On December 30, 2018 the Italian Parliament approved Law No. 145/2018 (Law 145) amending, among others, Law No. 130/1999 (the Italian Securitization Law).
Law 145 introduced, inter alia, the following new provisions into the Italian Securitization Law:
- Significant simplifications in relation to Italian Collateralized Debt Obligations (CDO) transactions;
- Additional provisions regarding synthetic securitizations carried out through loan facilities granted to an originator by the relevant securitization company (SPV);
- The possibility of securitizing income deriving from real estate and registered movable assets; and
- Certain amendments to the types of entities which can be financed by an SPV.
These new provisions will have several impacts, as described below.
First of all, the new provisions open up interesting possibilities in the CDO market. The relevant SPV may now subscribe for debt securities issued by Italian limited liability companies (società a responsabilità limitata or S.r.l.) and has more flexibility to invest in bonds issued by joint stock companies (società per azioni or S.p.A.).
In addition, in order to facilitate synthetic securitizations carried out through one or more loan facilities granted by the relevant SPV to an originator (without any transfer of receivables), new provisions in relation to asset segregation and other guarantees have been introduced.
Moreover, income deriving from real estate and registered movable assets can now be securitized. Finally, certain amendments to the entities which can be financed through a loan granted by an SPV have been made in order to facilitate these types of transactions.
These amendments could create significant opportunities for clients, as they will ultimately enhance the securitization market in Italy and potentially allow new financial structures.
New provisions facilitating CDO transactions
Although the Italian Securitization Law has been recently amended to introduce the option to carry out CDOs (i.e. securitization transactions carried out “by way of subscription or purchase of bonds and similar securities or financial drafts (cambiali finanziare)” by an SPV), the market has not witnessed many transactions so far. One of the main reasons for this has been the existence of certain limits on Italian companies restricting the issue of bonds (for S.p.A.) or debt securities (for S.r.l.) set out under the Italian civil code.
However, Italian market participants have shared the view that the CDO market could have been further developed by the enactment of specific legislation in relation to the securitization field. In this respect, the Italian parliament has finally accepted the views coming from market participants and removed certain limitations relating to CDOs.
In this context, to the extent that the CDOs to be issued by the relevant SPV are addressed to qualified investors (as defined under article 100 of Legislative Decree No. 58 of February 24, 1998), the following provisions of the Italian Securitization Law introduced by Law 145 shall apply:
- Possibility for any SPV to subscribe for debt securities issued by a S.r.l.: the debt securities (titoli di debito) to be subscribed for by the relevant SPV may also be issued by the S.r.l. by derogation from Article 2483, para. 2, of the Italian Civil Code (pursuant to which debt securities issued by a S.r.l. can only be subscribed by professional investors subject to prudential supervision and this definition does not include SPVs);
- A specific exception to the limits for the issue of bonds has been introduced: pursuant to article 2412 of the Italian civil code, a S.p.A. may issue bonds only up to an amount equal to twice the aggregate of their share capital, legal reserves and distributable reserves. This limit can be derogated from if the relevant bonds are listed in regulated markets or multilateral trading facilities. Such listing requirement shall now be deemed to be satisfied in respect of the underlying bonds where only the CDOs issued by the SPV are listed.
The provisions listed above will generally allow Italian companies (including SMEs) to more readily access the alternative financial channel represented by CDO transactions. In particular, the new provisions could lead to the following effects in the market:
- S.r.l. being able to readily access CDOs structures;
- Reduction in timing and costs (i.e. listing costs for all the underlying bonds) in CDOs transactions involving bonds issue by a S.p.A.;
- There could be a notable increase in simple, transparent and standardized (STS) CDO transactions in Italy. In particular, in relation to STS securitization transactions, Regulation (EU) 2017/2402 specifies that “the underlying exposures shall not include transferable securities, […] other than corporate bonds that are not listed on a trading venue.” Under the previous legal framework, only a few companies could have been involved in STS-compliant CDO transactions (i.e. among others, the companies having unlisted corporate bonds and otherwise satisfying the limits provided for under article 2412 of the Italian civil code). The main effect would have been fewer STS-compliant CDOs in the market and/or small-size-transactions. Through the exceptions introduced by Law 145, these barriers to the development of the market have been removed;
- Both S.r.l. and S.p.A. being (more easily) involved in complex structured finance transactions, including so-called basket bonds (i.e. CDOs having underlying baskets of numerous bonds and/ or debt securities with similar characteristics);
- An increase in listed CDO transactions.
