Italy introduces new measures for NPL disposal

by Patrizio Messina

Abstract: The article analyses the framework of the SPV’s functions within a securitization transaction and with specific regard to the stage of debt restructuring, to the management of loans and to the financing activities as well.

The main focus is given to the provisions of the new Article 7.1 of Italian Law No. 130/99, recently introduced by Law No. 96/2017, in order to understand how it can further facilitate securitization transactions.

Summary: 1. Introduction. – 2. Legislative updates. 3. Scope. Granting loans for a better credit recovery. – 4. Acquisition or subscription of financial instruments by the SPV. – 5. Acquisition and management of assets.

1. Non-Performing Loans (NPLs) are credit exposures that credit institutions have against borrowers who, due to a worsening of their economic and financial situation, are unable to fulfill all or part of their contractual obligations.

In Italy, the Bank of Italy is responsible for having defined and classified impaired loans into subcategories by means of Circular No. 272 of 30 July 2008, which has been subject to several updates over time. Currently, the definitions of impaired loans adopted by the Bank of Italy are those harmonised at Single Supervisory Mechanism (“SSM”^[1]) level, which reflect the criteria published in 2013 by the European Banking Authority (EBA) ^[2]. The transposition of the EBA’s harmonised definition has not led to discontinuity in the aggregate, as it has been substantially aligned with the concept used previously in Italy[3] The prolonged recession that hit the Italian economy following the 2008 financial crisis and the lengthy credit recovery procedures have contributed to the accumulations of an high level of impaired loans in the Italian banking system[4].

2. The Italian banking system is currently subject to some legislative reforms. These reforms concern mainly the issue of non-performing loans, which, on 23 June 2017, led the Italian legislator to the publication, in the Official Gazette Law No. 96/2017 containing urgent provisions, initiatives in favour of territorial authorities, further interventions for areas affected by seismic events and development measures (and converting decree Law No. 50 of April 24 2017), which will come into force as of June 24[5].

The newly introduced law has modified securitization Law No. 130 of 1999 inserting the new article 7.1. entitled “securitisation of impaired loans by banks and financial intermediaries”, which eight paragraphs implement what has already happened in legal practice and aim at ensuring the securitisationof receivables[6] qualified as deteriorated (deteriorati)[7]. According to the Bank of Italy classification, the amendments enhance the securitisation of NPLs, likely default loans[8] or expired and/or overdue exposures, as well as their management and recovery[9].

The regulatory changes have widened the operating possibilities of securitization special purpose entities[10], which can now carry out certain important activities in order to be able to manage, with a view to recovery, and no longer just liquidation, loans granted to counterparties that are subject to temporary crisis situations due to negative trends in the economy or the sector in which they operate, with reasonable prospects of a return in bonis through the revision or expansion of financial lines or reduction of leverage through capital increases[11].

To facilitate the structuring and implementation of such transactions, it allows:

1. securitisation companies (special purpose vehicles or SPVs), who have received NPLs, to grant loans aimed at improving the perspective for recovering the same receivables to the relevant debtors;
2. an Italian SPV, in the context of debt restructuring or under composition or recovery procedures[12], and always with reference to NPLs[13], to acquire or subscribe shares, quotas and other equity securities and equity instruments deriving from the conversion of part of the receivables of the acquiring subject;
3. to set up, in the context of securitisation transactions[14], a vehicle company (different from the SPV), with the exclusive task of acquiring, managing and enhancing the assets securing the securitised receivables, including assets leased under financial leasing agreements[15];
4. if selling non-block receivables, the use of simplified tools for transferability, represented by the publication of the transfer notice on the Official Gazette and by filing with the companies register, together with the indication, in the transfer notice, of the website where all relevant data will be available.

The regime introduced by the new article 7.1 of the securitization law is a significant improvement for the disposal of Italian NPLs[16].

3. The provisions of the new legislation apply only to securitisation transactions involving the sale of receivables that can be qualified as deteriorated. These will need to be transferrable to banks and financial intermediaries[17] subject to article 106 of the Banking Act and that have their registered office in Italy[18].

It’s worth noting that the SPV which received deteriorated loans, in compliance with the conditions laid down by the securitisation law on financing by SPVs, may grant funding aimed at improving the chances of recovering such loans and supporting the debtor’s recovery. In such cases, the management of the loans and of the financing granted by the SPV must be entrusted to a bank or a financial intermediary.

As such, the new version of the securitisation law expressly allows an SPV to grant loans and receive financing within the same transaction.

4. In the context of restructuring agreements or under a composition or recovery procedure, or other analogous procedures agreed with the assigning entity or agreements entered into under the bankruptcy law (Articles 124, 160 and 182-bis of the Bankruptcy Act), the SPV may acquire or subscribe shares, quotas and other equity securities and equity instruments deriving from the conversion of part of the creditor’s receivables, grant financing to improve the recovery of such loans and favour the debtor’s

The new provisions, therefore, have made plans for an SPV that, aside from the recovery of credit, can be actively involved in debt management.

