Below a summary of the relevant provisions:
Pursuant to the Decree, the Ministry of Economy and Finance (MEF) is authorized to issue a State guarantee (the Guarantee) to secure the senior tranche of ABS backed by nonperforming loans ("sofferenze") owned by Italian banks or Italian financial intermediaries (the NPLs). The NPLs must be assigned by the Italian bank or financial intermediary to a securitisation vehicle (the SPV) set-up in accordance with the Italian securitisation law (i.e. Law 130/1999), whose purchase is funded through the issuance of at least two classes of notes: senior notes and fully subordinated junior notes. Mezzanine notes may also be issued.
The Guarantee can only be issued in favour of the holders of the senior notes and must be remunerated at market conditions in accordance with the specific criteria set out under the Decree. Among the most important requirements, the senior notes must have received an investment grade rating and their remuneration must be set at a floating rate.
The Guarantee is an irrevocable and unconditional first demand guarantee but its enforcement is subject to the prior unsuccessful payment request to the SPV, in accordance with the detailed procedure described by the Decree. To prompt a quick recovery of the NPLs, the Guarantee becomes progressively more expensive if the senior notes are not repaid within the first three years.
2. Purpose, duration and implementation of the measures
Purpose of the Decree is to foster disposals by Italian banks and financial intermediaries of their NPL portfolios, totalling more than Euro 200 billion. In the Government’s intentions, the Guarantee (thanks to the cheaper funding cost) will possibly reduce the mismatch between ask price and bid price for NPL portfolios.
The MEF is authorised to issue the Guarantee for a period of 18 months from the date of entry into force of the Decree. This term can be extended by the MEF for a further period of 18 months, subject to the prior approval of the European Commission. The MEF is also demanded to designate a qualified and independent entity to monitor that the Guarantee is issued in compliance with the Decree and the decision of the European Commission approving the guarantee-grant regime introduced by the Decree.
Within 60 days from the conversion into law of the Decree, the MEF may issue implementing provisions.
3. Underlying assets and securitisation features
The underlying assets must consist of receivables (including financial lease receivables) classified as “non-performing” and owned by banks or financial intermediaries having their headquarters (“sede legale”) in Italy.
The other main securitisation features are the following:
- the receivables must be assigned to the SPV for a price not higher than their book net asset value (i.e. gross value net of write-offs ("rettifiche")) as of the assignment date;
- at least two different classes of notes must be issued by the SPV (e.g. senior and junior). A “mezzanine” tranche of notes can also be issued;
- up until the principal amount of the other classes of notes is repaid, the junior notes are not entitled to receive any payment from the SPV, either as principal, interest or other form of remuneration;
- the SPV can enter into:
- hedging agreements to cover the interest mismatch between assets and liabilities of the SPV (the Interest Rate Hedging); and
- a credit line agreement to cover the mismatch between the SPV’s recoveries and the interest payments due by the SPV on the notes (the Credit Line). The amount of the Credit Line should be sufficient to achieve the minimum financial flexibility consistent with the senior notes rating.
In order to benefit of the Guarantee, the senior notes must have received a rating from one of the agencies recognized by the European Central Bank (External Credit Assessment Institutions) as of 1 January 2016. The rating may not be lower than the lowest “investment grade” level. The same minimum rating applies to any additional rating from another ECAI that may be required under the applicable laws.
As an alternative, the rating can be produced as a private credit rating. In such case, the investment grade rating is addressed exclusively to the MEF and the rating agency’s fees are paid by the seller or the SPV. The rating agency must be one of the rating agencies recognized by the European Central Bank (ECAI) as of 1 January 2016 and must be approved by the MEF.
The SPV cannot request the withdrawal of the rating by the relevant ECAI(s) prior to the date on which the senior notes are repaid in full.
5. Independent servicing
To prevent conflicts of interest, the entity in charge with the servicing of the NPL portfolio cannot be the selling bank or financial intermediary itself nor another entity of the seller's group. The note holders may decide to replace the servicer only if such decision does not adversely affect the senior notes rating.
6. Senior notes features
The senior notes have the following features:
- they are remunerated with a floating rate;
- the repayment of the principal amount prior to the maturity date depends on the performance of the portfolio (cash flows and collections) and the costs associated therewith; and
- interest is payable in arrears on a quarterly, semi-annual or annual basis. The Decree further specifies that the payment of interest is made on the basis (“in funzione”) of the residual nominal value of the note at the beginning of the relevant interest period.
7. Mezzanine notes features
The mezzanine notes (if any) must have the same features of the senior notes (as described under paragraph 6 above) but the transaction documents may provide that their remuneration be, subject to certain conditions, subordinated to the prior repayment of the principal amount of the senior notes or delayed if certain triggers are hit or until certain minimum levels of performance are achieved.
8. Junior notes features
The Junior notes must be fully subordinated to all other classes of notes. This means that the payment of interest (and any other remuneration) as well as the repayment of principal of the junior notes is subject to the prior repayment in full of the senior notes (and the mezzanine notes, if issued).
