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Italian banks prepare almost EUR 10bn of NPL securitisations using GACS

Banks continue with plans to use government's guarantee scheme despite financial turmoil.

Italian banks with plans to use the government’s guarantee scheme for NPL portfolio securtization will continue to do so, despite the political crisis currently causing extreme volatility in the financial markets, according to sources polled by Debtwire.

Two sources familiar with the situation and four people briefed on the matter said they expect at least five securitisations of up to EUR 9.7bn (gross book value) of NPLs, using the garanzia sulla cartolarizzazione delle sofferenze (GACS) guarantee scheme, to close by end of June.

Banco BPM is due to securitise a EUR 5bn portfolio; Creval a EUR 1.6bn pool; Banco di Sardegna, part of BPER Banca Group, a EUR 1.1bn portfolio; with Iccrea Group and Crédit Agricole Italia (formerly Cariparma) working on portfolios of up to EUR 1bn, each. Debtwire is currently monitoring a total of 10 deals involving GACS, for a total of up to EUR 17.7bn.

The GACS scheme was enacted in February 2016 and is set to expire in September 2018, after having been extended by 12 months from its original 18-month term. The possibility of another six-month extension, which will impact some of the ongoing deals, will depend on the stance of the next Italian government.

The political uncertainty that has been unfolding in Rome over the last two weeks will most likely delay some transactions, but those in advanced stages will still come to market, said one investor.

“At the senior level, there is a one-to-one correlation to govvies [government bonds] and that might prove tricky right now,” said the investor. “For mezz, however, I don’t expect any impact at all as it is mostly related to the servicer. Banks will still need to get it off their balance sheets.”

The main issues under GACS will be the price of the guarantee, the price of the senior notes and appetite for mezzanine and junior notes, the sources said.

According to one advisor, however, most of the banks “retain the seniors so the impact is small – let’s hope – on the pricing. We are not fully relaxed but, at the moment, despite a bit of anxiety, investors keep being focused on the deals.”

In the most advanced category, Monte dei Paschi di Siena has already completed a securitisation of EUR 24.1bn (gross book value) of NPLs and is expecting to receive a guarantee on the EUR 2.918bn senior notes in June. Under the GACS scheme, the Ministry of Economy and Finance grants the guarantee by decree to qualifying securitisations once they have been rated.

While Italian banks have so far mostly retained senior notes, Monte dei Paschi announced that it would consider partially placing the seniors, which are rated A3 by Moody’s, BBB+ by Scope Ratings and BBB by DBRS. The source close and the source familiar said the bank may decide to slow down or reduce the scale of the sale of the seniors.

The source close and source familiar said they had originally expected the price of MPS’s senior notes to be around 3ME+ 150bps — in line with the coupon — but they now expect it to be impacted by widening in government bond yields.

“If GACS is treated as quasi-sovereign, then it is potentially subject to sovereign-induced volatility the markets are now experiencing in light of the increased political risk in the country,” Bank of America Merrill Lynch researchers said this week in a note.

“GACS of course are going to be affected for two reasons: first the cost of the guarantee, second the required yield on guaranteed tranches … the latter being linked to the Italian government yield, which has gone brutally wider,” said one trader.

Italian 10-year government bond yields were at 2.95% as of Wednesday afternoon (30 May), having spiked to well over 3% on Tuesday.

The GACS fee is based on the average credit default swaps (CDS) spread related to all Italian corporate issuers with a certain credit rating from Standard and Poor’s, Fitch or Moody’s – BBB/Baa2, BBB-/Baa3, or BB+/Ba1 if the underlying rating of the senior tranche is BBB-/Baa3; BBB+/Baa1, BBB/Baa2 or BBB-/Baa3 if the rating of the senior tranche is BBB/Baa2; and BBB/Baa2, BBB+/Baa1 or A- if the rating of the senior tranche is BBB+/Baa1.

Based on current CDS spreads, the GACS fee would amount to 101.2bps for the first three years of the guarantee, 126.4 for the next two years and 150.3bps for the remainder, according to Debtwire calculations. But these could become much more expensive should fears about the sovereign spread more generally to corporate credit — several financial institutions are included in the buckets. CDS spreads were 93bps for the three-year, 127bps for the five-year and 145bps for the seven-year in January 2016 when the GACS was announced, according to BAML research.

The Bank of Italy expects about EUR 65bn of NPL sales in 2018, said central bank governor Ignazio Visco on 29 May. “The reduction in NPLs must forge ahead, benefiting from the steady growth of the secondary market as the reforms to the foreclosure process begin to bear fruit.”

NPLs, net of loan loss provisions, have diminished by about a third since the end of 2015 to EUR 135bn, with a coverage ratio of 53% — “a much higher level than the average for the leading European banks,” said Visco. At the end of 2017, the ratio of significant Italian banks’ gross NPLs to total lending was 11.1%, compared with an average of 4.1% in the Eurozone; net of loan loss provisions, the Italian and Eurozone ratios were 5.9% and 2.4% respectively, according to data published by the ECB.

By Evis Progonati and Alessia Pirolo

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