EU deal for Italian bad loans “helpful” to European CMBS

The Italian government’s EU deal allowing it to provide guarantees to the country’s banks for securitising non-perfoming loans could be helpful to the European CMBS market.

According to Iain Balkwill, a structured finance partner in the London office of law firm Reed Smith, the news is “a significant, positive sign for European securitisation markets.”

He said that its significance for real estate and CMBS issuance “will largely depend on the extent to which Italian banks deploy securitisation as a means of offloading NPLs secured by commercial real estate.

“However, given the suggested volume of Italian CRE NPLs, the issuance backed by such loans has the potential to be sizeable,” he wrote.

Balkwill made his comments in a blog posted after Rome and the European Union announced last week the scheme to help Italian banks package up bad loans and move them off balance sheet. The idea is designed to get round an EU clampdown on any further publicly-owned, NAMA or Sareb-style bad banks, instead encouraging private investors to buy the loans, sweetened with the government guarantee.

The state guarantee is linked to credit default swaps which would be bought by participating banks. It would cover the senior tranches in the securitisations.

The measure is intended to help tackle Italy’s bad debt problem by encouraging the sale of loans; it is estimated the country’s banks have €350 billion of non-performing loans on their balance sheets. The EU said the strategy did not constitute state aid because the guarantees will be provided at the market price of the loans.

However, the measure has so far met with a lukewarm reception in many quarters.

Italian bank shares fell sharply last week, with the FTSE Italia All Share Banks Index dropping 5.8 percent the day after the announcement, to its lowest level since 2013. Although they have recovered slightly, they are still more than 20 percent down already this year.

As Balkwill observes, Italy has been one of the few countries to see several CMBS deals since the market began to re-open in 2011. One driver was as a means for getting round Italian domestic regulations which require institutions buying syndicated loans to have a banking licence.