OREANDA-NEWS. Fitch Ratings says that senior tranches of Italian non-performing loans (NPL) securitisations have overall performed well, whereas the performance of mezzanine and more junior tranches has been mixed. Notes issued pre-2006 have by far performed better than those issued at a later date because recoveries for the latest transactions proved to be more difficult to achieve as economic conditions materially worsened shortly after their closing dates.

At the top of the capital structure, repayments of senior tranches were smooth due to fully sequential principal pay-down mechanisms and easy work-out of the best quality underlying assets. The limited rating changes to the high investment-grade senior notes mainly reflected adjustments unrelated to the assets. For example, the Italian sovereign rating downgrade to 'BBB+' in 2013 triggered a new maximum rating of 'AA+sf' for all Italian structured finance transactions.

Fitch has observed that, upon redemption, almost all mezzanine and junior rated tranches from early transactions either carried the same rating assigned at issuance or had been upgraded. On the other hand, the performance of the 2006 and 2007 vintages, ie the last NPL transactions rated by Fitch in Italy, was more volatile, triggering multiple and severe rating downgrades.

NPL recovery procedures were weighed down by the inefficiencies of Italian legal proceedings, with creditors often waiting years for the courts to free up proceeds from property sales (ie, the so called "cash in court"). In the meantime, some issuers had to rely on drawings under liquidity facilities to make timely interest payments on the notes, while delaying their principal repayments. In addition, NPL securitisations suffered from higher-than-expected legal and servicing expenses. In some cases, delays were caused by poorly structured servicer fees, which were not properly tied to performance measures. Instead, fees were calculated as a percentage of the stock of outstanding NPLs still under management which meant that incentives of noteholders and servicers were not well aligned.

Fitch assigned ratings to about 30 Italian NPL-backed securitisations between 1997 and 2007. Since then, transaction volume has dried up. Unrated securitisations and NPL sales, largely of unsecured consumer loans, only reached around EUR10bn in each of 2014 and 2015. Volumes were held back by inefficiencies in the recovery process, limited investor interest due to often small size of the portfolios offered for sale, lack of transparency in the real estate market and a wide valuation gap between the aspirations of sellers and potential buyers, leading to pricing difficulties.

The recently announced government scheme for Italian NPL securitisations may trigger the return of Italian NPL transactions. Fitch expects that improving macroeconomic conditions in Italy and the amendments made to the Italian insolvency laws could support the performance of new Italian NPL securitisations, by providing a more favourable operating environment.