Scope Ratings On Government Proposal

Italian government proposal AC 843, aimed at supporting borrowers in financial difficulty by giving them the option to buy back exposures already sold to third parties through ABS or loan disposals, has created significant turbulence in the NPL market.

Taking up the buyback option would allow borrowers to clean up their credit status at the Central Credit Register (Centrale Rischi) and give them access to new financings. The proposal would have no immediate impact on banks’ credit quality but the knock-on effects of its retroactive nature could cause significant damage to the NPL market.

The retroactive nature has created concern among investors and other market participants so appetite for Italian NPL transactions is likely to plummet as uncertainty is priced in. We expect the proposal would have limited impact on the performance of Italian NPL securitisations, though.

Determining repurchase prices is open to interpretation but it can be inferred that borrowers would pay the average of the portfolio price to which loans belongs as a percentage of gross book value plus a premium. This definition would benefit some borrowers but penalise others, independent of their capacity to pay the option price.

Scope Ratings believes a relatively small share of borrowers would exercise the option because it would be very difficult to implement. The content and formalities of the notification process may also trigger litigation by debtors, which would lengthen resolution timing. Som delays in transaction cash flows can be expected until the proposal is passed or rejected.