STATUS OF ASSET BACKED SECURITIES MARKET AND MORTGAGED BACK

SECURITIES MARKET IN ITALY- FINANCIAL AND REGULATORY ASPECTS

(Assignment towards partial fulfilment of assessment in the subject of CFLP)

Submitted by: Submitted to:
AMRITAMBU SATYARTHI (ROLL NO 811)
ANUSHA NAGOJI (ROLL NO 813)
ARATRIKA CHAKRABORTY (ROLL NO 814)
DIVA DEVARSHA (ROLL NO 820)
MOHIT MAHESHWARI (ROLL NO 828)
N. S. TANVI (ROLL NO 829)
DR. RITUPARNO DAS
Faculty of Law





NATIONAL LAW UNIVERSITY, JODHPUR
SUMMER SESSION
(JULY-NOVEMBER 2014)

ii


CONTENTS
Introduction......................................................................................................................... 3
Structure............................................................................................................................ 3
Home Equity ABS............................................................................................................. 4
Auto Loan ABS ................................................................................................................. 5
Credit Card Receivable ABS ............................................................................................. 5
Financial aspects of securitization in European Union ...................................................... 6
The current situation of the EU securitisation market......................................................... 6
What measures and initiatives were proposed and implemented so far to address earlier
misalignments? ................................................................................................................. 7
What are the remaining roadblocks? .................................................................................. 8
Reliance on credit rating agencies .................................................................................. 9
Transparency and harmonization ................................................................................... 9
Securitisation law in Italy ................................................................................................... 9
Regulation of Asset Backed Securities and Mortgage Backed Securities in Italy ............. 11
Sale of Assets by creditor to purchaser ............................................................................ 11
Securitization of assets purchased .................................................................................... 12
Special Purpose Vehicles under the Securitization Law ................................................... 13
Effect of the changes brought by the amendment to the Securitisation law ................... 14
Amendments to the Italian Securitisation Law introduced by the "Destinazione Italia"
decree ................................................................................................................................. 16
Scope of Law 130 extended ............................................................................................. 16
Single investor permitted ................................................................................................. 16
Bond-backed ABS may be held by Italian insurance companies and pension funds ......... 16
Mortgage backed securities in Italy.................................................................................. 17
3

ABSTRACT
The passage of the new securitisation law in April 1999 has triggered a flood of
securitisation transactions by Italian banks, but of particular relevance is momentum in
securitisation of non-performing bank loans. Most Italian banks are using securitisation as
the device to clean up their balance sheets, gain international competitiveness and generally
to enhance shareholder value.The Italian Government in 1999 has the securitization laws to
promote investment in ABS as the traditional means of raising finances were not yielding the
desired results.This paper attemts to study the asset backed securities and mortgage backed
securities in the financial and regulatory framework of Italy.
INTRODUCTION
Asset-backed securities (ABS) and mortgage-backed securities (MBS) are two important
types of asset classes. MBS are securities created from the pooling of mortgages, and then
sold to interested investors, whereas ABS have evolved out of MBS and are created from the
pooling of non-mortgage assets. These are usually backed by credit card receivables, home
equity loans, student loans and auto loans. The ABS market was developed in the 1980s and
has become increasingly important to the U.S. debt market. In this article, we will go through
the structure, some examples of ABS and valuation.
STRUCTURE
There are three parties involved in the structure of ABS and MBS: the seller, the issuer and
the investor. Sellers are the companies that generate loans and sell them to issuers. They also
take the responsibility of acting as the servicer, collecting principal and interest payments
from borrowers. Issuers buy loans from sellers and pool them together to issue ABS or MBS
to investors. They can be a third-party company or special-purpose vehicle (SPV). ABS and
MBS benefit sellers because they can be removed from the balance sheet, allowing sellers to
acquire additional funding. Investors of ABS and MBS are usually institutional investors and
they use ABS and MBS to obtain higher yields than government bonds, as well as to provide
a way to diversify their portfolios.
Both ABS and MBS have prepayment risks, though these are especially pronounced for
MBS. Prepayment risk is the risk of borrowers paying more than their required monthly
payments, thereby reducing the interest of the loan. Prepayment risk can be determined by
4

