Since its launch in 2016, GACS has helped Italian banks offload 96 billion euros ($103 billion) of bad debt by mitigating the impact of divestitures on their profits.
At the end of 2021, investors held 11.6 billion euros in debt guaranteed by GACS, according to Treasury data in April. The scheme in its current form expires on June 14.
Four people briefed on discussions around the renewal of the system said Rome was considering reintroducing it with terms adjusted to reduce risk to taxpayers, possibly seeking an extension of more than 12 months. One of the options being discussed is an 18-month extension.
The extension would require the approval of European Union authorities, who first cleared the measure after ensuring it complied with EU state aid rules.
Rome is considering changes that would reduce benefits for banks and increase protection for the state to reduce the risk of it being left behind, the sources said.
Even under tighter conditions, the GACS scheme could help Italian creditors, who have rid themselves of more than €250 billion in bad debt since 2015, cope with an expected rise in business failures in the wake of the pandemic. and the Ukrainian crisis.
Italy, which guarantees within the framework of the system the reimbursement of the least risky tranche of doubtful loans repackaged in the form of securities, plans to raise the required rating of the “senior” tranche by at least one “BBB+” notch, indicated the sources.
Rome could also consider reducing the share of the senior tranche covered by GACS state guarantees, currently 100%.
The guarantees reduce the risks for those who invest in the securities, which allows the banks to get rid of the debts at a lower discount.
COVID PRTS REIMBURSEMENTS
The success of the GACS system in bridging the price gap between buyers and sellers has made Italy Europe’s largest market for bad bank loans. These debts now represent less than 4% of total bank loans, down from the peak of 18% reached in 2015.
Support measures taken by the government last year helped bring the number of bankruptcies to a record low, but companies must now repay part of the 280 billion euros in state-guaranteed COVID loans, while ‘they have to face record prices for energy and raw materials.
While striving to help its banks cope with new shocks, Rome is also keen to preserve the state coffers after loan recoveries in some of the previous GACS-supported operations fell short of expectations.
Moody’s Investors Service said in April that 15 of 28 Italian bad debt securitization deals it had analyzed had fallen short of initial projections for recovery, with a median underperformance of 35% against business plans. .
Italy had already tightened the conditions of the program in 2019, raising the minimum rating for the senior tranche and introducing mechanisms to incentivize collection companies to stick to business plans.
To further reduce risk, the Treasury plans to introduce a new performance indicator called the profitability ratio, the sources said, to prevent debt collection companies from increasing their income by reselling loans rather than covering them.
If the indicator falls below a certain threshold, collection companies would not receive their variable fees and interest payments on medium-risk “mezzanine” tranches would be temporarily frozen, the sources said. ($1 = 0.9320 euros)