9. Payments waterfall
The priority of payments to be complied with by the SPV when applying its available funds (the so-called “waterfall”) is usually negotiated among the parties on a transaction-by-transaction basis and reflected in the relevant terms and conditions. Conversely, for securitisations intended to benefit of the Guarantee, the waterfall is imposed by the Decree itself (without differentiating between pre-enforcement and post-enforcement and with the clarification that the waterfall is "net of the sums withheld by the entity in charge with the collection of the assigned receivables for its servicing activities") according to the following order:
- tax payments;
- payments due to “service providers” (“prestatori di servizi”). This expression seems to catch both categories of (i) “third party” providers and (ii) service providers which are directly involved in the securitisation transaction (presumably, other than the servicer, given the above referred wording on the waterfall being net of the amounts due to it) and have entered into the relevant intercreditor agreement (i.e. the so called “secured creditors”, which usually rank after category (i) in the waterfall). The Interest Rate Hedging counterparties rank juniorer (see below);
- interest and fees due in respect of the Credit Line;
- remuneration of the Guarantee (see below, paragraph 10 c));
- Interest Rate Hedging counterparties (without differentiating between the type of payment);
- interest on the senior notes;
- Repayment of the Credit Line (if drawn) to make the relevant amount available again for further drawings;
- interest on the mezzanine notes (if issued);
- repayment of the principal amount outstanding of the senior notes until full repayment thereof;
- repayment of the principal amount outstanding of the mezzanine notes until full repayment thereof; and
- repayment of principal and interest (and/or other remuneration) due under the junior notes.
The payment to "service providers" and Interest Rate Hedging Counterparties can be subordinated to specific performance targets or, provided that certain conditions are met, to the repayment of the principal amount due under the senior notes.
Guarantee as a first demand guarantee
The Guarantee is issued by means of a Decree of the MEF on the basis of a request submitted by the selling bank or financial intermediary together with the related supporting documentation.The Guarantee is an unconditional and irrevocable first demand (but not "autonomous") guarantee in favor of the holders of the senior notes, in respect of any amount of principal and interest due to them under the senior notes. The enforcement of the Guarantee is subject to the prior payment request to the SPV in accordance with the procedure described under sub-paragraph b) below.
a) Condition precedent to the effectiveness of the Guarantee
In order for the Guarantee to become effective, the selling bank or financial intermediary must have “assigned” more than 50%+1 of the junior notes and, in any case, an amount of junior notes and mezzanine notes (if any) that allows the selling bank or financial intermediary to fully deconsolidate the NPL portfolio from its balance sheet (as well as, on a consolidated basis, the banking group balance sheet) on the basis of the applicable accounting principles. The reference made by the Decree to the seller’s “assignment” of the junior notes and the mezzanine notes (if issued) seems to imply that such notes will have to be initially subscribed for by the selling bank or financial intermediary for a subsequent sale (rather than be subscribed for by the investors directly). Neither the State, nor any public administration or company controlled by them can acquire junior notes or mezzanine notes. The intended result is that the securitisation transaction would be a "market" transaction.
b) Enforcement of the Guarantee
In case of non-payment (including partial payment) of the senior notes, any holder of the senior notes may enforce the Guarantee within 9 months from their maturity date. The following procedure applies:
- the failure to pay must last for at least 60 days. In such case, the holder of the senior notes acting through the Representative of the Noteholders – should send a payment request to the SPV;
- if the SPV does not pay within 30 days from the date of receipt of the payment request (the Payment Request Date), the holder of the senior notes may (acting through the Representative of the Noteholders) - within 6 months from the Payment Request Date - ask the MEF to make the payment under the Guarantee;
- the MEF pays the amount as originally due by the SPV (i.e. without default interest and expenses) within 30 days from the date of receipt of the relevant request by the holder of the senior notes together with the relevant supporting documents; and
- following payment, the MEF is subrogated in the rights of the holder of the senior notes (and it is subject to the same contractual limitations) and, provided that interest due to the holders of the senior notes has been paid, can recover the amount due (together with interest accrued at the statutory rate from the payment date, plus expenses) with the same procedure used for the recovery of taxes.
c) Cost of the Guarantee
The Guarantee must be remunerated at market conditions and with the same periodicity of the interest due on the senior notes. The remuneration of the Guarantee is calculated by reference to three CDS baskets (whose exact composition is described in an annex to the Decree) , each consisting of a list of Italian companies whose rating from S&P, Fitch Ratings or Moody’s, as of the date of entry into force of the Decree, is equal to:
- BBB/Baa2, BBB-/Baa3 or BB+/Ba1 for the first basket, to be used if the rating of the senior notes is BBB-/Baa3/BBB-/BBB L;
- BBB+/Baa1, BBB/Baa2 or BBB-/Baa3 for the second basket, to be used if the rating of the senior notes is BBB/Baa2/BBB/BBB;
- BBB/Baa2, BBB+/Baa1 or A-/A3 for the third basket to be used if the rating of the senior notes is BBB+/Baa1/BBB+/BBB H.
If more than one rating is issued in respect of the senior notes, the CDS basket is identified on the basis of the lower rating.
The annual cost of the Guarantee is calculated by reference to the simple average price of all CDS included in each respective basket (all such CDS to be individually priced at their mid-price) and taking into account the residual value of the senior notes at the beginning of the interest period. The Decree provides for a step-up of the remuneration depending on the duration of the senior notes: the aforementioned simple average price is calculated by reference to three-year CDS for the first three years, five-year CDS for the following two years and seven-year CDS for the following years. In addition, if the senior notes are not repaid within the first three years, the remuneration of the Guarantee is further increased through the application of a premium (which increases if the senior notes are not repaid within the first five years).
The MEF may change the above calculation criteria in accordance with the decisions of the European Commission. Any such change would not affect existing transactions.