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Securitization markets in Italy
This page updated regularly deals with securitization developments in Italy. If you have any news or development to contribute to this, please write to me.
Updated on 4 August, 2009 by Nidhi Bothra
Law 30 April 1999, No. 130 (the “Law 130”) regulates securitisation transactions in Italy. Law 130 (i) allows thinly capitalised companies incorporated in Italy to purchase receivables and issue notes (abs); (b) ring-fences the securitised assets in favour of the holders of the notes and the other parties involved in the transaction structure; (c) allows the perfection of the assignment of the relevant receivables pursuant to Article 58 of the Banking Act; (d) provides that the servicer (i.e. the entity vested with duties to both collect the assigned receivables and manage the cash payments) is a bank or an authorised financial intermediary; and (e) sets out the system that allows Italian banks to issue bonds “covered” by guarantees issued by vehicles owning mortgage loans or receivables vis-ŕ-vis public entities.
For perfection of the sale of accounts receivables the debtor has to be notified of the sale or it has to be accepted by the debtor. The acceptance or the notification is to bear a certified true date (data certa) (Under Article 1264 of the Italian Civil Code). Pursuant to Law 130 and other regulatory constraints acting as a sevicer in a securitization transaction will not impair the true sale characteristics of the transactions. The Decree of Ministry of Economy and Finance of 4 April 2001 says that with respect to the securitizations made pursuant to Law 130 future receivables shall be defined as “any receivable which is not yet in existence and arising from the normal activity of the assignor”. Sale of future flow receivables are permitted but are only perfected when the assigned receivables arise. (Nidhi: The code is very elaborate and specific about how the assignment of receivables can be perfected.)
Chapter V of the Italian Banking Act requires all financial intermediaries to be registered in the register of financial intermediaries and those financial companies carrying out activities relating to securitization only are to be registered in a special register held with the Bank of Italy also.
Article 2 of the law asks for the disclosure of certain information in the information memorandum before issuing securities. This includes the shareholding relationship between the assignor and the assignee company. (Nidhi: Where laws generally provide for no relationship between the assignor and assignee for the transaction to qualify as a true sale, so is not the case here) Under the Italian bankruptcy laws there cannot be substantive consolidation of the estate of the purchaser with that of the seller. Article 2 also states that credit rating of the issue is required if the securities are issued to third parties that is other than professional investors.
In case of securitization transactions sale of receivables is subject to registration tax (imposta di registro) and is a fixed amount. Apart from this stamp duty of a fixed amount is also levied on the documents. Here the seller and the purchaser are jointly liable to pay taxes for the payment of stamp duty and registration taxes.
There is no withholding tax on the interest payment of securities, much in favor for the cross-border deals to flourish.
Some peculiar structures
For the past some years the Italian market has been dominated by ABS of healthcare deals, that is the receivables are derived from the supply of goods and services to the regional health care systems. With regard to the securitization of healthcare receivables Article 1, Paragraph 739 of Law 296 of December 27, 2006 states that with respect to the securitization of the receivables generated by the supply of healthcare goods and services, the obligation to pay assumed by the public entities would amount to a financial debt. Another feature of the healthcare receivables is that the payments in respect of relevant healthcare receivables can be deferred through a settlement agreement. However the law states that any deferral of payments beyond a period of 12 months would tantamount to financial debt. The delegation of payments by the Italian regional authorities was no longer permitted so the transaction was carried out on the basis of the healthcare authorities’ risk.
The securitization transaction is carried out in two phases: a) private phase and b) public phase. In the private phase the originator transfers pools of receivables to the special purpose vehicle and the SPV issues unlisted and unrated notes. The senior notes from these initial unlisted and unrated notes are subscribed by the financing bank or by the way of granting of a bridge loan. Then in the public phase the SPV issues rated securities and repay these unrated notes are repaid in full.
