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Italy's NPL problem still a bridge too far for Atlante spin-off
July 29, 2016 / 10:21 AM / a year ago

Italy's NPL problem still a bridge too far for Atlante spin-off

* New fund to target NPLs as MPS deadline looms

* Investors cautious after Atlante’s IPO backstops

* Waterfall, risk-return mismatch put off investors

By Mariana Ionova

LONDON, July 29 (IFR) - A second rescue fund is poised to lend fresh support to Italy’s efforts to rid its banks of their soured loans, but some warn the state-engineered vehicle will likely fall short as a lasting market solution for the country’s bad debt woes.

Italy is rounding up investors for a new fund dubbed Atlante 2, which has the sole purpose of helping banks securitise their non-performing loans (NPLs) and move them off their balance sheets.

A group of pension funds said this week they have agreed to pitch in 500m to a new fund, which market participants said is targeting 3bn-5bn, as Italy races to fix Banca Monte dei Paschi di Siena, whose hefty NPL burden is in sharp focus ahead of Friday evening’s stress test results.

But market participants warn Italy could struggle to convince existing and new investors to back yet another scheme, undermining the country’s broader efforts to tackle the problem.

“There doesn’t seem to be a flood of offers for putting capital in this fund,” said Rahul Kalia, investment manager at Aberdeen Asset Management.

“And it’s hard to find an investment rationale for why they would put more money into this.”

MARKET RELUCTANCE

The new fund comes just months after Italy cobbled together the first Atlante fund in April, a 4.25bn rescue vehicle funded by pension funds, insurers, banks and state lender Cassa Depositi e Prestiti.

The fund was designed to supporting Italy’s weakest banks, with 30% earmarked for buying junior paper in NPL securitisations. The idea was to help the economics of a new government scheme that insures senior debt but offers no help placing riskier tranches.

Yet hopes that the fund would jumpstart public NPL securitisation faded when Atlante spent 2.5bn taking over two regional lenders after their IPOs flopped, blowing the bulk of its firepower before it could even put a dent into the country’s 360bn bad-debt burden.

Market participants now expect the remaining 1.75bn to be rolled into the new Atlante 2 fund and put towards helping MPS shed 10bn in bad loans, after European regulators asked Italy’s third-largest lender to speed up its NPL disposals.

Atlante 2 is also trying to raise more funds for other potential deals, but some warn that the banks and investors that helped capitalise the first fund are hesitant to contribute fresh cash.

Several large Italian banks, including UniCredit, have already said they will not commit any more capital.

“As we suspected, it seems Atlante was created with only a few banks like MPS in mind,” said one NPL banker.

“And it’s not sufficient to solve the whole problem. So I think everyone is sceptical.”

RISK MISMATCH

Still, the fund’s involvement in an MPS rescue could provide a catalyst for the sector by testing the new state guarantee for bad loan ABS and setting a benchmark for a market that has not seen a public NPL deal since 2007.

“I think this transaction could be crucial for reopening the Italian NPL securitisation market,” said Biagio Giacalone, head of credit solutions at Banca IMI.

“We will see whether a rating-based approach can be effective compared to what we have seen in the market.”

The paltry returns Atlante targets for NPL deals are proving a barrier to attracting fresh capital for the securitisation scheme, market participants noted, however.

Under the state guarantee plan, known as GACS in Italian, the seniors must be repaid in full before any cash flows down to repay the principal on junior tranches.

Yet Atlante’s 6% return requirement, which is expected to also apply to its spin-off fund, is far too modest to compensate for the waterfall structure.

“It’s actually adding another layer of uncertainty on top of what you normally have,” said Farid Shavaksha, investment director at LCM Partners.

“Forcing banks that are not profitable and are under-capitalised to invest capital in a high-risk scheme for only 6% return - it doesn’t seem to me like a good idea or the best use of these banks’ capital.”

The 6% level is also a far cry from the 12%-18% returns expected by most private equity investors, raising questions over how Italy will tackle its broader NPL problem once artificial support runs dry from schemes like Atlante.

“I don’t know a lot of people who would buy junior risk in Italian NPLs at 6%,” said one investor.

“People investing in Italian NPLs are looking for high yields. So it’s a question of who is going to bite the bullet.” (Reporting by Mariana Ionova, editing by Robert Smith and Ian Edmondson)

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