Italy missed a trick by keeping UTPs out of GACS
There were widespread hopes earlier this year that not only would Italy’s Garanzia sulla Cartolarizzazione delle Sofferenze (GACS) scheme be extended, but it would also include a provision for loans classified as unlikely-to-pay (UTP).
The last GACS programme was set to last until March 6, but NPL securitization activity has continued regardless, with the market taking the view that GACS would be renewed.
It was, but with harsher provisions than its predecessors.
The scheme, in its own terms, has been a success — Italian banks have cut gross NPL ratios from 18.2% in 2015 to 12.5% in the first half of 2018, and the mainly retained GACS tranches have offered an alternative funding source for some of the hardest-pressed institutions.
When the time came for the Italian government to renew the scheme, expectations were that it would include a provision for UTPs. But many market participants were sorely disappointed, worrying that Italy might have stunted the growth of an emerging sub asset class.
According to Scope Ratings, Italian banks could dispose of €13bn-€18bn in unlikely to pay loans in 2019. This may sound like a significant amount, but compared with Italy’s €222bn NPL pool still outstanding as of June 2018, it will be a drop in the ocean.
Italian banks’ UTP stock represented 69% of bad loans in terms of gross book value in 2018, yet UTP loan sales represented just 1% of bad bank loan disposals in Italy, according to Scope.
An Italian servicer that looks at UTPs told GlobalCapital that roughly half of portfolios categorised as UTP turn out to be NPLs by the time the servicer gets its hands on them — boosting the argument for banks to get control of the problem.
But in spite of several servicers who have experience servicing UTP portfolios, the Italian government took the view that the sub-asset class was too complicated and lacked sufficient data to be given a space in the new programme.
€101bn of gross bad loans were disposed of in 2018 and 45% of those were securitised through 14 GACS-eligible transactions.
Securitization has shown itself to be a technology capable of shifting large amounts of debt under the right circumstances, and Italy remains in dire need of more support for the product — and a broadening of its scope.
Even without GACS, UTPs could eventually make their way to market. Some investors dislike them — it’s harder to get your hands on collateral by enforcing security — but hybrid servicing models and better investor information could help to close the gap.
Without moving to UTPs, Italy’s weak banks may find themselves running on an NPL treadmill, forever trying to get ahead of their growing NPL pile.
The market may find a way without government support, as it often has before, but with the end of the cycle close at hand, now is not the time for Italy to be ignoring opportunities for debt consolidation already on its doorstep.