Italian NPL ABS capture coronavirus exposures

Over the medium term, Italian NPL securitisations will capture loans that have defaulted since the outbreak of the pandemic. They will be different compared to pre-pandemic portfolios featuring loans with low seasoning, at early stages of legal proceedings and with increased concentrations.

According to a new report by Scope Ratings, banks will securitise low-seasoned NPLs, as portfolios will include new defaults because of the pandemic such as a portion of loans exiting payment holidays to borrowers in financial difficulty and loans currently in stage three (unlikely to pay). So far, the average unsecured seasoning has been five years. Less seasoning will be a positive rating driver for unsecured loans, as aged NPLs tend to have a lower likelihood of recovery.

Secured portfolios will be materially guaranteed by commercial assets. Retail and hospitality have been the sectors most affected by the pandemic. “We expect the share of corporate NPLs secured by those assets to increase, potentially exceeding residential mortgages, which had constituted the largest share of secured portfolios-on average 43% of secured gross book values,” states Scope.

Compared to commercial assets, residential properties are more liquid and exhibit less price volatility. This drives tighter bid-ask spreads, which likely explains the high share of exposures backed by residential assets in securitised portfolios.

“We see a higher share of commercial properties as credit negative. That said, given that the Italian NPL market is mature, we also foresee a greater preparedness among market participants to trade commercial NPLs,” says Scope.

New defaults will primarily concern corporate borrowers. “Latest figures show that 80% of outstanding loans under moratorium are corporate loans. On average, 4% of total bank lending is still under moratorium. We expect that new defaults will be mainly related to corporate borrowers, which already account for a high share of defaults-76% on average in GBV terms.”

The share of secured loans at initial stages or with no proceedings has risen by two-thirds since 2017 in GBV terms. Indeed, Scope expects a higher share of secured loans at early stages.

When loans are at early stages, originators or servicers have more room to carry out recovery activities. When loans are at more advanced stages, recoveries are less dependent on servicing capabilities and strategies. This explains why originators generally prefer to service in-house loans that are close to resolution and outsource the servicing of other loans via securitisations, disposals, or outsourcing mandates. A high share of secured loans at early stages is credit negative, as it results in a longer expected time horizon for collections compared to loans at more advanced phases.  

Finally, portfolios in 2021 show above-average concentrations. Scope concludes: “47% of GBV is related to the top 100 borrowers and 19% to the top 10 borrowers. The historical average is 30% and 9%, respectively. Since 2019, portfolio concentration has materially increased, mostly driven by sellers’ disposal strategies vis-à-vis top borrowers. A high concentration exposes noteholders to idiosyncratic risk, as the performance of leading borrowers may materially impact portfolio recovery proceeds.”

Stelios Papadopoulos