Portfolio Lead Advisory Services Weekly Digest - Edition 4

In the third edition of this blog series we included a Scope Ratings research article, which identified several Italian NPL securitisations that had underperformed over Q2 2020. The majority of these deals qualified for the Garanzia Cartolarizzazione Sofferenze (GACS) - an Italian Government scheme which provides a state guarantee on rated senior notes in eligible NPL securitisation transactions. The aim of the GACS scheme has been to help banks shed their stock of NPLs and free-up capital to re-deploy into new lending. A similar scheme in Greece, the Hercules Asset Protection Scheme (HAPS), was ratified by the Greek Government in October 2019.

Following GACS' inception in 2016, the NPL securitisation market in Italy has been resurgent. The HAPS scheme is expected to promote a similar level of activity in Greece, with several HAPS securitisations already in the pipeline.

However, last week Moody's published its ratings actions on five Italian NPL deals. Whilst the senior notes of three deals were affirmed, two senior notes in two other transactions were downgraded. Moody's attributed these to "slower and potentially lower than anticipated cash flows" following the COVID-19 outbreak, corroborating Scope's research on recent underperformance.

Banks continue to remain uncertain as to the full extent of the COVID-19 impact on their balance sheets. As the quantum of NPLs across Europe becomes clearer, other countries with active NPL markets (such as Spain, Portugal and Ireland) may consider introducing government-backed schemes to encourage the resolution of non-performing portfolios. Further, the EBA and BIS continue to review the current regulatory framework around NPL securitisations, with a view to revising the currently severe capital treatment.

Whilst critics of GACS and HAPS attribute them as being tantamount to state aid, government-backed schemes continue to promote deleveraging activity in Italy and Greece. However, it remains to be seen to what extent potential losses will be shifted to the state, if any. As events continue to unfold, it will be critical for financial institutions to respond swiftly and decisively to mitigate the risk of potential losses.

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