the Official Gazette.

It must be converted into law within 60 days and further amendments may be introduced during the conversion process.

The Decree also provides that the Italian Ministry of Economy and Finance may introduce implementing rules within 60 days of conversion of the Decree into law.

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.

Authors
Events from this Firm
26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

10 Oct 2018, Conference, Florida, United States
Julie Totten is Program Chair of this year’s conference, Lynne Hermle is speaking on women in the courtroom, boardroom, and c-suite, and Erin Connell is speaking on pay equity and pay transparency.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions