Italian energy tariff ABS poses banks a tough task
The Italian government has thrown securitisation bankers in Europe another meaty challenge by inviting them to compete for a devilishly complex deal parcelling tariffs on electricity bills.
As usual with Italian state securitisations, the deadline is frighteningly close. Gestore della Rete Trasmissione Nazionale (GRTN), the publicly owned company that runs electricity transmission in Italy, hopes to raise as much as Eu1.53bn by the end of this year and to establish a structure from which it can issue regularly in the coming years.
The payments involved are known as the 'A3', a component of the electricity bills of Italian consumers designed to compensate the GRTN for subsidies it extends to alternative energy producers.
Banks have until the end of the month to submit bids. Banca Nazionale del Lavoro, Calyon and Credit Suisse First Boston have formed one consortium; Banca IMI, Lehman Brothers and Nomura another.
A third consortium is rumoured to include Mediobanca, Morgan Stanley and UBS, although this could not be confirmed as EuroWeek went to press.
The origins of the prospective deal date to November 1987, when Italy voted against nuclear energy in a national referendum.
The following year the government declared a moratorium on atomic energy, and began encouraging alternative sources of energy with incentive schemes for producers.
Under one regulation, known as CIP 6, the state agreed to buy alternative energy over time from eligible producers at a fixed price, based on a formula incorporating three components — the cost of fuel, the amount of production and an additional incentive component.
The state energy transmission entity, now GRTN, then sells the energy to distributors at market rates.
GRTN recoups the deficit between the subsidised price at which it buys the energy and the market price at which it sells it to the distributors by charging the end customers. They pay the distributors an extra component on their bills, known as the 'A3'.
As the incentive package was only made available to eligible producers over a defined period of time, the cashflow generated by the 'A3' payments will decline to zero over the next 20 years. That means the burden on Italian consumers is high but declining.
The nature of the mandate is manifold. GRTN hopes to monetise the future 'A3' charges through a securitisation, and use the proceeds to make a discounted settlement with energy producers for part of the CIP 6 payments it is due to make to them in future.
That should enable the 'A3' payments to be stabilised and spread out more evenly over time, reducing the strain on the Italian energy consumers.
GRTN hopes to raise Eu1.53bn initially, backed only by part of the 'A3' payments for 2006, and would aim to tap the programme over time.
GRTN also hopes to achieve a cost saving to consumers by obtaining a steeper discount on CIP 6 payments from the energy suppliers than the net present cost of the securitisation debt.
That will reduce the amount energy consumers will ultimately have to pay on the 'A3' component of their bills.
A central factor will be the cost of the securitisation, which will in turn be determined by the ABS market's perception of the credit quality of the transaction.
The credit story appears highly attractive — a vast pool of obligors, obliged by statute to make a payment, and used to doing so as part of their payment for a vital resource. The deal will also have the implicit support of a state-owned company, though for the rating agencies that will be a weaker factor.
This is complicated, however, by the structure of the 'A3' payment mechanism. The 'A3' component is paid by Italian energy consumers, but passes through the electricity distributors on its way to GRTN.
Doubts over recourse
At this stage it is not clear whether the securitisation would have ultimate recourse to consumers, or just the relatively concentrated pool of distributors.
To achieve a suitably high advance rate at the triple-A level, the arrangers would have to devise a structure that presented a watertight argument that the securitisation had ultimate recourse to the consumers for the 'A3' payment, in case a distributor went bust and consumers reacted by not paying their bills.
One banker suggested a way round this might be to include a monoline wrap, if a monoline insurer would take a favourable view of the securitisation's credit and its "soft recourse" to the consumer.
One other banker suggested that this uncertainty could be resolved through a legal amendment to the regulatory framework.
A further uncertainty arises from the difficulty of securitising future receivables under Italian law, which may make it harder to achieve bankruptcy-remote status in the extremely remote scenario of a GRTN bankruptcy.
One banker added that this could be achieved through a legal change, or a special legal provision for the deal.