DBRS provided a comprehensive overview of the current state and future expectations of the Italian NPL securitization market in a recent commentary. Key trends and challenges in the sector include :
Reduction in NPL Stocks: Italian banks have successfully lowered NPL stocks to record lows through concerted efforts to offload impaired loans, improved credit quality, and increased profitability.
Challenges Post-GACS Expiry: The expiration of the Guarantee Asset Protection Scheme (GACS) in June 2022 poses a significant challenge, as it was a primary tool for Italian banks in NPL removal. Additionally, the draft bill introduced in January 2023 brings further uncertainty to the NPL securitization market.
DBRS Analysis of NPL Transactions: DBRS has analyzed key performance indicators of 35 outstanding NPL transactions. It notes a gradual recovery from COVID-19 disruptions, with transactions issued after 2019 showing stronger performance. The main recovery strategy continues to be judicial, with a recent shift back from amicable strategies【7†source】.
Impact of Business Plan Revisions and Interest Rate Risk: There’s a slowdown in downward revisions to business plans. Recent transactions are better collateralized, but the increase in interest rates over the past 18 months is expected to impact transaction performance, widening the performance gap between transactions.
External and Intrinsic Factors Affecting NPL Performance: The performance of Italian NPL transactions is influenced by country-specific external factors like local policies and economic aspects, as well as transaction-specific intrinsic factors like structural features and pool composition.
Impacts of Proposed Legislation: The proposed legislation allowing debtors to settle debts under certain conditions might lead to short-term impacts on transaction performance, especially delays in recoveries. However, for seasoned transactions, this could have beneficial effects if expected collections are lower than the amounts payable under the proposed law.
Performance of Older vs. Newer Transactions: Transactions rated before the pandemic showed moderate amortization of senior notes, increased structural costs, and exposure to interest rate fluctuations. In contrast, more recent transactions are better collateralized, with less volatile underlying portfolio performance
Ratings and Repayment Concerns: Currently, eight Italian NPL securitizations are rated CCC (sf) or below, raising concerns about the full repayment of senior principal in these transactions.
Future Outlook: The inflationary environment and rising interest rates pose risks to the performance of Italian securitizations in the short to medium term. Although collections are expected to remain below initial targets, performance ratios have stabilized at lower levels over the past year.
Blogger and Investment Management Advisor with focus on Distressed Assets & NPL. Massimo is Chief NPL & Fintech Editor at Credit Village Magazine.