On finding large gaps in its 1999 budget, the Italian treasury decided to deal with one notorious problem – delinquent social securities payments – in an unusual way, by simply selling them. It was a bold and intriguing deal and led to plenty of arguments among the banks that bid for it. But it produced a hefty cost saving for the Italian treasury.
The securitization of these overdue payments brought the country e4.65 billion in cash. Italy’s state pension manager, Istituto Nazionale della Previdenza Sociale (INPS), issued three FRNs at e1.55 billion each. The bonds were secured against delinquent social security payments from corporates, self-employed people and agricultural enterprises. Two soft bullets with an expected maturity of 1.2 and 2.2 years were priced at Euribor minus 5 basis points and Euribor minus 2bp respectively, and an amortizing tranche with an average life of 3.8 years at 11bp over Euribor.
The low borrowing costs on the deal were a tremendous achievement for the Italian treasury. But the price was too tight for the taste of many observers. According to one banker, the deal was very aggressive, because the leads compared it to traditional government bonds.
A second reason for the aggressive pricing was the Werce competition that accompanied the bidding for the underwriting mandate. Though Banca IMI, Morgan Stanley Dean Witter and UBS Warburg arranged the deal, the Italian treasury gave a separate mandate for underwriting the bonds to Caboto, Merrill Lynch and BNP Paribas.
The bonds widened soon after launch, indicating that the winning bid might have been inside where the market saw value. But according to Vincenzo La Via, director general of the public debt department of the Italian treasury, the issues were attractively priced, particularly when compared with the ABS market at the time.
The pricing also reXected the fact that the bonds received a triple-A rating from all four agencies. This, however, was somewhat of a surprise, because the issue does not carry a government guarantee. It is the largest securitization ever issued by a public entity without a government guarantee in Europe.
La Via explains that one of the main objectives of the transaction, the establishment of a benchmark, would have been impossible to fulWl with a government backing. Secondly, an oV-balance sheet treatment of the transaction does have the advantage of reducing Italy’s debt. “It was a major exercise in our budgetary operations of 1999,” says La Via. “With L8 trillion, this securitization greatly contributed to the reduction of our outstanding debt from 116.3% of GDP in 1998 to 114.9% in 1999.” Though startling at Wrst, the notion of borrowing against payments that are already overdue became an eVective way of reducing state debt.
The Italian treasury had been discussing the possibility with diVerent counterparties since 1997. The deal then needed to be structured thoroughly, but had to be designed to look fairly simple. “The bonds needed to be understood more quickly than the average ABS deal in order to maximize the eYciency of the auction,” explains Peter Shorthouse, head of European asset-backed securities at UBS Warburg. Thus over 20 banks were able to compete for, and quarrel about the deal.
But the main obstacle, says La Via, came in form of legal constraints. For the deal to receive a triple-A rating, speciWc features that discipline securitization in Italy needed to be attached. But these features, such as segregation of the issuer’s assets and provisions for the issuer’s bankruptcy remoteness, required a change in law. The changes were achieved before the launch of the transaction.
La Via Wnds that “the soundness of the legal structures has been particularly appreciated by the rating agencies.” These considered the transaction – without government guarantee – even safer than the straight debt of AA-rated Italy. The credit was thought to be strong enough based on its over-collateralization, a debt service reserve of e508.8 million, and the fact that any default would violate the Italian constitution as well as the country’s obligations to the Council of Europe.
The budget law for 1999 had already legalized the securitization of INPS’s assets. And another law, the securitization law of April 1999, contributed substantially to the reduction of the overall costs of the transaction.
In April, the treasury started with the operational preparations for the transaction, and brought together with the management of INPS and the arranging banks. The deal was then concluded in record time. “Compared with other precedents of ABS transactions, six to seven months of arranging this deal is a major achievement,” says La Via.
The treasury plans to issue another tranche of INPS’s secured assets this year. After all, the parliament legislated to reduce state debt by way of securitization by L8 trillion each year in 1999, 2000 and 2001.
