Scope on NPL ABS ReoCo performance

Disappointing So Far but Offering Potential

Using ReoCos structures can shorten recovery timing and increase proceeds for non-performing loan securitisations. Activity to-date has been limited and profitability disappointing but they still offer potential.

Italian non-performing loan securitisations have historically suffered from long recovery procedures, in part due to the mechanics of the legal framework. Properties are sold at auction with opening bids determined by the court. If no-one bids, a new auction is scheduled but the starting bid is set 25% below the previous one and so on until properties are sold.

By contrast with other jurisdictions that allow securitisation issuers to directly repossess properties and sell them in the open market, this option does not exist in Italy. As a result, the properties backing loans are less liquid and noteholders typically face longer recovery periods compared to peer jurisdictions such as Spain and Portugal.

Using ReoCo (Real Estate Owned Company) structures can shorten recovery timing and increase recovery amounts. Amendments to Italy’s securitisation law in 2019 relating to tax treatment were aimed at making the use of ReoCos more frequent and profitable, thereby revitalising the structure. ReoCo activity is still limited, but while the results in terms of profitability have been disappointing to-date, ReoCo structures do have potential.

As of May 2023, Scope had rated only four transactions that have ReoCos with acquired assets. On average, ReoCos plan to sell assets at 63% above their purchase price. Around 11% of properties acquired have been sold so far, as purchases have only been made recently. But exit prices have on average been 58% below ReoCo purchase prices.

A ReoCo is a corporate vehicle that acts in the exclusive interest of securitisation noteholders. Its sole purpose is to participate in auctions and manage and dispose of properties it buys. Payment for properties is typically deferred until they are sold in the open market. Although sales constitute their main source of funding, ReoCos can also access external financing.

ReoCos typically follow a defensive strategy i.e. they bid for assets with the aim of preventing excessive discounts on properties sold at auctions and drawn out sales procedures that result from empty auctions. By participating in auctions, ReoCos stimulate third parties to bid above base prices.

ReoCo structures do entail some risks, mainly related to operating and capital expenses and fees, which can erode net sales proceeds. Payment for purchases is typically deferred until the asset is sold, directly exposing securitisation noteholders to real-estate risk.

Securitisation ReoCo structures contain certain covenants to mitigate such risks, including limits to the aggregate value of properties that can be acquired by the ReoCo; incentive fees to align the interests of the ReoCo servicer and the noteholders; cross-collateralisation mechanisms, and required approval by mezzanine and junior noteholders if expenses are higher than forecast in ReoCo business plans.

Report Available at the following Link :

https://scoperatings.com/ratings-and-research/research/EN/174811

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