Provisions clarifying certain features of synthetic securitization transactions
Along with true-sale securitizations, the Italian legal framework also allows synthetic securitizations (i.e. securitizations whereby the relevant receivables to be securitized are held by the originator), realized through loan facilities to be granted by an SPV. The market has not witnessed many transactions so far, mainly because of the lack of provisions on the relevant segregation regime.
Law 145 has introduced new provisions amending article 7 of the Italian Securitization Law and setting out a system of asset segregation and guarantees securing the relevant synthetic securitization, which could lead to an increase in synthetic securitizations in the Italian market.
In particular, it has been specified that:
- Synthetic securitizations imply the transfer of the risk related to the receivables from the originator (which for the purposes of the transaction is also the borrower) to an SPV (which for the purposes of the transaction is also the lender), despite the ownership of such receivables being retained by the originator;
- The originator may:
- Segregate the receivables, as well as the rights and assets which in any manner whatsoever secure the repayment of such receivables, in order to satisfy the rights of the relevant SPV;
- Grant a pledge over such assets and rights in order to secure the repayment of the loan facilities granted by the relevant SPV; and
- The loan facility agreement relating to the synthetic securitization may provide for the obligation of the originator to transfer all the amounts collected from the securitized receivables to the relevant SPV, as would have been the case for a true sale securitization.
In addition, certain features relating to the provisions above will be better clarified through one or more decrees to be adopted by the Italian Ministry of Economy and Finance within 90 days from the entry into force of the Law 145 (i.e. January 1, 2019).
Securitization of income deriving from real estate and registered movable assets
Law 145 has also introduced into the Italian Securitization Law article 1, para. 1, let. b-bis), according to which the provisions of such law shall apply, where appropriate, to “securitization transactions of income deriving from the ownership of real estate assets, registered movable assets and in rem or personal rights over such assets.”
Since the Italian legislator has not provided any further clarification in respect of this provision, it is hard to define the real scope of the abovementioned article and to afford a proper and univocal interpretation.
Considering the uncertainties surrounding the said provision, it is possible to outline two potential scenarios:
- An SPV may directly purchase and own real estate and registered movable assets, as well as in rem rights (diritti reali) and personal rights (diritti personali) over such assets, in the context of a securitization transaction on the income deriving from such assets.
- Indeed, the Italian market has already seen similar securitization transactions carried out (pursuant to an ad hoc decree) by the Republic of Italy and other public entities (so-called SCIP transactions). The scenario outlined above would be thus similar to the ones already occurred in the public sector.
Persons having in rem rights or personal rights over real estate and/or registered movable assets could carry out a securitization (either a true sale securitization or a synthetic securitization) of the income arising out of such assets, for instance income deriving from rental contracts of real estates.
Indeed, some doubts still remain on these kind of transactions, and lacking further clarifications from the Italian legislator it could be difficult to imagine the implementation in the market of such structures in the future.
Entities which can be financed by an SPV
Law 145 also introduced some amendments in the context of direct lending by an SPV, partially removing the limit for an SPV to grant loans to microenterprises (i.e. an enterprise which employs fewer than ten people and whose annual turnover and/or annual balance sheet total does not exceed EUR2 million, according to Commission Recommendation 2003/361/EC).
In particular, it is now specified that an SPV shall not grant loan facilities to individuals and enterprises whose balance sheet total does not exceed EUR2 million.
Law 145 has introduced several amendments to the Italian Securitization Law which could lead to interesting opportunities for market participants.
Hopefully, some innovative financial structures (including CDOs/basket bonds and synthetic securitizations) will be further implemented, providing clients with efficient instruments to access to alternative financial channels and further developing the Italian securitization market.