Alessio Pignataro Senior Vice President Global Structured Finance +44 (20)

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1 Commentary Gordon Kerr Senior Vice President Global Structured Finance +44 (20) Nicola De Caro Vice President Global Financial Institutions Group +44 (20) Alessio Pignataro Senior Vice President Global Structured Finance +44 (20) Christian Aufsatz Managing Director Global Structured Finance +44 (20) Improving Prospects for Non-Performing Loan Securitisations Prospects for Italian non-performing loan (NPL) securitisations have recently improved after amendments to the existing securitisation law were introduced. The Italian NPL issue has been offered a lifeline by making better use of securitisation to remove bad loans from bank balance sheets. The New Law Law no. 96 of June 2017 (the Law) introduced several amendments to the existing Italian securitisation law no. 130 of 30 April 1999 (the Italian securitisation law) by introducing new provisions aimed at incentivising the securitisation of NPL and non-performing leasing portfolios. The Law introduced new instruments to maximise the recovery amount of NPL and non-performing lease receivables utilising the Italian securitisation law. It has also expanded the scope of activity of special-purpose vehicles (SPV) in the context of NPL and lease securitisation transactions. The amendment to the Italian securitisation law is specifically aimed at securitisation receivables classified as impared (deteriorati) and originated by Italian banks or financial intermediaries registered in the special registry and carried out by SPVs established under the law. These amendments include: 1. Allowing the securitisation vehicles to advance loans to debtors (except individuals and micro-companies) with the view to improve the chances of recovery and create re-performing loans. 2. Allow for reorganisation plans between debtor and servicer to help restructure enterprise loans (i.e. subscribe to or acquire equity in exchange for debt forgiveness. 3. Ability to have Real Estate Owned Companies (ReoCos) as additional SPVs (including leasing) in the context of an NPL securitisation. 4. Simplification of the publication requirements for receivables that are not able to be identified as selected based on a block criteria in the context of an NPL securitisation. DBRS believes that the following amendments will have the greatest and most positive impact on the resolution of nonperforming loans after the introduction of the Law: ReoCos The Law provides for the ability to establish a further entity to be incorporated in the form of a limited liability company (società di capitali), with the purpose of acquiring, managing and valuing the non-performing receivables underlying real estate or other registered moveable assets, for the exclusive interest of the securitisation. The recovery amounts deriving from such activity are to be paid to the note-issuing SPV, and will be destined by law to the satisfaction of the noteholders rights and towards any transaction costs. One form of ReoCo has the objective to acquire and manage real estate and other assets collateralising the original receivable. Additional features are provided for by the Law for the case that a ReoCo is incorporated to acquire leased assets together with the relevant leasing contracts (or the legal relations resulting from their termination). Here, the entity has to be incorporated for a single transaction and has to be liquidated upon completion of the transaction. This entity will then benefit from taxation as per leasing companies for the sale of assets upon termination of a leasing contract. It is DBRS s opinion that in order to maximise the effectiveness and efficiency of such an instrument, the associated fiscal and accounting aspects will play a fundamental role. Considering that a ReoCo is an alternative method for the liquidation of assets with respect to a standard foreclosure process, it would benefit the market if the Italian tax authorities could clarify whether and under what conditions the proceeds from the liquidation of the relevant assets would be fiscally neutral for the ReoCo.