Key elements of this kind of a structure under analysis:
The regulatory framework for covered bonds was completed in 2007. The framework governing covered bonds are:
The covered bonds regulations have tried to deal with the complexities and have simplified the transaction procedure as dealt with in a securitization transaction.
on 19th Feb 2002:
Added 5th October:
In year 2001, Italian securitization continued its surge. The year ended with a volume of Eur 30 billion, putting Italy at number 2 in Europe. The main currents of growth are banks trying to manage balance sheet, CDOs for arbitrage and balance sheet purposes, RMBS, government using securitisation as a new-found means of raising public funds (INPS, gaming receivables, mortgage properties) etc.
For a recent news report giving break up of issuance upto the 3rd quarter of 2001, see our news page here.
The Italian securitization market has rapid strides since the enactment of the new securitization law. In year 2000, Italy took its a proud place of number 2 in Europe, surpassing Germany. The remarkable fact about 2000 volumes is that it was possible to achieve such an impressive number inspite of not having something that Italy had in 1999: the INPS transaction. So far, under the new law, the major chunk of activity has come from the banking and financial services sector, but recently, a number of direct corporate users have also started looking at securitization. Telecom Italia will be one of such users [see our news item in our March-April 2001 newsletter.]
In year 2000, most of the issuance was on account of CBO/ CLOs.
The Table below, sourced from Deutsche Bank's Italy ABS Updated of 19th March, 2001, shows the steep growth in volumes of Italian securitization.
Added 13th June 2000:
Added 3rd April 2000/ Updated
27th March 2001:
Added March 23, 2000:
Up to 30 Italian securitizations are expected this year, totaling in euros from (8 billion to (12 billion ($7.6 billion to $11.5 billion). That will be a far leap from last years' total of seven deals, which came to (6.5 billion ($6.2 billion).
Also see a news item on our news page about 3 recent securitization deals in Italy - click here.
Added on 9 Feb 2000:
Giampaolo Salsi of Piergrossi Villa Manca Graziadei Milan has written an article on The New Italian law on Securitisation published in Journal of International Banking Law Dec. 1999 edition. The article provides a lucid and well-researched exposition of the securitization law in Italy.
The author laments the constraints that seem to have hindered full diffusion of securitization in Italy which is estimated to have a potential of Euro 100 million (according to Italian Chamber of Deputies, minutes of preparatory works on Draft Law No. 5058 July 7, 1998). Not less significant was the lack of enabling on securitization, but also equally important, a stifling restriction under sec. 2410 of Civil Law and sec. 11 of Banking law that restrained corporates from issuing debt notes exceeding their net owned funds.
The banking community took the lead in making a case for a securitization law in Italy - the Italian Banking Association on July 6 1997 prepared a discussion paper which constituted the basis for the law later. The law [no. 130 of April 30, 1999] was finally passed on May 14, 1999.
The law applies to transfer of existing or future receivables, transferred in bulk. The author discusses these two issues - what is meant by "receivables identifiable as a bulk" and the applicability of the law to future receivables.
The author contends that receivables "identifiable as a bulk" might pose difficulties in interpretation. Vinod Kothari's view is this might be an Italian expression for "homogenous portfolio of receivables" indicating that what is intended to be transferred is not a single receivables but many, and that they are all identifiable by some common characteristics, such a asset class, client type, etc.
The other issue the author raises is the applicability of the law to future receivables. The author contends that the general school of law is [also Civil Law provisions relating to assignments - sec. 1260 et seq.] is that transfer of future receivables is not valid in law since these receivables do not exist at the time of their transfer. However, the author cites several recent rulings that recognise the transferability of future receivables - Supreme Court ruling of May 8, 1990 no. 4040; Bari Tribunal Nov 6, 1996 in Banca, borsa e titoli credito, 1998 II; and Milan Tribunal, October 16m 1989 in Rivesta italiana del leasing 1990 P. 182.
The author feels that a clearer proposition of law on future receivables was necessary, since even under the present law, some commentators feel that future receivables are not transferable.
