On 30 December 2018, in the context of the 2019 Budget Law, Parliament approved Law 145/2018 and introduced some notable changes to the Italian securitisation framework. The amendments are effective as of 1 January 2019 and aim to further develop Italy's securitisation market by offering new tools and refining existing ones.
Law 145/2018 allows securitisation of proceeds that arise from the ownership of real estate or registered movable assets as well as other ancillary rights.
While the concept of 'proceeds' is unclear and not well-rooted in the Italian legal system, arguably this change attempts to expand the scope of securitisation beyond its traditional parameters. In principle, securitisation special purpose entities (SSPEs) are now entitled to purchase not only existing receivables (ie, arising from existing contracts), but also future cash flows and the mere expectation of receivables which may arise in future – most notably, those deriving from the management, lease and disposal of real estate properties.
This amendment is potentially groundbreaking, in particular for the commercial mortgage-backed securities market, as it appears to open up the possibility of so-called 'whole business securitisation' and hybridisation between the financial flexibility of securitisation schemes and real estate operations carried out through traditional real estate funds.
Nevertheless, the legislature's efforts are far from exhaustive. The new regime falls short of the required coordination with bankruptcy rules. For example, it remains unclear how to:
- ringfence future proceeds from an originator's third-party creditors in terms of formalities; and
- effectively segregate cash flows for the benefit of securitisation stakeholders.
As a result, market players are unlikely to embrace these new opportunities until the recent changes have been completed.
Italian SSPEs have been able to disburse direct loans since 2014. However, it was unclear whether one entity could act at the same time as a purchaser of monetary receivables and as a lender in the context of the same transaction. Law 145/2018 now clarifies that both roles can be conducted simultaneously in line with market expectations. This feature is crucial in the context of the so-called 'unlikely-to-pay' deals, where an SSPE purchases a portfolio of unlikely-to-pay exposures and provides senior financing to the distressed debtors with a view to enhancing the chances of a successful turnaround.
Law 145/2018 further clarifies the legal framework applicable to synthetic securitisations (ie, transactions in which the originator retains legal ownership of the underlying portfolio while transferring the credit risk to the SSPE, as protection buyer and protection seller, respectively) and in turn the SSPE grants a limited recourse loan to the originator.
In particular, the new rules confirm:
- that the risk transfer is governed by the contractual arrangements stipulated between the parties; and
- the originator's ability to segregate the reference portfolio for the benefit of an SPPE (eg, by creating a pledge over assets to secure the originator's obligations under the limited recourse loan) with a view to reducing the counterparty risk for the SPPE.
Parliament has delegated the Ministry of Finance to issue implementing regulations specifying, among other things:
- the assets and claims eligible for segregation;
- the formalities required to this end; and
- the effects deriving from this special regime.
In order to foster the corporate bonds market, Law 145/2018 provides incentives and safe harbours in cases where bonds are fully subscribed by SSPEs.
In particular, once asset-backed notes are reserved to eligible qualified investors and listed on a regulated market, the general limitations which would otherwise apply to the issue of bonds by Italian società per azioni (joint-stock companies) and società a responsabilità limitata (limited liability companies) are derogated. As a result, the underlying company can issue bonds irrespective of any restrictions in terms of debt-to-equity ratio and the status or liability of the investors.
For further information on this topic please contact Andrea Giannelli or Vittorio Pozzi at Legance Avvocati Associati by telephone (+39 02 89 63 071) or email ([email protected] or [email protected]). The Legance Avvocati Associati website can be accessed at www.legance.com.
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