November 29, 2016 / 1:05 PM / 8 months ago

Bari to sell risky NPL bonds without Atlante support - sources

5 Min Read

* Atlante not involved in sale of first Italian NPL ABS

* Davidson Kempner to take mezzanine, junior bonds

* Rescue fund's absence hints at focus on bigger names

By Mariana Ionova

LONDON, Nov 29 (IFR) - Banca Popolare di Bari is poised to sell the riskier bonds in its landmark bad loan securitisation without the help of Italy's rescue fund, having turned to a US hedge fund instead, according to people familiar with the situation.

The Italian lender has lined up Davidson Kempner Capital Management for both the mezzanine and junior notes in the Popolare di Bari NPLs 2016 securitisation, three people with knowledge of the matter said. The 14m mezzanine chunk is rated B(High)/B2, while the 10m junior slice is unrated.

A spokesperson for Davidson Kempner declined to comment.

Bari transferred the non-performing loans into the securitisation vehicle in August, laying the groundwork for the first publicly sold bond backed by Italian NPLs since 2007.

Italy's bank rescue fund Atlante will not be involved in any of the tranches, although it did consider the deal, the people said. The fund, which was set up to help banks sell their bad loans, was widely expected to buy the mezzanine bonds.

Atlante's absence from the Bari deal signals that the rescue fund could be conserving its limited firepower for deals from bigger banks with deeper problems.

When it was formed in April, the fund was envisaged as a way to complement Italy's state guarantee scheme, known as Gacs in Italian, which promised to insure senior NPL tranches but did not outline a plan for placing the riskier notes.

Part of Atlante's mandate was to buy junior and mezzanine risk in Italian bad loan securitisations. With a lower return target than levels demanded by distressed debt buyers, the fund was meant to kick-start the public NPL market without inflicting deep losses on Italy's fragile banks.

Greater Cost

Placing the deal's riskier tranches without Atlante's assistance came at a greater cost to Bari, the people said.

Atlante targets returns of 6% a year, having stated that it accepts a lower IRR on its NPL investments than the double-digit IRRs "traditionally requested by specialized investors".

Bari's mezzanine and junior notes carry coupons of 6% and 15%, respectively, over six-month Euribor, but the people said Davidson Kempner is buying the notes at significant discounts to par.

One person pegged the hedge fund's combined return at roughly 16%, as it is buying some of the debt at "around 70 cents" of face value.

However, Bari had to shed the riskier bonds in order to secure the all-important state guarantee for the senior bonds, one person familiar with the process said.

"They may end up with a bigger loss than they expected," the person said. "But they've been saying to the entire world that they are going to create the first Gacs transaction. And, in reality, the first transaction has not happened yet."

Italy's guarantee scheme was introduced earlier this year as part of the government's efforts to help Italian banks shed some 360bn in soured debt.

While Bari is said to have an informal green light from the state, it must deconsolidate the NPLs from its balance sheet to formally receive the Gacs.

Bari's initial plan was to publicly sell the senior notes once it had secured the guarantee, but market participants said the issuer can continue to retain this tranche for repo purposes if it cannot find buyers at the right level.

Bigger Concerns

Many expected Atlante to make its debut NPL investment with a contribution to Bari, which in March became the first Italian bank to announce plans to sell over 800m in NPLs through the Gacs scheme.

The rescue vehicle was funded through contributions from banks, insurers, bank foundations and state lender CDP. Notably, Bari was among the 67 investors who pitched cash into the fund.

But Atlante and its offshoot, Atlante II, instead committed 1.6bn to a behemoth deal from Banca Monte dei Paschi di Siena and are also said to be mulling a trade from UniCredit, which has earmarked up to 20bn of bad loans for a potential sale.

"Bari doesn't necessarily need Atlante," said one buyer of distressed Italian debt. "Where there is value (for the public market), you don't need Atlante there."

"Atlante goes in where there are bigger issues. And Popolare di Bari is not systemically important, so I don't think they were interested."

There are also signs that Atlante is eyeing smaller players, even though it chose to pass up Bari. This month, Quaestio's chairman said Atlante would bid on the bad loans of four small banks rescued from bankruptcy a year ago.

The fund is also considering trades from the likes of Banca Carige and Credito Valtellinese, which are both planning smaller NPL deals using the Gacs, according to a person close to the matter. (Reporting by Mariana Ionova, editing by Robert Smith and Ian Edmondson)

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