A recent commentary by Morningstar DBRS provides an in-depth analysis of the transaction structures for publicly rated Italian non-performing loans (NPLs) securitizations. This evaluation covers the financial structure's impact on senior notes' collateralization, amortization speed, exposure to interest rate risk, and the significance of the state-guarantee GACS premium.
Senior Notes' Collateralisation
The collateralization of senior notes, determined by the amount and timing of collections distribution, is crucial for understanding the amortization profile of these notes. Historically, the balance of senior notes relative to expected gross collections has increased, indicating a trend towards better collateralization in recent transactions. This improvement suggests enhanced financial stability and predictability for newer securitizations.
Amortisation Speed
The amortisation speed of senior notes is influenced by the cost structure and the priority of payments. Key drivers include subordination triggers and the conversion rate of available funds into senior principal. Faster amortisation rates reduce the overall cost burden, including the GACS premium and interest payments. However, transactions vary significantly in their amortisation rates, with some experiencing delays due to higher senior costs and interest rates.
Exposure to Interest Rate Risk
The recent sharp increase in interest rates has exposed some transactions to heightened interest rate risk, particularly those with unhedged exposures. This risk may negatively impact underperforming deals while potentially benefiting well-amortised transactions. The interest rate environment will likely exacerbate the performance gap between better- and worse-performing transactions.
State-Guarantee GACS Premium
The GACS premium, a significant senior cost in Italian NPL securitisations, has amounted to around EUR 436.5 million across rated transactions. This premium is pivotal in enhancing the creditworthiness of senior tranches backed by a public guarantee. However, there are concerns about the enforceability of state guarantees at maturity, with projections indicating that some senior notes may not be fully covered by expected collections. This situation is closely monitored, given the variability in servicers' future projections and collection rates.
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Detailed Analysis of Deal Size and Senior Notes Collateralisation
The analysis of 37 rated transactions reveals a total issuance of EUR 20.2 billion in notes. Over time, the deal size has declined, with senior tranches representing a substantial portion of the issued notes. The evolving ratio of senior notes' collateralisation, considering both original and updated expectations, highlights a trend towards poorer collateralisation due to deteriorating servicer expectations. Despite this, more recent transactions show better collateralisation ratios, offering a cushion for senior costs, interest, and principal repayments.
Senior Notes Amortisation Speed
Sequential amortisation is typical for most Italian NPL securitisations, with performance triggers potentially subordinating mezzanine interests. The conversion of gross collections into senior repayments averages around 70%, but this varies significantly across transactions. The amortisation profile is also influenced by periodic collection fluctuations due to events such as note sales or court closures.
Focus on GACS Fee Premium
GACS has facilitated market-based solutions for bank deleveraging, increasing the breadth and depth of the NPL market. The GACS premium, tied to market risk, starts high and reduces over time. The weighted average premium paid since issuance is approximately 0.9%, with higher premiums for older transactions. Despite significant payments towards the GACS premium, the potential risk of uncovered senior notes at maturity remains a concern.
Spreads and Interest Rate Cap Agreements
Interest rate risk is mitigated through interest rate cap agreements, which provide payments when Euribor exceeds a predetermined strike price. However, some transactions are underhedged, leading to higher-than-expected interest payments. The cap agreements typically expire before the final maturity of the securitizations, posing potential future interest rate risks.
Conclusion
Overall, GACS 2.0 transactions appear better positioned than GACS 1.0 transactions, both in terms of asset performance and structural robustness. The gap between well-performing and underperforming transactions is expected to widen, with underperforming GACS 1.0 transactions at risk of state guarantee enforcement at maturity. The ongoing analysis of transaction structures is crucial for understanding the evolving landscape of Italian NPL securitizations.
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Relevant Links:
https://dbrs.morningstar.com/research/433128/italian-npl-securitisations-transaction-structures
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