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Ireland sets the pace as eurozone grapples with bad loans

When it comes to repackaging bad loans in the eurozone, 2017 has been a tale of two peripheries. While global investors who had been hoping to buy debt backed by Italy’s non-performing loans have been left disappointed, in Ireland deals are gathering momentum.

Lone Star this week priced its latest securitisation of Irish mortgages, with the US private equity firm selling €420m of bonds backed by distressed mortgages which were originated by Bank of Scotland in Ireland before the financial crisis.

The securitisations are a further sign of Ireland’s ongoing recovery from a property and banking crisis which led to an EU bailout in 2010. Lone Star also launched a public deal for re-performing loans last month, and sold debt backed by non-performing loans through a private placement in November.

“The good thing about Ireland is it’s on the bounce back – house prices are coming off the lows, there’s a housing shortage,” said Andrew Dennis, an investor in securitisations at Aberdeen Asset Management.

Securitisation is the process where loans are lumped together and sold on as bonds to investors, with different tranches of debt providing different returns depending on risk. The least risky tranche on the latest Lone Star deal came at a yield equivalent to 225 basis points over Euribor.

In Spain, private equity investors have also begun to sell securitisations backed by loans bought after the eurozone crisis. Blackstone last month sold a €400m securitisation secured on a portion of loans it bought in 2014 from CatalunyaCaixa that had become re-performing. In that deal, the senior tranche — or less risky — priced at 90 basis points over Euribor.

The contrasting fortunes between Italy and Ireland extend far beyond the world of non-performing loans. While the Italian government’s borrowing costs have risen over the past 12 months, Ireland’s have remained steady.

The role of securitisation has been brought into focus as European policymakers try to tackle the continent’s bad loan problem. Deloitte estimated earlier this year that 2017 could bring with it a record €200bn of NPL sales — almost double last year’s total. In February, Vitor Constancio, vice-president at the European Central Bank, said securitisation could “complement” outright loan sales.

The improving situation in Ireland and Spain contrasts with Italy, where high hopes have been placed on the securitisation as a means of relieving banks of their bad debt burden and bridging an impasse between bank sellers and private equity buyers, but no significant deals have occurred.

Italy’s NPL securitisation scheme, known by the acronym Gacs, was introduced in April 2016 to make the senior tranches of securitisation deals more appealing to investors. The scheme would add a government guarantee to the senior tranches of securitisation deals.

However, no major deals have been done using the guarantee. The scheme was largely designed to satisfy EU state aid laws, which were beefed up in 2014, making it unwieldy from a market perspective – with a complex formula derived from a basket of credit default swaps used to determine the cost of the guarantee.

Italy’s bank rescue fund Atlante was also supposed to boost the economics of the scheme by buying the riskier tranches of the securitisations, which need to be sold externally for a bank to deconsolidate the NPLs from its balance sheet.

But the firepower of the investment vehicle was rapidly depleted, propping up capital raises at troubled Italian lenders, leading to the hurried formation of a new “Atlante II” fund to focus solely on NPLs.

While Atlante II in January signed an agreement to purchase mezzanine and junior tranches from a proposed securitisation of NPLs from lenders Nuova Banche Marche., Nuova Banca dell’Etruria and Nuova Cassa di Risparmio di Chieti, it is yet to publicly disclose any investments in any deals that have actually closed.

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