many factors, such as the current and issued mortgage rate difference, housing turnover and
path of mortgage rate. If the current mortgage rate is lower than the rate when the mortgage
was issued or housing turnover is high, it will lead to higher prepayment risk. The path of the
mortgage rate might be difficult to understand, so we will explain with an example. A
mortgage pool begins with a mortgage rate of 9%, then drops to 4%, rises to 10% and finally
falls to 5%. Most homeowners would refinance their mortgages the first time the rates
dropped, if they are aware of the information and are capable of doing so. Therefore, when
the mortgage rate falls again, refinancing and prepayment would be much lower compared to
the first time. Prepayment risk is an important concept to consider in ABS and MBS.
Therefore, to deal with prepayment risk, they have tranching structures, which help by
distributing prepayment risk among tranches. Investors can choose which tranche to invest
based on their own preferences and risk tolerance.
One additional type of risk involved in ABS is credit risk. ABS have a senior-subordinate
structure to deal with credit risk called credit tranching. The subordinate or junior tranches
will absorb all of the losses, up to their value before senior tranches begin to experience
losses. Subordinate tranches typically have higher yields than senior tranches, due to the
higher risk incurred. Investors can choose which one they want to invest in according to their
risk tolerance and their outlook on the market.
1

EXAMPLES OF ABS
There are many types of ABS, each with different characteristics and cash flows, thus making
the valuation different as well. Below are some of the most common ABS types:
HOME EQUITY ABS
Home equity loans are very similar to mortgages, which makes home equity ABS similar to
MBS. The major difference between home equity loans and mortgages is that the borrowers
of a home equity loan usually doesn't have good credit ratings, hence they are not able to get
mortgages. Therefore, investors and analysts need to take a look into the borrowers' credit
when analyzing home equity loan-backed ABS.

1
Alexandra Yan, Introduction To Asset-Backed And Mortgage-Backed Securities, Investopedia

5

AUTO LOAN ABS
Auto loans are a type of amortizing asset. Therefore, the cash flows of auto loan ABS include
monthly interest, principal payment and prepayment. Prepayment risk for auto loan ABS is
much lower when compared to home equity loan ABS or MBS. Prepayment only happens
when the borrower has extra funds to pay the loan off. Refinancing rarely happen when the
interest rate drops. That is because cars depreciate faster than the loan balance, resulting in
the collateral value of the car being less than the outstanding balance. Also, the balances of
these loans are normally small and borrowers won't be able to save much from refinancing
based on a lower interest rate, so there is little incentive to refinance.
CREDIT CARD RECEIVABLE ABS
Credit card receivable ABS are a type of non-amortizing asset ABS. They don't have
scheduled payment amounts and the composition of the pool can be changed and new loans
can be added.
The cash flows of credit card receivable ABS includes interest, principal payments and
annual fees. There is usually a lock-up period for credit card receivable ABS during which no
principal will be paid. If the principal is paid within the lock-up period, new loans will be
added to the ABS with the principal payment that makes the pool of credit card receivables
unchanged. After the lock-up period, the principal payment would be passed on to ABS
investors.
VALUATION
It is important to measure the spread and pricing of bond securities and know which type of
spread should be used for different types of ABS and MBS for investors. If the security
doesn't have embedded options that are typically exercised, such as call, put or certain
prepayment options, the zero-volatility spread (Z-spread) can be used to measure them. The
Z-spread is the constant spread that makes the price of a security equal to the present value of
its cash flow when added to each Treasury spot rate. For example, we can use the Z-spread to
measure credit card ABS and auto loan ABS. Credit card ABS don't have any options, hence
the Z-spread is appropriate. Although auto loan ABS do have prepayment options, they're not
typically exercised, as discussed above, thus it is possible to use the Z-spread to measure
them.
6

If the security has embedded options, then we need to use the option adjusted spread (OAS).
The OAS is the spread adjusted for the embedded options. There are two ways to derive the
OAS. One way is from the binomial model which can be used if cash flows depend on
current interest rates but not on the path that led to the current interest rate. For example,
callable and putable bonds are not interest rate path dependent therefore we can use the OAS
derived from the binomial model. The other way to derive the OAS is through the Monte
Carlo model which is more complicated and needs to be used when the cash flow of the
security is interest rate path dependent. MBS and Home Equity ABS are types of interest rate
path-dependent securities, thus we need to derive OAS from the Monte Carlo model to value
them.
2