In such a case, the sums deriving from the shares, quotas and other equity securities and instruments, for the purposes of the securitation law, are considered as payments made by the debtors. In addition, the same sums are intended solely for the satisfaction of the rights incorporated in the securitisation of the securities issued and for the payment of the costs of the transaction.

Accordingly, when this provision is applied:

• The SPV must identify a person of high competence and who has the necessary qualifications or authorisations to be responsible for management or administrative tasks in the interest of the holders of the securities, and to represent them.
• If the person above mentioned is a bank, a financial intermediary as per article 106 of the Banking Act, a securities brokerage company or a savings management company, the same person is also invested ex lege with the task of verifying the compliance of the activity and operations of the SPV with the securitisation law and with its prospectus.

5. In order to acquire, purchase, manage and enhance – in the sole interest of the securitisation transaction – the value of immovable and movable registered property and other assets and rights granted or constituted in any form to guarantee a securitisation, including assets which are subject to leases, even if terminated, possibly together with the relationships resulting from such agreements, an ad hoc SPV may be created in the form of a corporation. This company will have the sole purpose of carrying out the aforesaid activities (the vehicle company)[19].

Therefore, this provision would be aimed at:

• enhancing the value of the assets which secure the NPLs[20], since these are generally subject to important write-downs during the execution procedures; and
• allowing the SPV – through the vehicle company – to purchase the leased assets, thus avoiding that these may remain within the originator properties and that the credits part of the securitisation transaction can be sold at a lower price as they are considered unsecured.

Remarkably, sums in any way deriving from the detention, management or disposal of such assets and rights, owed by the vehicle company to the SPV, are considered, for the purposes of the securitisation law, as payments made by the debtors. The same sums benefit of the segregation regime, thus are intended solely for the satisfaction of the rights incorporated in the securities issued and for the payment of the costs of the transaction.

With specific reference to leasing agreements, it is also envisaged that, if the trade of receivables, together with the assets leased, includes also the related leasing contracts or the legal relationships resulting from the termination of such contracts, the vehicle company:

• must be included in the bank’s balance sheet;
• must be set up for specific securitisation transactions; and
• must be wound up when the transaction is completed.

In addition, with regard to the obligations related to contracts and financial lease agreements, such obligations must be performed by the servicer or by a person authorised to carry out a leasing business to be identified pursuant to article 7.1 of the securitisation law.

Patrizio Messina is lecturer at LUISS Business School in Legal aspects of International Business & Finance.

[1] For a complete overview of the creation, functions and composition of the SSM please see https://www.bankingsupervision.europa.eu/about/thessm/html/index.en.html.

[2] In October 2013 EBA, in view of the different notions of NPLs adopted by each of the Member States, has provided for the definition of NPLs to be harmonized. Instead, the harmonised definition of NPE can be found in the “Final Techincal Standards on NPLs and forbearance reporting requirements”, published by EBA on 21 October 2013.

[3] Bank of Italy’s, Financial Stability Report, No. 2 – 2014, p. 28.

[4] Bank of Italy’s, “I crediti deteriorati (Non-Performing Loans – NPLs) del sistema bancario Italiano”, 2017, available at https://www.bancaditalia.it/media/views/2017/npl/index.html.

[5]  Law No. 96/2017 (Disposizioni sulla cartolarizzazione dei crediti) (as amended of Law No. 96 /2017) available at https://www.normattiva.it/uri-res/N2Ls?urn:nir:stato:legge:2017-06-21;96!vig= and Articles 7 .1. “securitisation of impaired loans by banks and financial intermediaries” (Cartolarizzazione di crediti deteriorati da parte di banche e intermediari finanziari).

[6] Association for Financial Markets in Europe, High-Quality Securitisation for Europe: https://www.afme.eu/globalassets/downloads/publications/afme-high-quality-securitisation-for-europe-the-market-at-a-crossroads.pdf.

[7] European Banking Authority, “Eba report on the dynamics and drivers of non-performing exposures in the UE banking sector”, 22 July 2016, 8. M. Minenna, “Il problema dei crediti deteriorati italiani e l’Europa”, in Social Europe, 30 September 2016, 1. B. Bruno, I. Marino, Milano, Giugno 2016, 2. L. G. Ciavoliello, F. Ciocchetta, F. M. Conti, I. Guida, A. Rendina, G. Santini, “Quanto valgono i crediti deteriorati?”, in Note di Stabilità Finanziaria e Vigilanza, Banca d’Italia, April 2016. I. Ferraro, “Sui crediti deteriorati vanno superate le penalizzazioni: a colloquio con Pier Carlo Padoan”, in Bancaria, 2015, No. 4,  91.