The author goes further to state that the law does not make any distinction based on the credit quality of the receivables: that is, even non-performing assets can be securitized. [See below for more details about securitization of non-performing bank loans in Italy]. The author feels that it is not secret that number of Italian banks have seized upon this opportunity to clear up their balance sheets and even the first transaction in Italy was one of non-performing assets [Vinod Kothari's comment: Banca di Roma's securitization - see for the News item on our site, Securitisation news page. As a matter of fact, a number of subsequent bank securitizations have also parceled out bad loans. See also for data of non-performing assets below]
The law covers securitization notes issued by way of public offers as well as private placements. In case of public offers, the basic law in case of public offers, contained in Legislative Decree 58 of Feb 24, 1998 will apply. The filing requirements of offer documents are similar to those in most capital markets. Besides, the law also requires, in such cases, for the offer to be rated by one or more rating agencies.
In case of private placements to professional investors, the law sets out the contents of the offer documents. The broad contents of the offer document are:
1. Details of the originator and the issuer, transaction features, etc;
2. Details of the underwriter or issue manager
3. Details of the servicer/ administrator
4. Any conditions upon which the SPV may resell the receivables bought by it
5. Conditions upon which the SPV can reinvest intermediate cash flows
6. The main terms and conditions of the notes
7. Cost of the transaction
8. Participation of the originator in the issue.
The law restricts servicing functions only to banking institutions, which according to the author, is an unreasonable restriction. Strictly interpreted, according to the author, this would even prevent originators from acting as servicer themselves. [Vinod Kothari comments: this may be too narrow a view. Originator does not acquire servicing rights - he just retains them. ]
On the regulation of the SPVs, the law treats SPVs at par with financial intermediaries regulated under the relevant law - Banking Law, sec. 106 et. Seq. SPVs are not allowed to engage in any business other than purchase of receivables and issue of bonds. Further, SPVs are also required to register under Ministry of Treasury and Italian Exchange Commission.
As for true sale requirement, the law confers an assignment of receivables for the purpose of securitization a true sale treatment. The only condition is that transfer of receivables is published in the Official Gazette of the Republic of Italy. From the date of publication, the assigned receivables are segregated from other assets of the originator. Creditors of the originator do not have any rights on such segregated receivables.
According to the author, this provision also does not seem to have considered the regime of future flows. How would it be possible to notify the sale of receivables that do not exist? According to the author, a Supreme Court ruling [No. 9997 of November 14, 1996] seems to suggest that for such a transfer to be enforceable, there has to be an individual notification for each receivable as and when it comes into existence. [Vinod Kothari comments - the observations of the author seem valid - the legal validity of transfer of future receivables remains buried in doubt and it is better such a transfer is treated as a collateralisation instead of a true sale]. The author contends that the same will apply in case of revolving assets securitization as well - with a notification required for each sale taking place over time.
The Italian law is an umbrella legislation that covers tax issues as well. The income of the investors in securitization transactions is taxable at a fixed rate of 12.5%. Foreign investors domiciled in countries with which Italy has a double tax avoidance treaty are exempt from tax.
As a substitute for indirect taxes applicable on transfer of receivables the law provides for a total of 2% tax on the value of the transaction, provides the transaction has a minimum amortization period of 18 months. The author doubts whether this relaxed tax will be applicable on securitization of non-financial receivables.
The lawmarkers have been thoughtful enough to realise that many banks would be transferring their NPAs through securitization which might result into a loss on the nominal value. Therefore, the law allows the entity to defer the accounting for the loss over a period of 5 years, including the year in which the securitization takes place.
The author concludes by saying that "notwithstanding its obscurities, Law 130 may, however, become a powerful instrument to promote a full exploitation of the potential domestic market for securitisation. In a country whose economic backbone is represented by small to medium sized companies, a successful implementation of Law 130 may prove crucial to provide local entrepreneurs with an additional instrument to fund their expansion".
See also another article on the same issue - click here.
Securitisation of non-performing bank loans in Italy:
The passage of the new securitisation law in April 1999 has triggered a flood of securitisation transactions by Italian banks, but of particular relevance is momentum in securitisation of non-performing bank loans. Several huge securitisation issues by Italian banks have been reported on our news page. Most Italian banks are using securitisation as the device to clean up their balance sheets, gain international competitiveness and generally to enhance shareholder value.