FINANCIAL ASPECTS OF SECURITIZATION IN EUROPEAN UNION
THE CURRENT SITUATION OF THE EU SECURITISATION MARKET
The outstanding amount of ABS in the EU is currently about EUR 1,500 billion, or around
one quarter of the size of the US ABS market. Since its peak in 2009, the outstanding amount
has decreased by a third, or EUR 750 billion. Residential Mortgage Backed Securities
(RMBS) form by far the largest securitisation segment, accounting for 58%; SME ABS are
second, but account only for 8% of the market. The largest jurisdictions in terms of
outstanding ABS are the UK, Netherlands, Spain and Italy.
In 2006, all primary issuances were placed with end-investors and other banks; by 2009,
almost all deals were retained by the originating banks and many were placed as collateral
with central banks. Despite some small improvements since, public issuance volumes remain
very low in the EU and continue to be mostly originated in a small set of countries such as
Germany, Netherlands and the UK. The deals that have emerged from the more stressed
economies either involve short maturities, high yielding assets or SME transactions with
specific support from the European Investment Bank (EIB)/European Investment Fund (EIF)
(e.g. via purchases of senior or mezzanine tranches and/or via guarantees).
Despite the low issuance and the modest take-up by investors, most European structured
finance products performed well throughout the financial crisis, with low default rates.
According to an analysis by Standard & Poors, the cumulative default rate on European

2
Ibid
7

structured finance assets from the beginning of the financial downturn, July 2007, until Q3
2013 has been 1.5%. Some asset classes such as consumer finance ABS, SME Collateralised
Loan Obligations (CLO) and RMBS have experienced default rates well below this average
and the performance of European structured finance products has also been substantially
better than US peers.
3
By way of comparison, ABS on US loans experienced default rates of
18.4% over the same period, including subprime loans.
WHAT MEASURES AND INITIATIVES WERE PROPOSED AND IMPLEMENTED SO FAR TO
ADDRESS EARLIER MISALIGNMENTS?
To address earlier flaws in the securitisation market, several financial regulations and other
initiatives have already been implemented in the EU. These are focused on removing
misalignments of interests and information asymmetries between issuers and investors,
including creating greater transparency to support accurate pricing of credit risk. The new
regulations include, amongst others, the following:
Risk Retention Rule (originators to maintain some skin-in-the-game), introduced in
2011;
measures that address information asymmetry with the securitisation process by
increasing transparency of the securitisation structures (the due diligence
requirement);
EU Credit Rating Agency legislation in 2013, making rating agencies more
transparent and accountable.
There have also been a number of public sector initiatives to improve the functioning of the
EU securitisation market.
4

For example, significant steps have been taken to introduce consistently-recorded loan-level
data in all major ABS asset-classes throughout Europe via the Eurosystem's and the Bank of

3
The corresponding default rates for European consumer finance ABS, RMBS and SME CLO are 0.04, 0.1 and
0.4% respectively.
4
The loan-level information also facilitates central banks risk assessment of ABS that counterparties use as
collateral in central bank credit operations. In fact, due to the increased level of transparency and standardisation
in structured finance markets, the Euro system decreased its haircuts on ABS in July 2013, from 16% to 10% in
the permanent framework.
8

Englands loan-level data initiatives.
5
Market participants now have access to comprehensive
asset level data, which helps prevent originators, seeking to clean up their balance sheets,
from off-loading through securitisation their lowest quality assets. More broadly there are
initiatives to ensure that information on asset performance, transaction documents and cash
flows associated with deal structures is publicly available. This high level of transparency is
an important first step towards restoring investor confidence in European ABS.
In 2013 the EIB and EIF launched a European-wide scheme to increase their involvement in
securitisation. The EIB Group ABS initiative for SMEs provides credit enhancement for
senior and mezzanine tranches of securitisations backed by SME loans, including guarantees,
and facilitates their execution.
6
Finally, there have also been pan-European and national
initiatives from the private sector to enhance transparency and standardisation in
securitisation markets.
WHAT ARE THE REMAINING ROADBLOCKS?
The new regulations to protect investors, as well as policy makers and authorities efforts to
reduce the perceived regulatory stigma of ABS and to clarify their support for simple and
more transparent securitisations have so far failed to kick-start the EU securitisation market.
In large part, this may reflect current conditions, including: the availability of cheap funding
from other sources, deterring issuance of ABS; ongoing macroeconomic weakness in several
European countries, aggravating investors concerns about future asset quality deterioration
of the ABS collateral pools; and low demand for loans, making it difficult to build collateral
pools providing sufficient income to support the coupons and credit protection investors
demand. On this latter point, often referred to as deal economics, a sustainable recovery in
stressed euro area jurisdictions will only be possible as credit risk gradually recedes on the
back of structural reforms, strengthening economic fundamentals and unlocking profitable
investment opportunities. Still, while these shorter-term factors decrease, there are a number
of remaining structural roadblocks that may prevent investors and issuers from returning to
the market. By addressing these issues now, the authorities can help to catalyse the return of

