Italy bad loan scheme could set ball rolling with 10-20 bln euros worth of deals

* Italian banks saddled with 200 bln euros in bad loans

* State guarantee to lift value banks can get from bad loans

* Pressure from regulators seen spurring deals this year

* Portfolios must be around 1 bln euros so suits large banks

By Francesca Landini and Valentina Za

MILAN, March 1 (Reuters) - It may be no panacea to the dead weight of bad debts afflicting Italy’s banks, yet a government scheme announced last month to encourage lenders to unload impared loans could at least start the ball rolling amid regulatory pressure to cut problem assets.

Aiming to free banks to make the fresh loans needed to stimulate Italy’s slow-growing economy, the plan seeks to encourage banks to sell bad debts by allowing them to buy a state guarantee against default.

Some experts estimate the top banks will sell between 10 billion euros ($11 billion) and 20 billion in bad loans over the next 18 months under the programme, making a small dent in the estimated 200 billion euros worth of impaired lending in the financial system.

Yet credit rating agency Moody’s sees scope for as much as 40 billion euros of bad debt to be sold through the programme. And either way, some say any sales will add liquidity to the market for these assets and spur more transactions.

“The scheme does not work magic but it will encourage banks to shed bad loans by lifting the price they can sell them at,” said Andrea Mignanelli, CEO of Cerved Credit Management Group, which specialises in bad loan management.

The plan was intended to overcome the reluctance of banks to make painful writedowns in their accounts to reflect the difference between the value of the loans on their books and the price at which they can sell them. By reducing the risk for buyers of bad loans bundled as debt securities, the state guarantee aims to narrow that gap.

Mignanelli sees 10 billion euros in sales of bad loans backed by the state this year; Fabio Balbinot, head of bad loan manager Italfondiario, said disposals could reach 20 billion euros over the scheme’s 18 month life.

A market source in contact with banks looking into whether to tap the guarantee said 10 deals by large lenders could take place this year on portfolios worth up to 2 billion euros each.

Top Italian banks such as Intesa Sanpaolo, Monte dei Paschi di Siena and UBI Banca have said they are assessing the possible advantages of the scheme, while UniCredit does not plan to use the guarantee for now.

Italian banks sold 8 billion euros in bad loans last year, according to data compiled by consultancy KPMG, as lenders dithered awaiting the outcome of a year-long negotiation between Italy and the European Commission over the scheme.


In the meantime the government pushed through other measures to speed up loan recovery, but uncertainty over the market value of bad loans, as a market failed to develop, has been seen as one of the factors delaying an expected wave of mergers among cooperative lenders.

Rome and Brussels finally reached a compromise in January.

The deal fell short of expectations because strict EU rules on state aid required banks to pay a market price for the guarantee, which applies only to the safest portion of the bundled securities, the so-called senior tranche.

Under the guarantee scheme, support for Italian banks will be more limited compared with that enjoyed by lenders in Spain, where the government created a special asset management vehicle or “bad bank” which bought more than 80 billion euros of non-performing loans.

The scheme will be open until summer 2017 and could be renewed for another 18 months. The Treasury has said the guarantee mechanism will be in place by April and first deals are expected in the summer.

Bad loan transactions are complex to rate and banks can only tap the guarantee if the senior tranche of bundled loans achieves an investment-grade rating, meaning “BBB-” or higher.

For the scheme to be advantageous the investment-grade portion of the bundled debt must represent at least half the total.

To reach this goal, banks are expected to cherry-pick small loans with good-quality real estate assets as collateral to include in portfolios to be sold.

“The general view is that larger banks able to select a portfolio worth at least 1 billion euros could use it,” said an executive in charge of bad loan deals at a mid-sized Italian bank. “It’s not a one-size-fits-all solution.”

Yet banking sources say pressure from authorities, who want banks to sell bad loans to strengthen their capital, is set to spur sales this year.

“The Bank of Italy and the European Central Bank may say, ‘guys, there is a framework, let’s put it to use’,” Moody’s Investors Service Associate Director Alain Laurin said. ($1 = 0.9186 euros)