Structured Finance. S.C.C.I. S.p.A. Series 5 & 6. Asset-Backed/Italy Presale Report. Expected Ratings*

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1 Asset-Backed/Italy Presale Report Expected Ratings* Series Amount (EUR m) 5 1,5 2,0 6 1,0 1,5 Outstanding Series Series Amount (EUR m) Final maturity January July 25 Final maturity January ,710 January 28 Analysts Akinade Dada akinade.dada@fitchratings.com Suzanne Albers suzanne.albers@fitchratings.com Polly Kolotas polly.kolotas@fitchratings.com Patrizia Lando patrizia.lando@fitchratings.com Performance Analytics Babatunde Cole babatunde.cole@fitchratings.com Rating Rating * The preliminary ratings do not reflect final ratings and are based on information provided by the issuer as of 5 July 22. Summary S.C.C.I. S.p.A. s (SCCI) s Series 5 and 6 EUR3,0m asset-backed floating-rate notes have been assigned expected ratings as indicated at left. This issue is a re-opening of an existing transaction, originally rated by Fitch Ratings in November 1999 with a further issuance in June 20 (see below Performance of the previous Series ). The original issuance amount was EUR4,650m; Series 1 and 2 have been fully redeemed and Series 3 has been mostly redeemed. The total issuance for Series 4 was EUR1,710m. The current aggregate outstanding amount is EUR2,247m, as indicated at left. The new issue will bring the total outstanding amount of notes to EUR5,247m. The ratings of Series 5 and 6 reflect the available credit enhancement in the form of overcollateralisation, the new debt service reserve of EUR2m available to Series 5 and 6, the sound financial and legal structure of the transaction, and the servicing and administrative experience of Istituto Nazionale di Previdenza Sociale (INPS), which provides social security on behalf of the Italian State, and the servicing capabilities of the concessionari, who account for an increasing proportion of recoveries. The ratings address the timely payment of interest and the ultimate payment of principal by its final maturity date. This transaction is part of the Italian fiscal policy for 22. It traces its origin from Article 13 of the Law 448/1998, which provides for the securitisation of these assets. At closing, the issuer will issue the Series 5 and 6 notes and with the proceeds from the issue it will purchase all the social security contributions in arrears accrued by INPS during 20 and establish a new DSR, totalling EUR2m. The size of the 20 credits will be known with certainty only a few months after the closing date of the transaction, but INPS guarantees a minimum EUR3,667m. After this purchase, it is estimated that the collateral portfolio will total EUR51,6m, and will have the following characteristics: 65% are claims owed by companies; 26% by self-employed; and 9% by agricultural debtors. 96% are claims in arrears with no agreed amnesty agreements (repayment plans); only 4% are claims due under amnesty agreements. 7% relates to credits accrued during the year 20 (the new pool). The credit analysis performed by Fitch, and further described below, has been based on this amount. 9th July 22

2 Credit Committee Highlights New debt service reserve of EUR2m, in addition to the Series 4 DSR of EUR516m. The servicers interest in the transaction in the form of a deferred purchase price for INPS and through an incentive compensation scheme for the concessionari. Sound legal structure provided by the provisions contained in Art. 13 of the Law 448/1998. Improved servicing and reporting processes, due to the past experience of the originator as well as the involvement of KPMG as auditor of the servicing reports. Highly diversified portfolio. The proactive servicing approach of the concessionari, who have been recovering unpaid social security contributions on behalf of SCCI for 20 months. Collections from penalties and interest are now based on historical performance, compared to a flat rate of 6% used for assigning the ratings to the previous series. Due to the size of the collateral and complexity of the servicing process, reconciliation (between collections and relevant sources) time may be longer than in other transactions. Transaction Structure SCCI is a bankruptcy remote securitisation company registered in Italy and owned by two Dutch foundations. At closing SCCI will issue two new series of floating rate notes (the Series 5 & 6 notes), the proceeds of which will be used to purchase the new collateral pool and establish a new DSR of EUR2 m. All cash flow derived from collections is paid to the collection account in the name of the issuer with the Tesoreria Italiana di Stato, acting through the Bank of Italy. A new hedging agreement mitigates the interest rate exposure and ensures the Issuer is able to meet floating rate interest obligations under the Notes. Unless a trigger event has occurred, all cash flow derived from the collections, other than direct costs of the operations and taxes, are paid to amortize the notes