Italy'snew bank stabilization fund is not the only step being taken to ease marketjitters over the country's lenders.
FinanceMinister Pier Carlo Padoan has emphasized the government's commitment to easingcollateral recovery, telling Il Sole 24Ore on April 13 that efforts on insolvency law "will be decisive forthe revival of the banking system." He said the proposed, althoughunspecified, measures would complement the launch of Atlante, the privately ledbank support fund.
SpeakingApril 14 on CNBC, Padoan said Atlante might reach €50 billion thanks toleverage effects, not least from purchasing junior securitized debt, andbecause the government is expediting collateral recovery.
"Theobjective is to reduce recovery time from seven to far less years," Padoansaid, adding that the technical details were still being worked out and wouldbe added to current legislation.
Thereare indications that private banks' participation in Atlante, and thus thefuture of the fund itself, depend upon effective legal reform.
"Thestrong impression I get from the banks, particularly , is that they areonly participating in Atlante if [the government] improves bankruptcy andrecovery procedures," said a bank analyst who asked not to be named.
Johande Mulder, a bank analyst at Bernstein, emphasized that the proposed €5 billionor €6 billion fund, which is to serve as a backstop for bank capital raises andparticipate in bank debt securitization, is too small under the current debtcollection horizon of seven years. He said in an interview thatAtlante would need €20 billion to deal with bank bad debt and recapitalize theweakest Italian banks and UniCredit SpA, but he calculated that cutting debtcollection to three years on average and reducing the internal rate of returnfor investors to 10% would cut the amount required to €10 billion.
Similarly,the unnamed bank analyst said cash flow models showed that halving the recoveryperiod to four years from eight could enable private equity firms to pay 40cents on the euro, rather than 20 cents, for bad debt. This would close thecritical gap in the banking system between the book value of bad debt and the60% provided by the banks.
Theanalyst cautioned that investors are skeptical that reforms will be passed orthat they would be properly implemented. Bad debt pricing has not been affectedby legal change to date; moreover, he observed, Italy has a recent history ofpoor implementation of legislation.
MaurizioCimetti, a lawyer at Legalitax in Verona who represents international fundsinvesting in distressed debt, said in an interview that recent changes tobankruptcy law had not "had a great impact." Underlining the importanceof implementation, Cimetti claimed that "only three lines" in legaltext were needed to transform Italian law suitably, eliminating the need forcourt cases and favoring out-of-court settlement.
Hesaid it was critical to expedite the work of the official receiver when dealingwith creditors, particularly through out-of-court settlement, and when actingwith the tax authorities. The receiver should be obliged, Cimetti said,"to finish everything within 24 months."
Cimettisaid many northern courts have computerized procedures, reducing recovery timesto three years "and falling," compared to five years in central Italyand seven to 10 years in the south, which is "impossible." Yethe expressed optimism for change.
"Thegovernment measures to speed up either bankruptcy through the courts orout-of-court restructuring are very significant. I hope that the time requiredwill be the same throughout Italy," Cimetti said, emphasizing the need toinvest in digitization and personnel.
Theland registry has already been digitized, but delays persist. Cimetti saidofficial valuation as demanded by the courts should be expedited and threeweeks imposed as a reasonable limit.
Thecurrent court-centered process hits collateral value hard, not just by takingfar longer than in other European countries.
"Italyis the only place in Europe where it is the court that sells the collateral,where it is not assigned to the banks," the unnamed analyst observed. Thismeans that the banks cannot treat their collateral as a portfolio to maximizegains; instead, they are forced to sell through court-managed auctions wherethey realize less. Here there is the distinct possibility of corrupt collusionbetween debtor and officials.
Giventhe legal and geographic impediments, Cimetti said international investors areexclusively concentrating their investment in northern Italy. There is, heobserved, no shortage of demand: "The banks are selling unsecured loans atvery low prices; the investors are doing good business either here or in debtguaranteed by large properties."
Yetthe market could clearly accelerate. Cimetti said debt secured on property oflow to average value was proving difficult to market, while there waspotentially a significant opportunity in unsecured nonperforming loans in thesouth.
"Herethey have the highest possibility of repayment. The government has to undertakea reform which works in central and southern Italy," Cimetti said. He saidItaly might hope to match the efficiency achieved by Spanish legal procedures,which have resulted in real estate collateral being valued 30% higher than inItaly. This would transform Italian banks' asset quality and create asignificant investment opportunity.