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Italian securitization wave may have peaked, but GACS remains a helpful tool

Italy's government is planning to renew the guarantee system that has already helped the country's banks to shed €62 billion in toxic debt, but analysts have said it is unlikely that the securitization of soured loans will exceed the record levels of 2018.

The potential three-year extension to GACS, or Garanzia sulla Cartolarizzazione delle Sofferenzeis, is good news for both Italian lenders and for the development of the market for securitized debt, according to analysts.

GACS was introduced in 2016 and offers banks that securitize nonperforming loans a guarantee on the least risky tranche of debt. The scheme came to the end of its life on March 6, but according to media reports, the Italian government has drafted a law that will reinstate GACS for a further two years, with an option to extend for another year on agreement with the EU. The scheme was previously subject to review every six months because of European restrictions on state aid.

GACS popular among banks

Some 14 GACS-guaranteed securitizations of NPLs took place in 2018 as banks moved swiftly to take advantage of the scheme, according to a March 20 note from DBRS. These include Banco BPM SpA's €9.5 billion securitization of northern Italian business and individual loans, dubbed Project Exodus, Banca Monte dei Paschi di Siena SpA's securitization of a bad loan portfolio worth around €24.1 billion and Unione di Banche Italiane SpA's €2.75 billion securitization of mainly unsecured loans.

Smaller regional banks also made the most of the GACS securitization guarantee in 2018 with a raft of smaller deals, according to Scope Ratings data. These include Banca Agricola Popolare di Ragusa SCpA, with a €349 million securitization of loans mainly connected with borrowers in Sicily, and Banco di Sardegna SpA, with a €1.0 billion securitization of a mixture of personal and business loans mainly concentrated in Sardinia, an Italian island. In some cases, smaller banks clubbed together in order to gain the necessary scale to sell debt in the capital markets, such as Banca Popolare di Spoleto SpA and Banco di Desio e della Brianza SpA, which partnered for a €1.0 billion securitization.

There is no doubt that GACS-assisted securitizations have been popular among banks for speeding up the reduction of bad debts, according to Marco Troiano, executive director, financial institutions ratings at Scope Ratings.

Slowing pace

But the pace of securitizations is likely to slow in Italy in the coming years.

"The reason for this is twofold: firstly, the amount of NPLs on banks' balance sheets is greatly reduced already, as the economy has been in decent shape in the past few years and new NPL formation has been very limited. Secondly, the regulatory pressure to sell is comparatively lower, despite the new measures on coverage," he said in an email.

Italian banks still had some €225 billion of NPLs on their balance sheets as of the end of the first half of 2018, a decrease of 13% during the period — the most recent data available from Banca D'Italia SpA, the Italian central bank.

Italian banks are expecting to receive tougher targets from the European Central Bank shortly regarding NPL coverage ratios — a measure of their ability to absorb potential losses from their pile of bad debts. However, Troiano said he believed that most of the larger banks are on track to meet these derisking goals.

Good news, even if volumes are lower

The extension of GACS is good news for the deepening of the securitization market in Italy, according to David Bergman, executive director, structured finance, at Scope Ratings.

"Without an extension of GACS, new securitizations would have been very limited in Italy this year," he said in an interview.

It is likely that 2019 will be another good year for the Italian securitization market, although volumes are likely to be a lot lower than in 2018, he said.

"Maybe we'll see about 60% of what we saw in 2018. I think the peak for Italian securitizations has probably passed now," Bergman said.

The team of analysts at DBRS said in a note that they are hopeful that the extension of GACS will help Italian banks with their clearup of bad debts.

"Each time the previous guarantee was extended, there was an increase in new transactions. With a two-year window to structure transactions, it is hoped not all issuers will wait until the maturity of the new scheme. The drive to cleanup balance sheets is working, and further progress is expected with the use of securitization."