Banking & Finance 1 What's new in the Italian non performing loans market? Carlo Lichino Counsel +39 02 76231 649 firstname.lastname@example.org Following months of tussling with EU institutions to find an internal solution to the €200 billion of gross non performing loans (NPL), the Italian Government announced earlier this year an innovative reform of the banking sector. The hope is that the reform will improve the Italian financial industry as a whole. The reform introduces a scheme (structured in order to meet EU Commission demands of avoiding State aid) that envisages the use of true sale securitisation to facilitate the disposal of NPLs by banks on the Italian market. The scheme (known as Garanzia Cartolarizzazione Sofferenze or GACS) requires a first demand guarantee from the Italian Ministry of Economy and Finance to support the most senior tranches of notes (which have a rating at least equal to or greater than investment grade). In addition, the scheme requires that: repayment or prepayment of the subordinated tranches is prohibited until the senior tranches have been fully repaid; the guarantee extends to at least 50% of the mezzanine/junior tranches; and an independent third party services the securitised NPLs. The Italian finance community's immediate response is one of slight optimism. Finally, after a long period of stagnation, changes in the NPL market seem likely. But the mood is cautious, as this reform represents only the first of many steps needed to solve the problem. For instance: changes to the Italian bankruptcy laws to speed up the various bankruptcy procedures (which can take 14 years in certain courts, although the average is 7.8 years) are needed; tax incentives are required; and legal guidelines are needed to reduce the time it takes banks to foreclose on mortgages. It is hoped the reform will push the value of NPLs up, so that the price international investors are willing to pay (currently around 20% of the nominal value of the NPLs) is closer to the value banks have written down the NPLs on their balance sheets (on average around 40% of their nominal value). Thus providing the impetus for the NPL market to finally take off. Banking & Finance 2 The Italian Government has provided additional support to the NPL market through the establishment of a rescue fund called “Atlante”, which has been created to recapitalise weaker Italian banks. Funding has come from the Italian financial industry and Atlante's funds are to be invested in GACS schemes by way of subscribing for mezzanine and junior tranches. 2016 has gotten off to a terrific start. The actions of the Italian Government, which were designed to kick start the NLP market, look positive. Whether they will work remains to be seen. Many market participants have given the initiatives a lukewarm reception on the basis that more time is needed to judge whether they will be successful. Concern has also been voiced about the potential negative impact on the credit stability of the major banks who contributed to Atlante. For now, all eyes are on the first GACS transaction to be carried out by Banca Popolare di Bari which involves a Euro 800 million NPL portfolio. The expectation is that provided the Banco Popolare de Bari deal goes well, a number of Italy's secondary banks (essentially those who have not contributed to the fund Atlante) will want to be involved in GACS transactions, kick starting the Italian NPL market.