SECURITIZATION IN ITALY: THE NEW LAW
July 26, 1999
By Damian Thompson, Duff & Phelps Credit Rating Co
Duff & Phelps Credit Rating Co. (DCR) expects the combination of the European Monetary Union, recent changes in the law, and banking industry consolidation to provide a major boost to securitization volumes in Italy a market which has been growing slowly to date.
Since May 29, 1999 when the new securitization law came into effect, it has become possible to efficiently structure a securitization through an Italian special purpose vehicle and thereby issue securities in Italy. Changes in the treatment of SPVs, in the rules for the transfer of assets, and in the taxation treatment of the securities issued have been credited, making the process of structuring, rating and selling Italian securitization transactions significantly more straightforward.
DCR is already seeing an increased interest in Italy. Transactions financing non-performing assets will generate much of the initial rise in volume, with a number of bank-originated transactions under development. The government is also expected to be a major issuer through its well-publicised proposal in which non-performing social security receivables owned by INPS, the Italian social security agency, will be securitized. However, there are well-established precedents for transactions in other sectors including residential mortgages, leasing, and intellectual property. DCR expects these sectors to see increased issuance volumes in the coming months also.
The following summarises the major points of interest in the new law as DCR sees them, and a view as to how the transaction process might be impacted.
The law does not exclude any asset types, including both existing and future receivables, requiring only that they be "individuabili in blocco". This, we understand to mean, simply implies a requirement for homogeneity amongst the assets. There appears to be some dispute as to exactly what needs to be done to allow future receivables to be purchased, although not that it is possible.
Securitization SPVs have been exempted from the limit on companies issuing debt greater than the size of their capital base. Previously, this made securitization transactions, which are typically very highly leveraged, effectively impossible through Italian companies. There remains some uncertainty as to exactly what legal form the SPV may take, which may affect the amount of share capital that will need to be issued, although the maximum is ITL200 million ($105,000).
Assets can be purchased directly by the SPV, removing the need for transactions to be structured through the purchase of receivables via a bank, or well-capitalised financial intermediary. This dramatically simplifies the process, and from a rating perspective removes the need to factor the credit strength of the intermediary into the analysis.
The law provides for an SPV to issue more than one transaction, with the important provision that by law, the assets for each are fully ring-fenced between each other, and from any other creditors of the SPV. This is an important supporting factor to the important question of the "bankruptcy remoteness" of the structure, i.e., the insulation of the structure from the bankruptcy risk of external counterparties, or internal elements.
Perfection of Asset Transfers
The law has simplified the methods by which notification needs to be given to generate a valid transfer of the assets. All that is now required is notice of the sale to be published in the Official Gazette. Importantly, once this requirement is met, the assignment is enforceable against competing, but un-enforced or unregistered claims on the assets, as well as the underlying debtors themselves. This makes for a robust "true-sale" position, which is a key requirement in the legal analysis of securitization transactions.
Aside from the simplification and "true-sale" benefits of the notification method, it also significantly reduces the potential costs of mortgage-backed transactions, which previously required individual notification at the land registry at a cost in excess of two percent.
The law also overrides (for qualifying securitizations only) provisions in the Bankruptcy Law, allowing the "claw-back" under certain circumstances of transactions entered into one to two years prior to insolvency of a company. This period has been shortened to between three and six months. This significantly reduces the risks DCR previously associated with this possibility.
Requirements for Distribution of Bonds
The law includes sensible requirements for the issuance and minimum content of offering circulars, with less restrictive requirements for transactions sold purely to professional investors a definition found elsewhere in Italian law and one which holds no surprises as to who is included.
A public offering of the bonds will require that they are rated by (undefined) third-parties. Further regulation appears to be expected in this regard from CONSOB, the Italian stock exchange supervisor.