White smoke on the bad bank. After an exhausting 5-hour negotiation with the European Commission in Brussels, the Minister of the Economy, Pier Carlo Padoan, was able to announce yesterday evening an agreement for the management of non-performing loans of Italian banks which will give life to vehicle companies which will be able issue bonds on which banks will be able to purchase public guarantees "at market prices". The mechanism is complex and will have to be further perfected in the next few hours, but the way to relieve the banks of the ballast of bad debts has finally been found.
"We have reached an agreement with the European Commission - explained Padoan - on a guarantee mechanism which represents a very useful tool for the management of bank non-performing loans" through a guarantee on the securitization of the non-performing loans themselves which "completes the Italian toolbox for managing non-performing loans". In essence, it is a question of activating an incentive mechanism to speed up the absorption times of non-performing loans by the market.
“The Commission – commented Eurocommissioner Vestager for competition – welcomes the agreement reached with Minister Padoan on the terms for setting up a guarantee scheme to support Italian banks in tackling non-performing loans: the guarantees are priced at market conditions so that they do not constitute State aid. With other reforms implemented by Italy - he added - the ability of banks to grant should improve
loans to the real economy”.
The match between Rome and Brussels was played on the issue of the price of the guarantee, i.e. the value that Italian banks will recognize to the Treasury in order to receive a guarantee of last resort on senior bonds to finance the vehicles that securitize non-performing loans. The banks will confer to their bad banks - the so-called Spv (Special purpose vehicles) newly created - the non-performing and difficult to recover loans, against the issue of tranches of junior, mezzanine and senior bonds. On the latter type of bond – which has the best quality credit as collateral – the banks will be able to purchase a public guarantee from the Treasury through the Cassa depositi e prestiti.
The hypothesis, which supports the agreement, is that the guarantee costs an intermediate value between 20-30 basis points indicated by the banks and the 100 basis points requested by Brussels.
THE DETAILS OF THE TRANSACTION
The Ministry of Economy intervened, with a statement published today Wednesday, to explain the details of the operation authorized by Brussels. Basically, the guiding principles are that the State guarantee will concern only senior bonds, with a rating equal to or higher than investment grade; and that the public coffers will not lose money but, on the contrary, will derive a positive income from it. The plan will have a duration of 6 years and the price of the guarantee, at market values, will increase to encourage the disposal of problem loans.
“The State – explains the Mef – will only guarantee the senior tranche of securitisations, i.e. the safest ones, which are the last to bear any losses deriving from lower-than-expected credit recoveries. It will not be possible to proceed with the repayment of the riskiest tranches (junior and mezzanine), if the senior tranches guaranteed by the State have not first been fully reimbursed. The guarantees can be requested by the banks that securitize and sell the non-performing loans, against the payment of a periodic commission to the Treasury, calculated as an annual percentage on the guaranteed amount. The price of the guarantee is market price, as also recognized by the European Commission, which agrees that the scheme does not include state aid. The price will be calculated by taking as reference the CDS prices of Italian issuers with a level of risk corresponding to that of the guaranteed securities. The price will increase over time, both to take into account the greater risks associated with a longer duration of the notes, and to introduce a strong incentive to recover debts quickly”.
HOW THE PRICE WILL BE CALCULATED
The expected price for the first three years is calculated as average of the mid price of three-year CDS for issuers with a rating corresponding to that of the guaranteed tranches. In the fourth and fifth year, the price will increase as a result of the application of a first step up (5-year CDS) and the payment of an incentive increase, to offset the lower rate paid for the first 3 years. From the sixth year onwards the price of the guarantee will be full (7-year CDS). For the sixth and seventh year, a further incentive increase will also be due, to offset the lower rate paid for the first 5 years".
SENIOR BONDS GUARANTEE
“The State – continues the MEF note – will issue the guarantee only if the securities have previously obtained un rating equal to or higher than Investment Grade, by an independent rating agency and included in the list of agencies accepted by the ECB. The rating will be released by applying the strict criteria that the agencies are required to observe, which include: the analytical estimate of the cash flows associated with the guaranteed security, the verification of the quality of all the underlying credits, the percentage invested in the tranches that absorb losses first, the operational capacity of the servicer who will be in charge of debt collection. Banks will be required to appoint an independent external servicer to recover the debts. This will prevent the recovery action from being held back by any conflicts of interest.
EASIER TO DISPOSE OF SUFFERING
The presence of the public guarantee - concludes Minister Pier Carlo Padoan - will facilitate the financing of operations for the sale of non-performing loans. This intervention adds to the numerous measures approved in recent months to contribute to the ongoing strengthening of the banking sector (transformation of the major cooperative banks into joint-stock companies, reform of banking foundations, simplification of debt collection procedures and insolvency procedures to reduce time, adaptation to the European standard of the tax treatment of write-downs , the forthcoming reform of cooperative credit banks)".
“With this additional piece, the complex of interventions will facilitate the effective and progressive management of the residual element of weakness of the Italian banking sector, represented by the concentration of non-performing loans. The intervention will not generate charges for the state budget. On the contrary, the commissions collected are expected to exceed costs, and therefore there is a positive net income”.