[8] Default loans are credit exposures for which a bank considers it unlikely, without the initiation of enforcement proceedings, that the debtor will fully meet its contractual obligations (in principal and/or interest) (such as, for example, and without claiming exhaustiveness, loans, mortgages and loans). Likely default loans are, therefore, all those loans that are formally intact but which inherently present a high degree of risk because their fulfilment is unlikely.

[9] For the notions of loans classified as Non-performing, Restructured, Substandard and Expired Exposures, please refer to the Bank of Italy, “Impaired loans of the Italian banking system”, cited above, or consult the Bank of Italy’s “Financial Stability Report” No. 2/2014, 28.

[10] Special Purpose Vehicle (SPV), is a company specialising in securitisation transactions. It is the assignee of a portfolio of homogeneous loans but also the company that issues the debt securities to finance the operation, offering them on the market. In Italy, SPVs are governed by Law No. 130 of 30 April 1999 on the securitization of loans, regulating every aspect of the securitization: from the requirements they must meet for the securitization to the corporate form to be adopted. For a more exhaustive discussion of the subject, please refer to Law No. 130 of 30 April 1999 on the securitization of loans.

[11] A. Pilati, Deputy Head of the Banking and Financial Supervision Department of the Bank of Italy, in his speech at the conference AIAF, “Le cartolarizzazioni: problemi ed opportunità”, 2017, 7-9. Moreover, the Author, in his speech at the AIFA Conference, states that “in order to encourage investment in the new finance, the securitization tranches, which represent the credit granted by the vehicle company, may be senior to the mezzanine and junior tranches issued against the previous debt transferred to the vehicle company. In addition, the vehicle company may participate in debt-to-equity swaps by subscribing capital or other equity instruments issued by the debtor and deriving from the conversion of the loans”.

[12] The Debt Restructuring Agreement is an instrument that allows the recovery of a company in crisis.  Its purpose is to reduce debts and to attempt, if possible, corporate restructuring. It takes the form of an agreement with many creditors representing at least 60% of the claims. Likewise, the composition with creditors is an instrument that allows the commercial entrepreneur who is in a state of crisis or insolvency to avoid judicial liquidation through the proposal of a plan that allows creditors to be satisfied through going concern or liquidation of assets. Both procedures are provided for and governed by the Bankruptcy Law (Royal Decree No. 267 of 16 March 1942 and subsequent amendments), presenting numerous aspects in common.

[13] Capriglione, F., “Incidenza degli NPLs sulla stabilità del Sistema bancario. I possibili rimedi, in Giurisprudenza e autorità indipendenti nell’epoca del diritto liquido”, in Studi in onore di Roberto Pardolesi, F. Di Ciommo e O. Troiano, 635 ss.

[14] The securitization transaction involves the sale without recourse of a portfolio of loans without recourse by a bank (“Originator”) to SPV, in which the latter buys the portfolio of impaired loans from the former at an agreed price and at the same time issues bonds in which the loans are incorporated, so-called “Asset-Backed-Securities” (“ABS”) to finance itself. The ABS are then placed with investors (so-called “Noteholders”) while the debt collection activity is entrusted to a Servicer, which is independent from the Originator.

Since its introduction, this structured finance technique represents an important leverage available to banks to meet their liquidity needs and, therefore, allow them to concentrate on their core business of financing businesses. In addition, financial practice has developed several securitisation models..

[15] Leasing is a financial transaction of Anglo-Saxon derivation, whereby the availability of a movable or immovable asset can be obtained by avoiding its purchase. By entering into a leasing contract, companies can acquire the availability of an instrumental asset without paying the necessary capital to buy it, without exposing themselves to the risk of the loss of value of the asset due to rapid obsolescence, and reserving the right, at the expiry of the established term, to purchase the property definitively or to return it.

[16] E. Norden, L., Buston, C. S. & Wagner, W., 2014, “Financial Innovation and Bank Behavior: Evidence from Credit Markets”, in ‘Journal of Economic Dynamics and Control’, 43(C), 130–145.

[17] The regulation of financial intermediaries is contained in Article 106 TUB. According to this provision, the financial intermediary may carry out activities of granting loans to the public or collecting the assigned receivables and cash and payment services in accordance with Article 2, paragraphs 3, 6 and 6-bis of Law No. 130 of 30 April 1999 on credit securitization (so-called “Servicing”)”.

[18] F. Panetta e F. M. Signoretti, “Domanda e offerta di credito in Italia durante la crisi finanziaria”, Questioni di economia e finanza, 63, Banca d’Italia, April 2014, 1-2.

[19] E. Brodi, S. Giacomelli, I. Giuda, M. Marcucci, A. Pischedda, V. Profeta, G. Santini, “Nuove misure per velocizzare il recupero dei crediti: una prima analisi del d.l. 59/2016”, in Banca d’Italia, Note di stabilità finanziaria e vigilanza, no. 4, 2016.

[20] F.Cesarini,”I crediti deteriorati nelle banche italiane”, in Giappichelli Editore, 2017, 53.