Banca Popolare di Bari is planning the sale of an NPL portfolio of up to EUR 1 billion (more precisely EUR 600 million) using the public guarantee scheme for bad loans.
The transaction, structured as a securitisation of non-performing loans (GACS), would be the first to use the scheme devised by the government last month to help banks lighten the burden of non-performing loans.
But let us look at how it works.
Operation
Decree-Law No. 18 of 14 February 2016 provides for the issue of a State guarantee (the “GACS”) aimed at facilitating the disposal of bad loans from the balance sheets of Italian banks.
The GACS may be granted by the MEF (Ministry of Economy and Finance) on the liabilities issued in the context of securitisation transactions under Article 1 of Law 130/1999, provided that the underlying assets are:
(a) monetary claims classified as bad loans (sofferenze); and
(b) assigned by banks having their registered office in Italy.
The MEF is authorised to grant the GACS for 18 months from the date of entry into force of the Decree and may, by its own decree and subject to approval by the European Commission, extend that period by up to a further 18 months.
The Decree[2] provides that an independent qualified person must be appointed by the MEF to verify compliance with the decree for the purposes of issuing the guarantee.
Main features of the securitisation
The senior notes to be guaranteed by the GACS must be issued as part of a securitisation structured in accordance with the Decree. Specifically, a securitisation special purpose vehicle (the “SPV”) will purchase the NPLs from the relevant bank.
In return for the purchase of the NPLs, the SPV will issue asset-backed securities (“ABS”) and the collections and recoveries deriving from the NPLs will be applied exclusively to satisfy the rights embodied in the ABS and to pay the costs of the securitisation.
The securitisation will be carried out under Law 130/99, thereby benefiting from the provisions of that law, including those on the segregation of assets.
In order to benefit from the GACS, the structure of the securitisation must have the following main characteristics:
(a) NPL sale price
The assigned receivables must be transferred to the SPV for an amount not exceeding their net book value (gross value net of write-downs).
(b) ABS notes
The SPV must issue at least two classes of notes: a senior class and a junior class.
The senior notes will be paid in priority as to interest over all the other notes issued.
One or more classes of mezzanine notes may also be issued, which may receive interest only after payment of the interest on the senior notes but before repayment of the principal of the senior notes.
The senior and mezzanine notes must be issued with floating-rate interest. Payment of that interest will be made in arrears on a quarterly, half-yearly or annual basis, depending on the residual nominal value of the note at the beginning of the relevant interest period.
Repayment of the principal of the senior and mezzanine notes before the maturity date will be linked to the cash flows deriving from the recoveries and collections made in relation to the portfolio of NPLs sold.
The junior class will be entitled to receive repayment of principal, payment of interest or other forms of remuneration only after the full repayment of the principal of the notes of the other classes.
(c) Rating
The senior notes must have at least one rating equal to or higher than investment grade from an independent rating agency included in the list of agencies accepted by the ECB (External Credit Assessment Institution or “ECAI”)[3].
(d) NPL Servicer
An external and independent servicer (different from the assignor bank and not belonging to its banking group) must be appointed to carry out the servicing and management of the NPLs (the “NPL Servicer”).
(e) Order of priority of payments
The issuer’s available funds – net of the sums retained by the NPL Servicer for its management activity – must be used by the SPV to pay the items indicated, and in the order provided for, in Article 7[4] of the Decree.
(e) Ancillary contracts
The following may be entered into:
(i) swap contracts to hedge interest rate risk, and
(ii) liquidity lines in order to manage the risk of any mismatch between the funds deriving from collections and recoveries and those needed to pay interest on the notes.
The State guarantee
Main features
The GACS is an unconditional, irrevocable guarantee payable on first demand, which will be issued by the MEF by specific Decree.
The GACS may be granted only on the senior tranches (i.e. the least risky notes) to guarantee the contractually provided payments of interest and principal.
Effectiveness of the guarantee
The GACS becomes effective only when the assignor bank has transferred for consideration at least 50% plus 1 of the junior notes and, in any case, an amount of the junior notes (and, if issued, of the mezzanine notes) that allows the derecognition of the securitised receivables.
Consideration for the guarantee
The consideration for the GACS was one of the key points of discussion between the Italian Government and the European Commission. That consideration must be on market terms.
The annual consideration for the guarantee will be:
(a) calculated by reference to the prices of credit default swaps of certain Italian issuers (specified in the Decree) with a level of risk corresponding to that of the guaranteed notes;
(b) increasing over time, if the senior notes have not been fully repaid by the end of the third or fifth year from the granting of the GACS.
Admission to the guarantee
The GACS is granted by decree of the MEF upon the documented application of the assignor bank.
Enforcement of the guarantee
The GACS may be called by the holder of the senior note within the 9 months following the maturity of the Senior Note, in the event of non-payment of the sums due by way of principal or interest.
If the non-payment continues for at least 60 days from the expiry of the deadline for performance, the holders of the senior notes (acting jointly and through the noteholders’ representative) must send the SPV a request for payment of the overdue and unpaid amount.
After 30 days and within 6 months from the date of receipt of that request without the SPV having made payment, the holders of the senior notes (acting jointly and through the noteholders’ representative) may request the intervention of the GACS.
Within 30 days from the date of receipt of that request, the MEF will pay the amount due to the holders of the Senior Note, in accordance with the transaction documents and by subrogation to their rights.
Establishment of a specific fund
To finance the GACS, the MEF has established a specific fund with an endowment for 2016 of EUR 100 million, which will then be further supplemented by the annual consideration for each GACS granted from time to time.
SOURCE: http://www.dirittobancario.it/approfondimenti/finanza/gacs-garanzia-cartolarizzazione-sofferenze-lo-schema-di-garanzia-statale-italiano-i-titoli-senior
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