sequentially. In the event of a shortfall in the collections, the DSR will be drawn. Upon the occurrence of a trigger event, at the discretion of the representative of the noteholders, all cash flow derived from the collections and the drawing on the DSR are immediately paid to amortize the notes pro-rata. The main trigger events are: Default on the notes. Insolvency or winding up of the issuer. Collections <65% of anticipated amount by plan. Originator Istituto Nazionale della Previdenza Sociale ( INPS ) was created under Royal Decree No.1827 in 1935, although its history can be traced as far back as Acting on behalf of the Italian State, INPS is the main provider of social security services to the Italian public (over 15m people). As such, INPS plays an important role in the execution of social security policy for the Italian State. Other providers are much smaller in size and provide social security services for minor categories of beneficiaries. The annual turnover of INPS is thought equivalent to over one sixth of total Italian gross domestic product (GDP). An autonomous public institution with independent legal status, INPS is supervised by the Ministry of Labour and Social Security and the Ministry of Treasury. INPS institutional duties are carried out by appointed official bodies, including, amongst others, the Chairman, a Board of Directors and a Management Committee. As a public body INPS cannot be declared bankrupt nor could the special procedure of forced administrative liquidation be used. INPS can, however, be wound up and its financial assets liquidated if it faces serious financial difficulties, although this would be considered the abolition of a fundamental instrument of policy for the State under Article 38 of the Italian Constitution. The current legal framework ensures that the abolition and liquidation of INPS requires the consent of all of the following: Parliament, the Italian Republic, the Prime Minister; and the Ministers of Employment and Finance. As a fundamental tool of social policy, Fitch is of the opinion that it is unlikely that the Italian government would abolish or liquidate INPS. In the unlikely event of the abolition and liquidation of INPS, the State would have to act directly to fulfill INPS key role or transfer the duties and functions previously performed by INPS to another public body. The Origination of the Claims INPS is the main provider of social security services to the Italian public. As such, INPS (i) provides social security provisions and (ii) collects social 2

3 Main Transaction Parties Issuer: Societa di cartolarizzazione dei crediti INPS S.C.C.I. S.p.A. Servicers: (i) Istituto Nazionale della Previdenza Sociale (INPS) (ii) Concessionari: Companies charged with the collection of receivables entered onto Ruoli (see Concessionari and Ruolo section on page 4). Hedging Counterparty: UBS AG, Morgan Stanley Capital Services and UniCredito Italiano S.p.A. (minimum rating of F1) Swap Guarantor: Morgan Stanley (minimum rating of F1) Transaction and Agent Bank and Principal Paying Agent: JPMorgan Chase Bank, Milan Branch Collection Bank: Tesoreria Centrale dello Stato, acting through the Bank of Italy (minimum rating for the Republic of Italy is AA- ) security contributions on behalf of the Italian State. Among the benefits provided are old age, invalidity and disability pensions as well as unemployment, sickness and death benefits. The main source of funding for the payment of these benefits is represented by contributions from all employees working in the private and public sector and self employed individuals in Italy. Contributions from these individuals are legally compulsory. Provided that their minimum compulsory contribution has been paid in full, these individuals are entitled to a level of benefits proportionate to the amounts of contributions made. Failure to pay their minimum compulsory contribution in full would result in the non-payment of their benefits by INPS. Contributions are paid by the employer for their employees or by the individual, if self-employed. On the incorporation of a business, these parties register with INPS. On a regular basis companies (on behalf of their employees) and the self-employed declare their contribution due to INPS by completing a standard form. By completing this declaration, the obligor has recognized its debt and thus becomes legally bound to pay the declared amount. There are two ways in which an unpaid contribution is determined: The first is by comparison between the amounts actually paid with the amount declared due. The second is through an inspection carried out by an inspector, who is an officer recognized by the law and who visits the debtor s premises and produces a report on the basis of this assessment. The claims that arise from the inspections are often subject to dispute from the obligor. Fitch was provided with a detailed description of the activity of the inspectors and their background. Moreover, Fitch