5
For the Eurosystem, this began in January 2013 for RMBS, SME ABS and CMBS. In January 2014, the
reporting requirements began for the other asset classes - auto, leasing and consumer ABS transactions and in
March 2014 for credit card ABS. For the Bank of England, reporting requirements were introduced in December
2011.
6
See SME Loan Securitisation 2.0 Market Assessment and Policy Options, Working Paper 2013/19, EIF
Research.
9

asset backed securitisation to support monetary and financial stability and economic
recovery.
Reliance on credit rating agencies
Credit rating agencies influence the ABS market via three important channels. First, as a
result of weak economic conditions, rating agencies now require far greater levels of credit
enhancement to achieve a given rating, which consequently makes it more costly to issue
structured finance assets (supply side effects). Second, rating actions taken on sovereigns
indirectly lead to ABS downgrades. In some EU countries, rating agencies currently also
apply maximum rating caps to ABS that are not related to the underlying collateral quality
itself, but to sovereign rating levels.
Transparency and harmonization
Whilst significant effort has been expended to create standards for quality, transparency and
simplicity and therefore help to boost investor trust, market participants continue to cite the
lack of transparency and standardisation of ABS and related data on underlying assets as a
key constraint. Over the long run, the Single Supervisory Mechanism might also influence
transparency and underlying underwriting standards. Nevertheless, further improved and
standardised data availability may be needed to enable investors to assess the credit risk
inherent in securitised assets and to help restore investor confidence in the securitisation
market
SECURITISATION LAW IN ITALY
The passage of the new securitisation law in April 1999 has triggered a flood of securitisation
transactions by Italian banks, but of particular relevance is momentum in securitisation of
non-performing bank loans. Most Italian banks are using securitisation as the device to clean
up their balance sheets, gain international competitiveness and generally to enhance
shareholder value.
Though Italy is one of the largest economies in the World (6th largest), Italian banking is
associated with a high percentage of non-performing assets, accumulated out of lack of
monitoring as well as the recession that hit the country in the early part of 1990s. The
percentage of non-performing loans to total loans was estimated at 11.2% in 1996 though it
10

came down to 9.7% in 1998. [As per a report in Il Sole 24 Ore the amount of NPAs held by
Italian banks was estimated at Lira 169628 billion ]
Most of these non-performing loans are secured by mortgages over immovable property. The
real difficulty, however, lies in the enforcement of the mortgage. Mortgage foreclosure can
take anywhere between 4 to 12 years in the legal system. All mortgages are required to be
enforced with Court intervention.
The constraints that seem to have hindered full diffusion of securitization in Italy which is
estimated to have a potential of Euro 100 million (according to Italian Chamber of Deputies,
minutes of preparatory works on Draft Law No. 5058 July 7, 1998). Not less significant was
the lack of enabling on securitization, but also equally important, a stifling restriction under
sec. 2410 of Civil Law and sec. 11 of Banking law that restrained corporates from issuing
debt notes exceeding their net owned funds.
7

The banking community took the lead in making a case for a securitization law in Italy - the
Italian Banking Association on July 6 1997 prepared a discussion paper which constituted the
basis for the law later. The law [no. 130 of April 30, 1999] was finally passed on May 14,
1999.
The law applies to transfer of existing or future receivables, transferred in bulk.The law does
not make any distinction based on the credit quality of the receivables: that is, even non-
performing assets can be securitized. The law covers securitization notes issued by way of
public offers as well as private placements. In case of private placements to professional
investors, the law sets out the contents of the offer documents .The law restricts servicing
functions only to banking institutions.Strictly interpreted, this would even prevent originators
from acting as servicer themselves.
8

ECB President Mario Draghi said on Thursday the central bank had unanimously agreed that
asset purchases, also known as quantitative easing, might be needed if inflation proves
persistently low.The ECB has yet to discuss details of how it could carry out any quantitative
easing, ECB Vice President Vitor Constancio said on Friday.

