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* Italian NPL framework to test rating agencies
* Reliance on servicers, incomplete data still a challenge
* Market players expect caution, small senior tranches
By Mariana Ionova and Robert Smith
LONDON, March 9 (IFR) - Italy's bad loan securitisation
scheme will pull rating agencies into the sector for the first
time since the financial crisis, reviving worries over how risk
is assessed in the opaque asset class.
The government's new framework aims to help Italian banks
sell off some 201bn in non-performing loans (NPL) into
securitisation vehicles by insuring the senior part of the
A key part of the proposal, which will be written into law
by mid-April, is that only notes with an investment grade-rating
will be eligible for a guarantee.
This places rating agencies at the centre of the scheme,
despite the fact they have been absent from the Italian NPL
space since 2007.
It has also sparked questions about how agencies will
approach the rating process, as they step back into a sector
where risk is notoriously difficult to assess.
"The government has placed a lot of responsibility on the
rating agencies," said Ilaria Vignozzi, investment manager at
LCM Partners and a former S&P structured finance analyst.
"If the rating agencies get it wrong, they could potentially
be subject to legal claims by the state."
SECOND TIME AROUND
Italian NPL securitisation saw the start of a short-lived
heyday in 2000, after the state introduced a framework that
offered banks tax relief for recognizing losses on their soured
This sparked a wave of NPL deals, with bad loan disposals
making up about half of all Italian securitisations that year,
according to the IMF. Between 2001 to 2005, nearly 26bn of bad
loans were securitised, making up about 20% of all Italian ABS.
But the booming asset class remained a difficult and
unpredictable one for agencies to rate.
Market players said a key issue was that agencies had to
lean heavily on special servicers for both objective loan data
and subjective recovery forecasts.
Yet the Italian judicial system is complex, with foreclosure
that can take up to 10 years, and estimating loan recovery is
"Through the current judicial process, it might take four,
five, seven years to recover an NPL," said one NPL investor.
"That impacts the value. Because right now, you buy an NPL,
you don't know when you're going to recover."
While the Italian government has tried to address sprawling
foreclosure times in recent years, a full reform of the NPL
recovery process has yet to come.
Rating agencies tried to counter the data flaws by leaning
on hard data and applying stress tests to assess the risk.
"(In the past) there were transactions that didn't have all
the data we would've ideally wanted," said Michelangelo
Margaria, senior vice president at Moody's.
"And to the extent that it was clear, we discounted it in
Slim investor appetite following the financial crisis shut
the public NPL ABS market in 2007, putting these concerns to one
side. But Italy's bid to revive the NPL market has thrust them
back to the forefront once again.
While most agencies have revamped their criteria over the
last decade, the fundamental approach is likely to stay the
same, with heavy reliance on servicers largely unavoidable.
"NPLs have a much more prominent role for the servicer than
do performing transactions," Margaria said.
"That is something that will remain and, honestly, I don't
see how you can do it differently."
While the guarantee scheme has spurred a flurry of
commentary by rating agencies, it is not yet clear which ones
will step back into the sector.
Margaria said Moody's has a framework in place and could
rate Italian NPLs if asked to do so.
S&P declined to comment, but noted it has revised its
methodology for Italian NPLs.
Fitch Ratings also declined to comment. The agency ceased
commenting on Italian entities beyond published research in
2012, after an Italian court indicted its local division over
accusations of market manipulation related to Italian sovereign
DBRS published fresh criteria for rating European NPLs in
November and several market sources said it is the rating agency
most strongly pursuing the Italian NPL market.
DBRS did not respond to repeated requests for comment.
Ultimately, market observers expect those agencies that
decide to forge ahead to take a cautious stance towards the
This may mean only a thin slice of new deals bag the rating
required for the state guarantee, throwing the economics of the
scheme into question.
"My opinion is that the agencies will have a very
conservative approach when rating these transactions," Vignozzi
"Some agencies may prefer to stay away. Because there are a
lot of risks involved. It's high-risk rating."
(Reporting by Mariana Ionova, editing by Robert Smith and