2 Improving Prospects for Non-Performing Loan Securitisations DBRS.COM 2 Direct Financing by the Securitisation SPV Securitisation transaction SPVs will now be allowed to grant loans to assigned debtors with the aim of helping borrowers to become re-performing and, in turn, increase the chances of recovery of non-performing receivables. Direct lending by the securitisation SPV was already allowed under article 1, paragraph 1-ter of the Italian securitisation law, subject to the satisfaction of the retention requirement by a bank of a financial intermediary acting as a sponsor. The innovation introduced with these changes now means that, under certain circumstances, the SPV can execute the two allowable activities within the same securitisation transaction: the purchase of receivables and active lending. This will help in working through forbearance measures and attempts to return the borrowers to a performing status (i.e. re-performing). The other amendments made within the Italian securitisation law are also helpful in ensuring a smoother process of creating securitisations of NPL transactions and giving servicers better scope to maximise the value from the NPLs. Time is Ticking: Potential New Restrictions on Horizon Recent drafting of the European Union s (EU) securitisation framework 1 has revealed a change intended to limit the future use of self-certified mortgages as DBRS has commented on in its Self-Certified Securitisation Ban A Solution Looking For a Problem commentary, published on 15 August As it currently stands, what are defined as self-certified mortgages would not be eligible for securitisation from January However, an unintended peripheral impact of this ban could be felt by owners of distressed assets seeking capital relief via securitisation. With this new regulation due to come into force in 2019, and assuming that a number of distressed loans might unintentionally fall under the definition of self-certified, time might be running out for the use of securitisation to help fund NPL portfolios. The reason for this is the wording of the language banning residential loans that were marketed and underwritten on the premise that the loan applicant or, where applicable, intermediaries were made aware that the information provided by the loan applicant might not be verified by the lender. Given the nature of distressed portfolios and the quality of information, it is possible that this definition could capture loans where the seller may not be able to verify that the loan does not fall under this definition. In NPL transactions it is generally expected that one of two types of business plan will be followed by the servicer, who plays a pivotal role in NPL transactions: either the portfolio is already in various stages of litigation and the transaction will rely on sale proceeds from enforcing the mortgaged security, or the servicer is undertaking various forbearance measures in an attempt to develop a re-performing portfolio of assets. For re-performing loan portfolios, or where the second type of business plan is followed, the servicer will likely undertake updated income-affordability assessments to comprehend the borrower s ability to pay on a sustainable basis. The exposure in these pools is to borrowers who are already delinquent or unable to pay; therefore, the analytical focus is on the business plan associated with the transaction. However, for the sellers, purchasers and servicers of these transactions, concerns are focused on an inability to securitise the pool in order to help fund these transactions. DBRS expects that the market price of self-certified mortgage portfolios could fall as a result of the regulatory changes. The removal of the securitisation financing strategy could negatively affect portfolio prices, because of the number of parties who can purchase these portfolios being limited. Also, warehouse financing, which has become an increasingly common way of financing portfolio purchases, regularly falls under the EU s definition of securitisation. If adding self-certified mortgages into warehouses became prohibited, purchasers would lose another financing option, also negatively affecting pricing and demand. Further to this, the market price of portfolios that potentially contain non-verified income mortgages could fall, considering the administrative costs resulting from additional due diligence requirements, as buyers will want to have clarity about potential financing options. 1. Proposal for a Regulation of the European Parliament and of the Council laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation and amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012.

3 Improving Prospects for Non-Performing Loan Securitisations DBRS.COM 3 European Plans for Support of Future NPL Liquidity On 11 July 2017, the European Commission adopted an action plan intended to improve the management and handling of nonperforming loans across Europe. On the basis of an expert report 2, produced by a subgroup of the Council s Financial Services Committee (FSC), the need for action was highlighted with regard to: Enhancing supervisory tools to address the management of NPLs by banks; Promoting structural reforms of insolvency and debt recovery frameworks; Development of secondary markets in Europe for NPLs ( distressed assets ); Fostering the restructuring of banks and the European banking sector in the context of NPL resolution. From the securitisation industry perspective, the most important of these is the development of secondary markets and the support of securitisation as a funding tool. Through these actions, the Council is looking for better supervision of the banking sector in order to speed up the de-recognition of these troubled loans, provide greater transparency, and to improve the process for clearing up these problems in the future. Overall, these developments should be supportive for progress within Italy, particularly with respect to secondary market improvements as well as insolvency and debt recovery frameworks. Bank Divestments The stock of NPLs for Italian banks continued to decrease in Q on the back of lower inflows from performing loans, higher recoveries and an increase in provisioning levels. At the same time, the pace of NPL disposals has accelerated, paving the way for a more significant improvement in asset quality. Between March and July 2017, several banks, including large, medium-sized and small institutions announced plans to reduce NPLs via disposals for a total consideration above EUR 50 billion. The total amount exceeds EUR 70 billion when including UniCredit s disposal of EUR 17.7 billion (known as Project Fino) announced in December Plans to reduce NPLs have been supported by extraordinary measures, including increases in capital as well as restructuring actions to improve efficiency and risk management. Several banks have been reorganising their credit divisions with dedicated NPL units, partnership agreements and ReoCos to proactively manage collateral, as well as investments in IT platforms and data management. The recent law changes highlighted earlier will further support the use of securitisation for funding the removal of these portfolios from bank balance sheets. Recent NPL deals show a growing interest from both domestic and international investors as well as bank willingness to divest. Asset portfolios have generally contained a mixture of unsecured and secured loans as well as corporate and retail borrowers. NPL valuations, which change as a result of different factors, such as asset class, size of the portfolio and vintage, have generally remained below the book value, weighing on the cost of credit and profitability, as well as capital levels, especially in the case of large NPL transactions. The largest plans for NPL reductions have been announced in combination with government support as well as burden sharing with junior subordinated bond holders. In July 2017, Banca Monte dei Paschi di Siena announced a securitisation of EUR 26.1 billion of bad loans, corresponding to 57% of the bank s outstanding stock of gross NPLs, as a condition for a precautionary state recapitalisation. As part of the liquidation process of Banca Popolare di Vicenza and Veneto Banca in June 2017, the Italian and European authorities agreed to transfer the two banks entire stock of NPLs, equal to EUR 18 billion, to the government-owned vehicle Società per la Gestione di Attività - SGA S.p.A. Smaller but still significant NPL transactions were announced in July by Credito Valtellinese (EUR 1.4 billion) and Banca Carige (EUR 931 million) in the form of securitisations with the GACS scheme. Banco BPM, which sold EUR 693 million to private investors in June 2017 and EUR 641 million in January, announced plans for additional NPL disposals of EUR 2 billion by the end of 2017, as well as a possible securitisation with the GACS scheme of EUR 3.5 billion in Other recent transactions include disposals by REV Gestioni Crediti, Intesa SanPaolo, Banca Sella and some other small to medium-sized banks. The number of investors is growing with each transaction completed. As shown in the chart below, there have been approximately 24 different investors in Italian NPL portfolios over the past two years. Not included in the chart are the recently announced large deals as they have yet to close. In total, there have been less than EUR 5 billion in transactions before the large announced deals that should close in the fourth quarter (the largest quarter in both 2015 and 2016 for deals). 2. Report of the FSC Subgroup on Non-Performing Loans, May 2017,