7
Giampaolo Salsi, The New Italian law on Securitisation, Journal of International Banking Law, Dec 1999.
8
Christopher Thompson ,Italian bank puts packaged business loans back on menu, The Financial Times, July 3
, 2013
11

Purchases of asset-backed securities are regarded as one of the possibilities. But UniCredit
CEO Federico Ghizzoni said that if this was the case, Italian banks would not have assets that
are "easily purchasable" by the ECB.One of the problems is that there are several credit lines
for which there is no standard documentation, or sometimes none at all, especially when it
comes to short-term credit.The bulk of Italian bank lending has a short-term maturity, he told
journalists on the sidelines of a business conference.In Italy, a widespread form of bank
lending to small businesses is through an overdraft on their bank accounts.The lack of
standard documents for a loan of this type would make it hard for banks to securitise it, or use
it as collateral to issue a debt security.
9

REGULATION OF ASSET BACKED SECURITIES AND MORTGAGE BACKED SECURITIES IN
ITALY
The securitization of assets ( mortgage being one specific type as explained in the previous
section) is a complex process that involves the application of several laws at various stages in
the process of securitization. For example, contracts law would determine the manner of sale
of the assets from the creditor to the purchaser, a specific statute could govern the
securitization of those assets, company law could govern their sale, transfer etc. Thus, in this
section, we will attempt to give a comprehensive overview of all the Italian laws that would
govern the securitization of an asset within Italy.
We will undertake the study of the laws along with their latest (available) amendments at
every stage of the process of securitization.
SALE OF ASSETS BY CREDITOR TO PURCHASER
The Italian Civil Code governs this aspect. Specifically, Articles from 1260 of the Italian
Civil Code govern the transaction. This sale is generally known as a transfer or assignment
of the assets.
10


9
CERNOBBIO, ECB purchase of asset-backed notes problematic for Italy banks-UniCredit, Reuters, Sat Apr
5, 2014
10
Latham & Watkins, The International Comparitive Guide on Securitisation 2013, Page 216. Available at -
www.lw.com/thoughtLeadership/securitisation-2013-guide ( Last visited on 30
th
September 2014)
12

Article 1260 states that The creditor can assign its credit with (1266) or without
consideration (1266) also without the consent of the debtor, provided that it has not a
personal nature or that the transfer is not prohibited by the law. (323, 378, 447, 1261).
The parties can exclude the assignability of the credit (1823); however the pact shall not
prevail against the assignee, if it is not established that he knew it at the time of assignment.
Thus, the creditor does not need the permission of the debtor unless it has been specially
mentioned in the loan agreement, as companies are incorporating more frequently in their
agreements.
11
if the seller sells the receivables without the debtors consent, the assignment
of receivables is valid and effective against the debtor, unless evidence is given that the
purchaser was aware of the prohibition. In such a case the seller is liable for breach of
contractvis-a-vis the debtor and shall indemnify the debtor for any damages incurred by it.
Once the assignment documents have been signed, all privileges, guarantees and advantages
are transferred to the purchaser.
12
The transfer of all these advantages begin the moment the
acceptance of the contract is given or notified.
13
The most interesting provision with regard to
the transaction is the conditions laid down in Articles 1266 and 1677.
Article 1266 states that when the assignment is for consideration the assignor must guarantee
the existence of the credit at the time of assignment and Article 1267 states that The assignor
is not responsible for the debtors solvency, with the exception that he acts as surety. Thus,
from the very beginning of the transaction, protection is provided to the securitizing
company.
SECURITIZATION OF ASSETS PURCHASED
The Securitization law, Law 130/99 is one of the important statutes passed by the Italian
Legislatures. This governs the entire securitization process from the purchase of assets to the

11
Ibid
12
Article 1263, Italian Civil Code. Available at -
http://www.fondazionefarmafactoring.it/en/downloads/Artt_1260_rev_2011_ENG.pdf ( last visited on 30
th

