Reuters logo
Fitch: Recoveries Are Key to Italy SME NPL Concentration Risk
April 3, 2017 / 2:15 PM / 6 months ago

Fitch: Recoveries Are Key to Italy SME NPL Concentration Risk

(The following statement was released by the rating agency) LONDON, April 03 (Fitch) Volatile recovery rates make obligor concentration harder to identify in securitisations of Italian non-performing loans than in deals backed by performing loans, Fitch Ratings says. Expected recoveries are a better indicator of concentration than some other measures, such as gross book value (GBV), which could understate the potential cash flow volatility in an NPL deal. Italian banks held about EUR200 billion of NPLs at end-2016, around 70% of which were SME exposures, according to the Bank of Italy. Securitisation is one way that the Italian authorities are encouraging banks to reduce their large stock of impaired loans, although the market remains small. The repayment of any debt backed by an NPL portfolio relies on recovery amounts. These will vary due to numerous factors, such as collateral quality, the time since default, the status of any legal enforcement process and servicing strategies. A first-ranking, secured claim could contribute a greater share of forecast recoveries than a larger unsecured claim, and failure or delay in collection could heavily jeopardise the portfolio's actual performance. CLOs backed by performing Italian SME loans typically measure concentration risk by the maximum current loan balance of any borrower as a percentage of the total portfolio (in practice, very few borrowers account for more than 0.5% due to selection criteria). Replicating this approach in an NPL deal (using GBV) would give a less accurate picture of idiosyncratic risk to portfolio performance than using reliance for recovery proceeds. The latter approach is, however, more complex and subjective. It depends on numerous assumptions, as well as the assessment of servicer business plans that may not be finalised when portfolios are assembled. The intrinsic volatility of recovery cash flows and typically high geographic and obligor concentration mean that we do not expect to assign Italian NPL deals ratings above 'BBBsf'. Excessive concentration of expected recoveries could result in a lower rating cap, or in Fitch declining to rate a deal. We may also decline to rate deals where all or most exposures are unsecured. In diverse Italian NPL portfolios, we would increase our market value decline (MVD) assumptions for properties securing loans to borrowers that account for at least 1% or 5% of expected recoveries (by 25% or 50%). Over the life of a deal, obligor concentration may increase, but this can be mitigated. We would expect servicers to prioritise the work-out of claims contributing most to expected recoveries. Structural mitigants (such as postponing interest payments on junior or mezzanine notes if minimum recovery collection targets are missed) may also be available. Fitch analysts will discuss our recently published methodology for analysing Italian NPL deals on a teleconference on 6 April. Details are available at www.fitchratings.com. Contact: Adele Sindoni Director, Structured Finance +39 02 879 087 245 Fitch Italia S.P.A. Via Morigi, 6 Ingresso Via Privata Maria Teresa, 8 20123 Milan MI Italy Pasquale Giordano Director, Structured Finance +1 212 908 0797 Ilaria Farina Senior Director, Structured Finance +39 02 879 087 242 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria Non-Performing Loan Securitisations Rating Criteria (pub. 16 Mar 2017) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT <a href="https://www.fitchratings.com">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT <a href="https://www.fitchratings.com/site/regulatory">HTTPS://WWW. FITCHRATINGS.COM /SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below