4 Improving Prospects for Non-Performing Loan Securitisations DBRS.COM 4 Exhibit 1: Completed NPL Portfolio Transactions by Purchaser by Date Q Q Q Q Q Q Q Q Q Q3 PIMCO & Fortress US fund Bain Capital Credit Algebris Bayview CRC & Bayview Italo Sicav Creditech (Mediobanca) MB Credit Solutions Balbec PRA Group Europe Deutsche Bank Atlante (Mezzanine + Junior) Kruk Group Locam (Seer Capital) Banca IFIS & Cerberus Confidential AnaCap Banca Ifis Hoist Finance Cerberus Algebris & Cerberus Credito Fondiario Atlante Hoist Finance (Marte SPV) Christofferson, Robb & Co. SPV (Law 130/99) B2 Holding LCM Partners e altro Not specified Source: DBRS. Going forward, DBRS expects the number of NPL transactions to increase, driven by the evolving regulatory framework. Recognising that the stock of NPLs remains elevated and financial hurdles to executing sales remain, the European and Italian authorities continue to improve the use of various tools to tackle the NPL issue. Securitisation remains the popular choice, with 67.3% of deals by volume executed (including planned) via securitisation versus 32.7% via direct portfolio sales in 2017 (Exhibit 2). However sometimes not by choice, with government intervention on both sides directing 62.4% of total disposals. Exhibit 2: Known Italian NPL Disposals by Method of Execution, 2017 % of Total Volume 32.7% 67.3% Source: DBRS, Bank Disclosures, and Press Articles. Total securitisation Direct sales

5 Improving Prospects for Non-Performing Loan Securitisations DBRS.COM 5 NPL Transaction Performance Supportive In 2016, Banca Popolare di Bari executed the first NPL securitisation since 2007, Popolare Bari NPLS 2016 S.r.l. DBRS rates the transaction and on 11 August 2017 confirmed its ratings 3. The portfolio of loans originated by Banca Popolare di Bari S.p.A., Banca Tercas S.p.A. and Banca Caripe S.p.A. is serviced by Prelios Credit Servicing S.p.A. At issuance, Prelios prepared the business plan assuming a judicial procedure for each borrower. The servicer s initial business plan, as reported in the most recent semi-annual servicing report dated 19 June 2017, assumed cumulative gross disposition proceeds (GDP) of EUR 13.8 million from the period between the closing date and Q Based on the same report, the servicer s reported actual cumulative GDP collections are equal to EUR 16.7 million, which is 17.5% higher than initially expected. An updated business plan from Prelios is included in the most recent semi-annual servicing report, which estimates increased cumulative GDP collections compared with its initial business plan. Specifically, the expected cumulative GDP for the next 18 months (to Q4 2018) is EUR 50.6 million, or 10.3% more than the initial expectation of EUR 45.8 million for the same period. Since closing and because of the disposal of residential and commercial properties as well as unsecured loans, the total gross book value (GBV) of the portfolio has been reduced by EUR 17.8 million, or by 3.7% compared with the initial GBV. The most recent reported GBV as at May 2017 is equal to EUR million (EUR million at issuance). The cumulative collection ratio and net present value cumulative profitability ratio are 176.3% and 168.0%, respectively, as reported in the semiannual servicing report of June Conclusion The outlook for bank balance sheets is starting to improve with support for the securitisation of pools of NPLs held on bank balance sheets. The environment for this should improve further with additional focus on improving the liquidity and operational support for handling these distressed assets. 3. DBRS Confirms Ratings of Popolare Bari NPLS 2016 S.r.l., 11 August s-r-l.html

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