September 2014)
13
Article 1264, Italian Civil Code, Available at
http://www.fondazionefarmafactoring.it/en/downloads/Artt_1260_rev_2011_ENG.pdf ( Last visited on 30
th

September 2014)
13

sale of the assets. While the law itself is a brief statute, it has led to the creation of several
more rules and regulations to govern each aspect mentioned in its provisions.
Briefly, the relevant points from the Law have been mentioned below
(i) securitisation law applies to securitisations carried out by way of non-gratuitous
assignment of monetary certain receivables to special purpose companies (SPV), which issue
notes to be repaid using the cash flow arising from collections in respect of the receivables;
(ii) if the receivables to be transferred in the context of a securitisation transaction are more
than one, they need to be transferred in blocco;
(iii) all the receivables purchased by the issuer and collections in respect thereof which are
paid after the publication of the notice of assignment in the Official Gazette and the issue of
the notes are segregated from all other assets of the issuer and may not be attached or
foreclosed by any party which is not a holder of the notes;
(iv) in the event of bankruptcy of the assigned debtors the rules in relation to clawback
actions, pursuant to Article 67 of the Bankruptcy Law, do not apply to payments made by the
assigned debtors to the issuer; and
(v) in the event of bankruptcy of the assignor, the one-year and six-month terms for the
exercise of the clawback action pursuant to Article 67 of Bankruptcy Law are reduced to six
months and three months respectively.
14

SPECIAL PURPOSE VEHICLES UNDER THE SECURITIZATION LAW
Prior to this Law, the Special Purpose Vehicles created required a factoring license which
was a cumbersome and expensive process. Article 3 of this Securitization law requires that
SPVs must be incorporated as a joint stock company or limited liability company. The
securitisation companies shall have as their sole corporate purpose the carrying out of one or
more securitisation transactions.
15
The SPV must also be registered as a financial
intermediary in the register of securitisation vehicles (elenco delle societ veicolo) held by

14
Latham & Watkins, The International Comparitive Guide on Securitisation 2013, Page 220. Available at -
www.lw.com/thoughtLeadership/securitisation-2013-guide ( Last visited on 30
th
September 2014)
15
http://www.iflr.com/Article/2027666/Securitization.html ( Last visited on 30
th
September 2014)
14

the Bank of Italy pursuant to article 4 of Regulation of the Bank of Italy (provvedimento della
Banca dItalia) dated 29 April, 2011 and is therefore subject to the supervision of the Bank of
Italy.
16

This reference to a specific SPV is copy of the Anglo-Saxon model of securitization. In this
model, the scope of the SPV is circumscribed to protect the end investors from extreme risk
or fraud.
17

The Italian Securitisation Law contains certain provisions aimed at safeguarding the interests
of the obligation holders. As mentioned above, pursuant to Article 1, par. 1, letter (b) of the
Italian
Securitisation Law, the amounts paid by the underlying obligors can only be applied in
satisfaction of the rights of obligation holders and to pay the transaction costs. In addition,
pursuant to Article 3, par. 2 of the Italian Securitisation Law, the receivables relating to each
transaction constitute an asset that is segregated (patrimonio separato) from the assets of the
SPV and from those of any other transaction and no action by creditors, other than the
holders of the obligations issued in order to fund the purchase of the receivables, is permitted
against such segregated assets. Finally, pursuant to Article 4, par. 2 of the Italian
Securitisation Law, upon perfection of the transfer by publication of the Notice the only
enforcement proceedings permitted against the transferred receivables are in favour of the
note holders and other creditors of the SPV within the framework of the securitisation.
18

EFFECT OF THE CHANGES BROUGHT BY THE AMENDMENT TO THE
SECURITISATION LAW
The Italian Government in 1998 has the securitization laws to promote investment in ABS as
the traditional means of raising finances were not yielding the desired results.
19
Similarly, in

16
DBRS, Commentary on Italy 2013, available at - http://dbrs.com/research/256368/legal-commentary-
italy.pdf ( Last visited on 30
th
September 2014)
17
http://vinodkothari.com/luciaart/ ( Last visited on 30
th
September 2014)
18
Supra at 8
19
Roberto Forlani, Securitizationa nd its application in Italy A Summary, Available at -
http://www.forlaniconsulting.eu/public/immagini/doc/Scarica_Securitization_Summary_&_Contents_8316_560
6.pdf
15

