In recent years, the Italian banking system has been the constant focus of attention of both international and EU institutions due to the high number of non-performing loans on the balance sheets of Italian banks. Aware of the negative impact of this issue on the credit market and the overall economic landscape, Italian institutions – under the ongoing supervision of the European Union – have adopted several measures to encourage banks to dispose of non-performing loans and free up resources to support the real economy and the production system.
Among these measures, the guarantee on the securitisation of non-performing loans (GaCS), introduced by Decree-Law 18/2016 (converted with amendments into Law 49/2016, the so-called GaCS Decree) should be mentioned. The GaCS is a guarantee issued by the Ministry of Economy and Finance against consideration for the benefit of holders of the most senior class of asset-backed securities issued by securitisation special purpose vehicles (SPVs) in the context of transactions involving the disposal of non-performing loans originated by Italian banks and financial intermediaries. The GaCS should facilitate raising resources in the context of securitisation transactions and make this funding option more attractive for third-party investors.
According to analysis carried out by DBRS and published in March 2019,(1) from its introduction in 2016, the GaCS has been granted for 21 different securitisation transactions for an aggregate gross book value of over €62 billion.
The GaCS's original expiry date was extended several times and supposedly expired definitively on 6 March 2019.
In view of the extensive and increasing appeal of the GaCS to Italian originators, the government recently resolved to further extend the duration of the guarantee scheme through Decree-Law 22/2019 (the Brexit decree).
The extension of the GaCS remains subject to prior confirmation by the European Commission of its ongoing compatibility with EU state aid rules. Accordingly, the 24-month deadline extension for granting the GaCS by the Ministry of Economy and Finance, as provided in the Brexit decree, will be effective from the issue of a positive decision by the European Commission. Moreover, an additional 12-month extension of the final deadline could be implemented by the ministry subject to the European Commission's prior approval.
In addition to the extension, the new decree introduced some key changes to the GaCS framework.
Firstly, the minimum rating required for senior notes to have access to the GaCS has been increased by one notch (BBB or equivalent).
Further, the formula for the calculation of fees due to the Ministry of Economy and Finance as compensation for the issue of the guarantee has been amended, so that the guarantee's overall costs will arguably increase.
The Brexit decree has also provided certain structural features that securitisation transactions must comply with in order for senior notes to be eligible for the GaCS. In particular, the payment of any sums due to the securitisation SPV's agents (notably, the servicers in charge of the collection and recovery of the securitised receivables) must be, in whole or in part, conditional on the achievement of certain performance targets in relation to the collections and recoveries made by the servicer.
If the cumulative net collections made by the servicer fall below certain thresholds, the payment of interest on the mezzanine notes (if any) and a portion of the fees due to the agents must be subordinated in the securitisation waterfall to the reimbursement of the senior notes, unless such underperformance is fully remedied.
Moreover, should the GaCS be enforced and an underperformance of the servicer compared with the relevant business plan (to any extent) be in place, the appointed servicer must be replaced and no penalty or other sums will be due to the latter as a consequence of its replacement.
In light of the foregoing, the extension of the deadline for granting the GaCS (again, subject to the European Commission's prior approval) represents a welcome measure to strengthen the stability of the Italian banking system and support, without interruption, the process of reducing the stock of non-performing loans and developing a secondary market for them. However, while the amendments introduced by the Brexit decree bear limited relevance for the senior lenders of a securitisation, the impact of the reform on equity investors, also in terms of cost-benefit ratio of the granting of the GaCS, is still to be evaluated.
(1) An abstract is available here.
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