International Financing Review February 29 2020 13For daily news stories
@ visit http://www.ifre.comItalian NPL deals
under threat from
new law
Structured Finance Proposal would cap returns at 20%BY CHRIS MOOREThe Italian parliament is
considering a law that would
effectively cap returns on past
non-performing loan sales and
securitisations, threatening a
market that the country’s
banks rely on to take bad debt
off their books.
The proposal would give
defaulted borrowers whose
debt was purchased over the
PASTûlVEûYEARSûTHEûRIGHTûTOûPAYû
it off at the purchase price plus
20% - effectively capping
investors’ returns.“If this goes through it
would have a big psychological
effect on NPL sale prices for
investors outside Italy,” said
one Italy-based NPL specialist.
He said the proposal might
well fail, and if it did pass the
LAWûCOULDûBEûDIFlCULTûTOû
implement – but that might not
be evident to the overseas
buyers that drive much of the
market.
“An investor out in Boston will
look at it and just say, ‘this is a
limit to my potential upside’,”
he said.
The proposal was made by an
opposition MP in 2018 but only
put up for discussion by the
3ENATEûlNANCEûCOMMISSIONûATû
the start of this year.
It applies to individual or SME
borrowers with debts of under
õMûWHICHûWEREûCLASSIlEDûASû
non-performing between 2015
and 2018, and sold to a third-
party through a portfolio
transfer or a securitisation
before the end of 2019.
Defaulted borrowers would
be able to demand the holders
of their debt tell them the
purchase price paid.Borrowers would then have
30 days to state their intention
to repay, at the purchase price
PLUSûû4HATûûlGUREû
appears to be an arbitrary
level.
They would have 90 days to
pay, and once they had done so
their debt would be scrubbed
from the national NPL register.
Norman Pepe, partner at law
lRMû)TALIANû,EGALû3ERVICES ûSAIDû
the proposal could disappoint
existing foreign investors in
Italian NPLs and scare
newcomers, reducing Italian
banks’ ability to access
international markets for
future NPL sales.
“It is arguable that, in the
current form, this initiative
could be challenged on the
GROUNDûTHATûITûCONmICTSûWITHû
certain constitutional
principles and raises other
legal issues,” Pepe said.
For instance, effectively
lXINGûTHEûYIELDûONûHISTORICALû
NPLs at 20% would have a
random impact on investors’
returns, which would depend
on when a loan had been
acquired from a bank, Pepe
said.
According to the NPL
specialist, the proposed law
could help debtors whose
property which had been
undervalued at the time their
debt was sold, because a
servicer would otherwise be
eyeing a juicier return than
20%.
The wording of the proposal
in 2018 said that since the
lNANCIALûCRISISûCOMPANIESûHADû
been buying Italian NPLs at
very advantageous prices, after
the selling banks had
themselves failed to settle with
debtors.
It said the law would help
around one million people,
mainly families and SMEs,
while still allowing the buyersTHEûCHANCEûTOûMAKEûAûPROlT (^)
Ultimately, Kraft decided to
halt planned asset sales and
belatedly reinvest in those
mAGSHIPûBRANDS ûWHILEûALSOû
maintaining a dividend to
appease shareholders.
The moves resulted in
downgrades by Fitch and S&P to
BB+ and angered some bond
investors who participated in
Kraft’s 2019 liability
management exercise on the
assumption the company would
lGHTûHARDERûTOûMAINTAINûITSû
investment-grade ratings, IFR
previously reported.
BIGGER AND BOLDER
The Kraft example highlights
the tightrope that food and
beverage companies are
walking as they try to grow sales
ASûWELLûASûlRMINGûUPûTHEIRû
balance sheet.
Kraft hopes to improve sales
by boosting its media spending
by 30% this year and to drive
MARKETINGûEFlCIENCIESûTHROUGHû
a shift to support “fewer, bigger
and bolder initiatives”, said
Dave Novosel, high-grade bond
analyst at GimmeCredit.
Other companies such as
Conagra have strengthened
their language around using
asset sales as a means of hitting
THEIRûlNANCIALûTARGETS
But the shift in language was
too little too late for S&P, as rating
agencies show signs of becoming
less lenient on missed targets.
!LTHOUGHû30ûAFlRMEDûAû
stable outlook for Conagra’s
BBB– rating in January, a month
later it revised the outlook to
negative after the company
guided for lower organic sales.
Conagra still holds stable Baa
and BBB– ratings at Moody’s and
Fitch, respectively.
“The outlook revision feels a
little bit like Conagra paying for
the sins of Kraft Heinz,”
CreditSights wrote in a report.
“That the agencies are
suddenly holding Conagra
immediately accountable feels
indicative of a more stern
approach following years of
leniency, and following the
Kraft Heinz downgrade.”
This tougher approach creates
a challenging sector for
companies and their
bondholders at a time when
consumer behaviour is changing
rapidly, said Jason Shoup, head
of global credit strategy at Legal
& General Investment
Management America.
“It’s a time that is really tricky
to navigate,” he said. “There are
winners and losers as a result of
that.” (^)
either on a standalone basis or
on a non-pro rata basis.
On Double B rated
ThyssenKrupp’s outstanding
€2bn revolver, BBVA, MUFG,
BayernLB, BNP Paribas,
Citigroup, Commerzbank,
Credit Agricole, Deutsche Bank,
SEB and UniCredit are
mandated lead arrangers. There
are another seven lead
arrangers and 10 arrangers.
HIGH LEVERAGE
At €8.5bn of funded debt, the
deal is expected to be highly
leveraged, which could prove
tricky for some banks to
participate.
Deutsche Bank, Goldman
Sachs and JP Morgan were M&A
advisers and JP Morgan is trying
TOûGETûAûSPOTûONûTHEûlNANCINGû
but may come up against
regulatory issues that prevent it
from getting involved.
If this is the case, it would be the
second time JP Morgan has had to
turn a deal down this year after
not playing in a £1.3bn leveraged
LOANûlNANCINGûBACKINGûTHEû
acquisition of UK forensic sciences
group LGC by a private equity
CONSORTIUMûLEDûBYû%UROPEANûlRMSû
Cinven and Astorg, despite being a
staple bank.
The price of ThyssenKrupp’s
elevator unit beats the most
optimistic estimates and
roughly matches a bid that had
been submitted earlier in the
process by Finnish rival Kone,
which dropped out of the race
earlier this month over
expected antitrust risks.
ThyssenKrupp said it would
reinvest about €1.25bn to take a
stake in the unit, which, based
on the purchase price, would
result in a 7.3% share that would
be used to partially fund its
pension liabilities in a trust. (^)
“It would have a big
psychological effect on
NPL sale prices”
4 IFR Top news 2322 .p 4 - 14 .indd 13 28 / 02 / 2020 19 : 41 : 47