2014, a slew of amendments were effected to make the market more investor friendly so as to
promote more investment in Italy. This was known as the Destination Italy Decree.
20

This decree ensured that the restrictions that dampened interest in Italy was removed and
facilitated an increased investment in the country.
The following are a brief overview of the changes it has effected
21


1. Regulatory provisions eliminated: In the case of securitization, the purchaser can be a
single investor as long as such investor is a qualified investor in order to
facilitate flexibility in the structuring of securitization transactions.
2. Restructuring clarified: The securitization pool is not available to creditors of the
servicer, subservicer or depositary bank in an insolvency situation of any of these
entities, thereby removing a grey area in the jurisprudence which would render such
assets exposed to such creditors and was contrary to segregation and bankruptcy-
remote principles of securitization.
3. Notification requirements reduced: The Destination Italy Decree simplifies the
procedures for securitization based on factoring of trade receivables by reducing the
formalities required to notify debtors of the factoring transaction. In particular, the
Destination Italy Decree permits securitization participants to apply the formalities in
the Factoring Law, eliminating, for such credit class, the need to bundle the factoring
transactions in order to comply with the notice requirements. This reform results in
reduced transaction costs related to the publication in the Official Gazette of each
factoring operation.
4. Trade receivables treatment harmonized: The Destination Italy Decree also
harmonizes the treatment of trade receivables related to public entities with those
related to private entities. In particular, payments that expire on the day of bankruptcy
or prior are no longer considered ineffective8 as long as they were made by the

20
http://www.forlaniconsulting.eu/public/immagini/doc/Scarica_Securitization_Summary_&_Contents_8316_56
06.pdf ( Last visited on 30
th
September 2014)
21
Latham & Watkins, Destination Italy Decree measures to encourage debt capital market transactions,
Number 1655, February 2014, Available at - www.lw.com/thoughtLeadership/lw-destination-italy-decree ( last
visited on 30
th
September 2014)
16

bankrupt entity in the two years prior to the bankruptcy and insofar as they are related
to securitization notes.
AMENDMENTS TO THE ITALIAN SECURITISATION LAW INTRODUCED BY
THE "DESTINAZIONE ITALIA" DECREE
On 23 December 2013, law decree n. 145 or the so-called Destinazione Italia decree ("Decree
n. 145") was published in the Italian Official Gazette providing for certain changes to law n.
130 of 30 April 1999 ("Law 130" or the "Italian Securitisation Law")
SCOPE OF LAW 130 EXTENDED
The proposed reforms expressly permit the securitisation under Law 130 of not only
receivables (crediti), but also bonds (obbligazioni e titoli similari) with the exception of
exchangeable and convertible bonds, hybrids and bond representing company equity. This
change will allow Law 130 SPVs to be more like investment companies holding a portfolio
of assets comprising both receivables and bonds including Italian securitisation ABS and so-
called Italian "mini-bonds".
SINGLE INVESTOR PERMITTED
Decree n. 145 has clarified that ABS issued under a Law 130 securitisation can be held by a
sole investor so long as it is an "investitore qualificato" (qualified investor) under Article 100
of Law Decree n. 58 of 24 February 1998 ("TUF") without any risk of the transaction being
recharacterised for fiscal or other purposes.
BOND-BACKED ABS MAY BE HELD BY ITALIAN INSURANCE COMPANIES AND PENSION FUNDS
Law 130 ABS backed by bonds (even if they are unrated and/or unlisted are stated to be
suitable assets to be held as investments by Italian pension funds and by Italian insurance
companies to form their technical reserves (riserve tecniche). Such amendment should have
the effect of expanding the potential investor base for Italian securitisation ABS.An
implementing regulation by IVASS (the Italian insurance industry regulator) containing
further details in relation to the proposed reform is required.
22


22
Emiliano Conio, Corrado Angelelli, The Destinazione Italia Decree: significant amendments to Italian
securitisation transactions, Freshfields Bruckhaus Deringer,January 2014
17

