The revelation that rescheduled long-term debt with implied government support contravenes Article 119 of the constitution of the Republic of Italy – which states that local public entities are allowed to incur debt only if the debt is to finance investments – invalidates the principle of delegazion de pagamento (payment delegation). This concept, whereby the regional government becomes the direct obligor of the receivable which is then rescheduled, has been the basis on which securitization has papered over the cracks in the decentralization of healthcare provision in Italy [see S&P knocks Italian regionals, Euromoney October 2006].
As previously reported, Standard & Poor’s last year highlighted the plight of the local healthcare suppliers in the regions of Campania, Abruzzo and Lazio, which routinely face protracted delays before getting paid out of central government remittances. The agency affirmed Campania before Christmas and downgraded Abruzzo but the jury is still out on Lazio.
Hard deadline
This means that Campania’s planned public health receivables securitization, a deal of undisclosed size jointly mandated to Calyon, Credit Suisse and Lehman, will safely make it to market by March 31, the expiry date imposed by Italy on deals that require its debt delegation. Although Italy insists that the date amounts to a hard deadline, it actually governs the delegation of payments rather than the launch of transactions, such that a deal that has been certified and delegated may still be launched into the market after the cut-off.
However, with Lazio still in negotiation with ministers over the restructuring of the healthcare service in the region, the deal, which has already been pushed back from Q4 2006, is in danger of getting caught up in the mess. For its part, S&P says that despite the complexity of Lazio’s engagement with central government, it expects to resolve the negative credit watch by February. However, whether the region, rated BBB, will escape a downgrade to speculative grade is another matter.
Now that delegated payments have been consigned to the bin marked "good idea at the time", can structured finance still offer a solution to a deficit problem widely considered to be in the region of many billions of euros? "Knowing that these transactions had been key liquidity providers for the regions, now that they have been invalidated, how can we avoid ongoing credit crunches?" asks Vittoria Ferraris, public sector analyst at S&P. "The deficits have not been managed down, if anything they have got worse," she says.
Interestingly, Ferraris adds that interest in cash securitizations of healthcare receivables had actually increased since the rule change and deadline imposition. "That’s the real point of setting a deadline, to bring everything out of the closet," a banker familiar with the situation says.
Suggested approaches vary between the pragmatic and the ideological. Perhaps the simplest and most convenient approach is one suggested by Fitch in 2005 as an alternative to debt delegation. Rather, Fitch suggests that transactions should focus on the underlying credit risk of the individual healthcare entity. "The close relationship between the entity and the region makes the former’s rating closely linked to that of the latter." This way the varying credit profiles of the numerous healthcare entities within any one region will be capped at the regional level.
New era
Alternatively, the challenge of solving the healthcare deficit issue might lead Italy to revisit its decentralization model. "We are moving into a new era for regional healthcare finance – we are seeing unprecedented interest and discussion over how decentralization should actually work, how do we actually achieve control or manage entities that are not consolidated in regional accounts but are dependent upon them for funds," says Ferraris.
She suggests that consolidation is one possible approach that might improve the checks and balances that are already in place. And there is always the politically sensitive issue of direct local taxation to service securitizations.
"The easy way out – buying the receivables from the supplier on a principal basis and trestructuring them into a five-year bullet with full regional government support which can be sold into the market – has disappeared in a puff of smoke," says Robert Palache, head of corporate securitization at Morgan Stanley. "We need to be cleverer now, which may mean structuring a properly distributed portfolio of receivables into a traditional ABS or CLO, without direct regional government support."
Burden
This approach might provide investors with direct risk exposure to the Italian healthcare sector, but who would want to enter a sector stricken with a growing debt burden with durations of up to 30 years? This conundrum takes us neatly back to Eurostat, which perhaps now gets the joke. By insisting that the public finance ABS deals be treated as components of the central government’s debt pile, the statisticians have at last grasped the fund managers’ investment rationale, albeit at the wrong end of the stick.
The typical buyer of these deals, the Depfas and Dexias of the institutional investor universe, pile into healthcare ABS, and other public sector related debt, precisely because it is high-yielding, low-risk-weighted, government-style risk. Deals with public sector obligors that are longer directly linked to the region or to a credit profile that is known and rated will prove a much harder sell to either investors (or monoline insurers) regardless of how granular and diversified they might be.