NPL investors set to shrug off Italian politics

Buyers of Italian non-performing loans are likely to shrug off issues associated with the country’s controversial new government, according to market participants at Global ABS. But their bankers may be less fortunate, with financings marked wider and losses likely to be booked.

Request a PDF

The government, formed last week as a coalition between the Five Star Movement and the Northern League, has markets worried — though Italian government bonds rallied when the government formed, as the coalition toned down its most strident anti-euro rhetoric and removed its demand for a mechanism to leave the euro from the final coalition agreement.

For the NPL disposal market, which has kicked into high gear in Italy, however, the coalition could still prove a problem. The market relies in part on the government’s GACS guarantee for senior securitization tranches, and a robust market for servicing loans.

The GACS scheme need to be renewed in September, which requires approval from the European Commission, while the coalition agreement between the parties also pledges to protect debtors from being forcibly removed from their homes — a provision which could make it harder for NPL buyers to enforce security and seize collateral.

Buyers in the market, however, are undeterred, with live transactions, including Banco BPM’s sale of mezzanine and equity, and Monte dei Paschi’s sale of its GACS tranche, moving ahead.

“If you’re already looking at the Italian market, you should be taking your collection time assumptions and doubling them anyway,” said one senior structured finance banker. “It can already take seven years to enforce a loan in the courts, even without any legal changes — the players in this market expect to be involved for the long term.”

A loan restructuring adviser agreed, pointing to considerable optimism around the very fact that Italy had agreed a government which could potentially push through constructive reforms.

He also pointed out that most of the Italian portfolios that have traded so far have been SME loans or commercial real estate, with a relatively small proportion of consumer collateral compared to other jurisdictions — meaning proposals to protect consumers from debt enforcement is unlikely to hurt the market.

A rating agency analyst said that this proposal in the coalition agreement was “very vague”, and any ratings implications would need to wait for a more concrete policy proposals from the new government.

The Northern League, according to the adviser, is likely resistant to any moves to slow down the restructuring of the banking sector, meaning continued support for the GACS and a continued push for banks to dispose of NPL books.

But, regardless, the senior lenders who finance Italian NPL purchases could be hit harder.

The banker said that because NPL lending was typically risk weighted as a capital deduction when booked in the banking book, investment banks usually held the positions in their trading books — implying mark-to-market accounting.

While marking NPL portfolios is more art than science, the uncertainty which has attended the formation of the new government has pushed government bond spreads last week, and there’s still likely some uncertainty premium in the price.

Portfolio financings, according to the banker, are often structured with a 2+1+1+1 maturity structure, meaning a relatively long tenor and therefore a substantial mark-to-market loss for bridges underwritten before the most recent bout of uncertainty.

The Italian Treasury has already applied to the Commission for the renewal of the GACS scheme. Further market volatility, or worries about the Italian banking system, could diminish the scheme’s use, since the cost of the GACS guarantee to issuers is based on a composite of Italian bank and corporate CDS.