Though Italy is one of the largest economies in the World (6th largest), Italian banking is associated with a high percentage of non-performing assets, accumulated out of lack of monitoring as well as the recession that hit the country in the early part of 1990s. The percentage of non-performing loans to total loans was estimated at 11.2% in 1996 though it came down to 9.7% in 1998. [As per a report in Il Sole 24 Ore the amount of NPAs held by Italian banks was estimated at Lira 169628 billion ]
Most of these non-performing loans are secured by mortgages over immovable property. The real difficulty, however, lies in the enforcement of the mortgage. Mortgage foreclosure can take anywhere between 4 to 12 years in the legal system. All mortgages are required to be enforced with Court intervention.
A report by Fitch IBCA [Structured Finance 12th July 1999] gives estimates of the time taken in enforcement of a mortgage as follows:
Inspite of the above scenario, securitisation of non-performing loans in Italy is catching up both issuers and investors. The underlying rationale is the valuation of the properties mortgaged. Based on the value of the property, a rating agency computes the value of the asset looking at the potential of either taking the obligor to insolvency, or to sell off the loan, or an out-of-court settlement.
In most of the securitisations of non-performing assets, it is recommended that the servicing of the transaction be handed over to specialised servicer. To quote Fitch IBCA, " The special servicer can accelerate the timing of the ultimate recovery by ensuring that each phase of the procedure runs efficiently or finding possible out-of-court solutions. In particular, the special servicer can accelerate the legal proceedings by:
Apart from giving latitude and incentives to show good results, it is also recommended that the servicer should have his own capital at stake by way of subordinated bonds in the securitised pool.
Securitisation to reduce Govt. deficit - an Italian innovation:
One would have noted a news item in the Securitisation news page of this web site that the Italian Government was being, perhaps, the first in the World to make use of securitisation to reduce government deficits. In a unique move, the government was to securitise social security contributions and collect the cash upfront by assigning these contributions to investors.
There are more news items on INPS, and INPS II - follow our news pages or better do a site search.
Legal initiatives to promote securitisation:
On April 22, 1999, the Italian Parliament has finally approved the Draft Law no. 5058, concerning securitization of medium and long term credits.
The law defines securitisation as a process consisting of (i) any non-gratuitous transfer of credits or other non-negotiable financial assets, that are likely to generate on-going periodic cash flows, and (ii) in the subsequent process of transforming such credits and/or assets into negotiable securities to be placed on the market.
The most apparent impact of the new law is to enact that the issuance of securitised instruments will be taken as a "financial instrument" and hence will not be subject to restrictions applicable to sourcing of public funds.
In order to be eligible for the favoured treatment, the law requires securitisation exercise to satisfy the following requirements:
The law also makes provisions relating to rights and obligations of the debtors, assignor and assignee as follows:
Taxation of securitisation:
The new law also defines the taxability of securitisation issues. The basic tax treatment of securitised instruments will be at par with corporate bonds. Withholding tax, as applicable on interest in case of corporate bonds, will apply to the payments on account of securitised notes.
Updates in July 2003
Tax neutrality of securitisation vehicles:
By a recent circular letter 8/E issued on February 6 2003, Italian tax authorities have cleared the issue of de facto tax neutrality of securitisation vehicles under Securitization Law (law 130 of April 30 1999).
The Ruling is based on the so-called asset-segregation principle, as set out in the Securitization Law, pursuant to which any amounts payable in connection with the receivables purchased by the Securitization Vehicle must exclusively be applied by same Securitization Vehicle:to satisfy the obligations towards its noteholders, as well as its other creditors; and to meet any related transaction costs.
Since the revenues of a particular transaction are dedicated solely to the benefit of the creditors of the transaction, there will be no income as far as the SPV is concerned, unless the SPV brings any transaction for which there are no dedicated investors.
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