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Italy's bad loan scheme poised to deliver after long gestation

MILAN (Reuters) - A complex scheme Italy conceived to help the country’s banks offload their bad loans seems ready at last to deliver on its potential, as the lenders fight their way through a mass of practical problems.

A woman walks past Banca Popolare di Milano ( BPM) downtown Milan, Italy, February 11, 2016. REUTERS/Stefano Rellandini/File Photo

The "GACS" state guarantee scheme, aimed at easing a major concern hanging over the Italian economy, has had a long gestation. European authorities approved the plan almost two years ago, and one senior banker has compared the drawn-out task of preparing debt sales under its rules with childbirth. (GRAPHIC - Italian banks' bad loans

"The GACS is like a baby, it takes nine months," the head of bad loans at Banco BPM BAMI.MI, Edoardo Ginevra, said in May.

BPM, Italy’s third-largest bank, has started work on a 3.5 billion euro GACS sale to hit the market in 2018 and hopes are high that Italian lenders overall can use the scheme to deal with around 10 times that amount in the coming year.

JP Morgan, which together with Mediobanca advised the Treasury on GACS, has predicted the scheme will help Italian banks to sell 30-40 billion euros ($36-$47 billion) in bad debts in the next 12 months.

So far, only three sales totaling 2.8 billion euros have been struck in the 15 months since Italy completed the GACS framework in August 2016, of which 860 million carries state guarantees.

Italy still has a long way to go. It accounts for a quarter of the euro zone’s $1 trillion pile of bad debts left over from the debt crisis. Pressure for action is intense, with the European Central Bank still planning to force euro zone banks to set aside more money against newly soured loans, despite its openness to delaying the rules’ implementation.

A major concern for regulators is that the bad debt problem compounds the weakness of Italian banks, which are major funders of the country’s public debt, one of the world’s largest.

Fellow euro zone economy Spain rescued its troubled banks with European help in 2012 while Greece, Ireland, Portugal and Cyprus have tackled their bad debt mountains after taking sovereign bailout programs.

In Italy the process has been much more drawn out, so rising GACS-backed sales are part of the push to force lenders to clean up their balance sheets while keeping losses to a minimum.

Banca Popolare di Bari, an unlisted southern Italian bank which was the first to tap the state guarantee, said on Tuesday it had sold another 320 million euros in bad loans to a securitization vehicle and would request the GACS guarantee for the deal.


A significant boost will come from state-owned Monte dei Paschi di Siena BMPS.MI, which plans to use the scheme for a 26 billion euro bad loan securitization that the Tuscan lender must carry out under a restructuring plan agreed as part of its bailout. This pools bad loans and reparcels them into tranches of debt of varying quality.

At the heart of the GACS program is a state guarantee that protects buyers of the safest - or most senior - tranche in the securitization. That lowers its risk to that of a government bond, cutting the securitization vehicle’s financing costs.

Rome took so long to act that new stricter EU regulations now apply to such guarantees, restricting its freedom of movement. This has included the possibility of forcing small bank bondholders to suffer losses, an idea which has provoked strong political opposition.

“Given existing rules and the way the EU applies them, all that Italy is left with are half-measures,” said Andrea Resti, an associate professor at Milan’s Bocconi University,

“But it’s becoming quite proficient at using them and the GACS is probably one of the best ones,” Resti, who advises the European parliament on banking supervision, told Reuters.

The GACS scheme has revived securitized debt sales and widened the range of potential buyers of Italian bad loans to include smaller U.S. hedge funds, a person familiar with the matter said.

Such investors would not consider an outright purchase because they would not be able to oversee the process of recovering the loans. In a GACS securitization, this job is left to an independent servicer.

The range of potential investors is expected to grow as banks, including UniCredit CRDI.MI, plan to start selling the GACS-backed notes which they have retained from the three deals completed so far -- by Popolare di Bari, Creval PCVI.MI and Carige CRGI.MI. Buyers of such tranches would typically comprise insurers or pension funds.


Like any securitization, the GACS scheme is complex and those involved in its execution warn privately that banks would have to employ “armies of people” to speed up the review of loan data.

Patchy loan data has proved a huge problem for Italian banks which are digital laggards and are now being forced to whip into shape data contained in thousands of paper documents scattered across their branches.

Missing data dent the value of bad loan portfolios. In a GACS deal, good data is needed to achieve the desired size of the cheaply-financed senior tranche and maximize the benefit of the state guarantee.

In rating the debt UniCredit plans to issue under a 5.4 billion euro GACS securitization deal, Moody’s said it could consider only 12,633 of the 26,913 properties backing the loans because information such as valuation or mortgage size were missing.

UniCredit still managed to get an ‘A2’ rating on the most senior tranche, the highest assigned so far in a GACS securitization.

“The question banks most frequently asked us when the GACS was introduced was: how much is a deal going to cost?” said Marco Spano, head of financial institutions at Mediobanca’s debt capital markets team.

“At the time it was impossible to say, it all hinges on the quality of the loans and it takes months of work to check what really is in a portfolio.” ($1 = 0.8451 euros)

editing by David Stamp