Securitization in Italy: New Market-Friendly Rules Enacted
The Situation: The Italian Parliament recently approved the Conversion Law of Decree no. 50, dealing with, among others, securitization regulations.
The Result: The Conversion Law expands the scope of the "Law 130 Vehicle" for the sale of certain securitized assets due to an insolvency or restructuring.
Looking Ahead: The new provisions should attract new investment and make it easier for banks and other financial intermediaries to dispose of nonperforming leases and other claims.
On June 15, 2017, the Italian Parliament approved the Conversion Law of Decree no. 50 of April 25, 2017 ("Conversion Law"). The Conversion Law includes a review of the legal framework applicable to Italian securitization transactions. The Conversion Law provides for significant changes aimed at attracting new investments and facilitating the disposal of distressed claims ("crediti deteriorati") (including nonperforming, unlikely to pay, and forborne claims) as well as financial lease receivables (and their residual value component) by Italian banks and financial intermediaries.
The Conversion Law will be published in the Italian Official Gazette shortly and likely will become effective the following day.
Below is a brief summary of the most significant changes set out in the Conversion Law.
Some of the proposed changes entail a legal recognition of the so-called "ReoCo" schemes. Such schemes usually are implemented by investors in securitization transactions to maximize profits with respect to those collateral assets that offer a potential upside, to the extent they are managed, refurbished, and/or sold out of insolvency and/or enforcement proceedings.
In a nutshell, a special purpose vehicle company ("AssetCo") may be set up in the context of a securitization transaction governed by the Italian Securitization Law ("Law 130 Vehicle") to manage the assets and/or the security package used as collateral in relation to the receivables being securitized.
In addition, AssetCo must:
- Be set up as a limited liability company; and
- Have as its sole corporate purpose the purchase, management, and extraction of value from immovable assets, registered movable assets, and other rights granted or constituted in any form as collateral, in the exclusive interest of the securitization transaction, to guarantee the assigned claims, e.g., assets subject to financial leasing agreements (even after their termination) and any ancillary contractual relationships.
The proceeds arising from the management and/or disposal of the assets owned by AssetCo due by it to the Law 130 Vehicle are destinated by law exclusively to the satisfaction of the noteholders' claims vis à vis the Law 130 Vehicle under the securitization transaction and to the payment of the relevant transaction costs.
If the pool of assets assigned to AssetCo in connection with the securitization of lease receivables includes, in addition to the leased assets, the leasing agreements or the legal relationships resulting from the termination of such agreements:
AssetCo must be consolidated in the financial statements of a bank, even if it is not otherwise part of a banking group;
- AssetCo must be dissolved at the end of that securitization transaction;
- The by-laws of AssetCo and the contractual documentation of the transaction must set out the limitations to the corporate purpose of AssetCo, its operations, and the financial leverage applicable to the transaction, if any;
- Any rights and obligations pertaining to the leasing agreements must be carried out by a bank or by a financial intermediary acting as servicer under the securitization transaction or by an entity authorized to carry out a "leasing business" activity in Italy; and
- The transfer of the assets to AssetCo following the termination of a financial lease agreement—as a consequence of a lessee's default and the transfer of the asset by AssetCo to the lessee upon exercise of the option to purchase under a financial lease agreement, or to third parties following the termination of the financial lease agreement as a consequence of the lessee's default—is subject to nominal registration, mortgage, and cadastral taxes of €200 each.
These changes provide for a fronting structure, based on the Law 130 Vehicle/AssetCo scheme, which allows nonbanking/financial institutions to invest in nonperforming financial leases. The Law 130 Vehicle purchases the claims (no other rights or assets can be acquired by the Law 130 Vehicle) while the AssetCo purchases the residual portion of the agreements (or related rights upon termination) and the underlying assets, with the intent of managing and liquidating them and transfering the relevant proceeds to the Law 130 Vehicle.
The Conversion Law specifies that any proceeds deriving from the management or disposal of the assets by the AssetCo are as a matter of law segregated in favor of the Law 130 Vehicle's relevant noteholders. This substantially mitigates the insolvency risk of the AssetCo, addressing one of the main concerns of nonfinancial entities when investing in this asset class.
The above scheme applies only to: (i) so-called "crediti deteriorati," with the goal of supporting the nonperforming leases ("NPLs") disposal processes; and (ii) NPLs originated by banks or financial institutions with a registered office in Italy—thereby excluding those sales made by branches of EU banks. This latter restriction does not seem to respond to any specific regulatory or legal requirements, and it will need to be better analyzed from the perspective of its compliance with the principles of EC Law.
Investing in this asset class is made more efficient by the application of the favorable tax regime (namely, transfer taxes) applicable to transfers of assets by financial leasing companies to transfers made by AssetCo, as well as by segregation of proceeds deriving from the sale of assets made by AssetCo in favor of noteholders.
The Conversion Law opens the possibility for Law 130 Vehicles to grant rescue financing to distressed debtors to the extent that it may actually improve the recoverability of the receivables included in the securitized portfolio and the turnaround of the relevant distressed debtors. However, the relevant lending activity by the Law 130 Vehicles is subject to the involvement of a bank or a so-called Section 106 financial intermediary, which must also retain a significant economic interest (i.e., at least 5 percent) in the securitization. If the financing is granted in the context of insolvency or restructuring proceedings (such as a debt restructuring agreement or composition with debtors proceedings), no "skin in the game" apparently is required. This is probably because those financing transactions would take place in the context of court-supervised proceedings.
With regard to insolvency and restructuring proceedings (such as debt restructuring agreements and composition with debtors proceedings), Law 130 Vehicles may acquire or subscribe for, as applicable, shares, quotas, and/or other participating financial instruments deriving from debt to equity swap transactions.
Purchase on a Cherry-Picking Basis
The Conversion Law introduces the possibility for Law 130 Vehicle to purchase nonperforming claims on a cherry-picking basis (instead of the traditional transfer of the bulk of receivables to be selected on objective eligibility criteria), substantially taking advantage of the same simplified formalities provided for portfolios' acquisitions and trade receivables.
Four Key Takeaways
Changes to Italian securitization laws will make it easier for banks and other financial intermediaries to dispose of nonperforming financial assets.
The Law 130 Vehicle/AssetCo arrangement permits non-banking and non-financial institutions to invest in nonperforming financial leases.
- The introduction of a favorable tax treatment will potentially make investments in these assets more attractive.
Law 130 Vehicles can provide rescue financing to distressed debtors in an attempt to improve the chances of ultimately recovering the receivables.
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