MORTGAGE BACKED SECURITIES IN ITALY
The mortgage market went through great reform in 1993, when new mortgage legislation was
introduced. Previously, only specialized mortgage credit institutions could grant residential
mortgage loans. Unlike the retail banks, which were typically short-term lenders, the
specialized institutions were allowed to lend money only on a long-term basis. It was via
these "istituti di credito fondiario", which in most cases were owned by Italian deposit-taking
institutions, that the retail banks could extend mortgage loans to their clients.
The Banking Act introduced on Jan. 1, 1994 eliminated the distinctions between long- and
short-term credit institutions, allowing all banks to grant mortgage loans. In addition, the new
law permitted any foreign lender, provided that it was a regulated credit institution within the
EC, to expand its mortgage lending activity in Italy. The combination of these two factors
contributed to a substantial increase in the number of market players. This, in turn, resulted in
an immediate improvement in mortgage loan terms and conditions (i.e., the reduction of
interest rates and prepayment penalties, the lengthening of maturities, etc.) and raised the
quality of origination and loan management procedures, which became more efficient.
The market is highly concentrated, with the four largest national mortgage lenders covering
more than one-half the total residential mortgage business nationwide.
Mortgage origination is still undertaken principally through each bank's branch network,
given the large base of clients already dealing with the bank for other services such as current
accounts, personal loans, and deposits. An intermediaries network is also a channel for loan
origination, however. Although it is quite new, its usage is constantly increasing. Originators
are beginning to appreciate the benefits of such a network, namely, the potential to widen
their presence in the market on one side, and on the other, to reduce the cost of operating
local branches.
Although origination and mortgage applications can be done either at the intermediary or
branch level, the analysis of a client's creditworthiness is done centrally . The responsible
body will then approve or reject any credit application according to the bank's powers of
authorization, which vary from institution to institution.
23


23
Criteria for Rating Italian Residential Mortgage-Backed Securities, Standard &Poors, 16
th
July 2002
18

The Commercial Mortgage Securities Association (the CMSA) is an industry trade group
formed in 1994 and dedicated to improving the liquidity of commercial real estate debt
securities through access to the capital markets. The CMSA includes as its members the wide
spectrum of companies involved in the business of creating, trading, monitoring and investing
in commercial mortgage-backed securities (CMBS) including Originating Banks and other
commercial mortgage loan originators, Investing Banks and other CMBS investors, mortgage
servicing companies and securities trustees, rating agencies as well as Bondholders investing
in AAA-rated to Non-Rated CMBS classes.
There are multiple benefits to the investor in the CMBS transaction. The most significant
benefits are: (a) the diversification of the pool of loans (if multiple loans); (b) the tranching of
the CMBS securities into various rating levels (typically AAA to BB); and (c) ability to
invest in commercial real estate debt in relatively low investment amounts, as compared to
the principal balances of the related mortgage loans.
24

According to Citigroup Inc. (C), senior tranches of bonds backed by Italian mortgages have
the most to gain among European securitized assets from an economic recovery in the region.
The view of Italian residential mortgage-backed securities from 30,000 feet is bad - the
economic and political situation, as well as the lengthy foreclosure process, do not paint a
rosy picture - but the view from the ground shows there are lots of truffles to be found among
the poisonous mushrooms.
With senior tranches of Italian home-loan bonds yielding an average 150 basis points to 200
basis points more than comparable U.K. and Dutch prime RMBS, the debt has more room to
rally if a recovery in Europe causes credit spreads to narrow. Europe exited its longest ever
recession in the second quarter and posted further growth in the third quarter, according to
data compiled by Bloomberg.
25


24
Ibid
25
Alastair Marsh ,Italian Mortgage Debt to Offer Among Best ABS Returns, Citi Says,Bloomberg, available at
http://www.bloomberg.com/news/2013-12-31/italian-mortgage-debt-to-offer-among-best-abs-returns-citi-
says.html

19

The securities also benefit from relatively short maturities that help protect investors from
large mark-to-market swings should credit spreads widen. Italian mortgages typically range
from 15 years to 20 years compared with an average 30 years in the Netherlands.Securities
with a weighted-average life of three years to six years yield between 2.5 percent to 4 percent
and most Italian RMBS bonds have an average tenor of less than five years, according to
Roy. U.K. prime RMBS with a similar weighted-average life pay 1.7 percent to 2.5 percent.
About 80 percent of Italian RMBS currently held by investors is ranked AA by at least one
ratings company, two levels below the highest AAA rating given to almost all senior tranches
of Dutch and U.K. RMBS. Banks create asset-backed securities by pooling consumer and
property loans into notes, which typically allow lenders to raise capital more cheaply than by
issuing unsecured debt.