was provided with information on the success rate of disputed claims, 82% of which derive from inspections. According to the information provided, 73% of the disputed claims are resolved in favour of INPS outright. On the basis of such information, Fitch believes that the activity of INPS inspectors is carried out in a proper manner. For the purpose of the transaction, INPS internal legal department carried out an in depth due diligence to prove the existence of the collateral. This focussed on assessing the validity of the debtor s address, the size of the claim, the legal status of the debtor and whether or not the claims arise from a company in bankruptcy. However, no third party due diligence was carried out to audit the existence and recoverability of the claims sold. In relation to the old portfolio, INPS will indemnify the issuer for any invalid claims in excess of EUR 516m. Invalid claims in the new portfolio will have to be substituted by INPS according to a predetermined mechanism approved by Fitch. This will be applied only if the amount of existing credits was lower than the one guaranteed at issue (EUR 3,667m). Each semester INPS has the choice of indemnifying the issuer by paying cash or transferring another claim. In certain instances, debtors may off-set amounts due under the receivables against credits they may have with INPS. INPS will indemnify the issuer against this set-off. Each semester, INPS will verify the occurrence of any set-offs and indemnify the issuer within 30 days. The Claims Claims can be classified in three main categories: those originating from amnesties, those in the administrative phase of the recovery process, and those in the legal phase of the recovery process. Claims subject to amnesties were originated when the debtor accepted the government s offer to reschedule their debt. In substance, the original amount due was not reduced, but there was an amnesty on interest and fines payable on the claim. Each amnesty is accompanied by a repayment plan. For these claims the debtor makes regular installment payments to INPS. 3

4 Although this repayment option has not been available to debtors since 1998, INPS still expects to receive payments from amnesties agreed prior to Claims in the administrative phase have arisen and are waiting to be passed onto the concessionari. This is a passive phase as no collection attempts are made. Claims in the legal phase have been passed onto the legal department and judicial procedures have commenced. INPS internal lawyers are responsible for the initiation of legal proceedings. Servicing of the Claims For the purpose of this transaction, pursuant to Art /1998 and Art. 24 of LD 46/1999, collections will be carried out by INPS as well as by the concessionari through the system of iscrizione a ruolo, depending on the type of claim. INPS will continue to collect the instalments due under the amnesties and those claims subject to enforcement procedures or disputes (those in the middle of legal proceedings and which are the responsibility of INPS internal lawyers). The concessionari will service all the remaining claims. Upon the first missed payment of the instalments due under the amnesties, the claims will be serviced by the concessionari. Concessionari and Ruolo Concessionari are companies which have as their objectives the collection of outstanding amounts payable to the Local and State authorities on a regional basis. Almost all of them are owned by the main Italian banking groups. They have been selected by the Ministry of Finance, mainly on the basis of their creditworthiness and technical and organizational skills. Their mandate was granted in Unless previously terminated, the concessionari in place at closing of this transaction will retain their mandate to 24. Monitoring of their performance and their termination is the Ministry of Finance s responsibility. Although the Ruoli collection system has been effective since 1 July 1999, the system was only fully implemented in 20 and 20. It relies upon the efficiency and enforcement powers delegated to the concessionari collecting the credits. The new system is expected to continue to show an improved recovery performance, relative to the previous collection methods mainly due to the following: The use of the concessionari features the collection of the unpaid credits through the iscrizione a ruolo system. This system allows action to be taken immediately against the debtor under a titolo esecutivo (a writ of execution). The concessionari are compensated on the basis of the amount and timing of the collection. The concessionari already have substantial experience in collecting other credits due to Local and State Authorities. The expertise of the concessionari in the recovery of Local and State taxes, together with their ownership structure, their incentive scheme and their 20 months of collecting unpaid contributions provides Fitch with substantial comfort that they will continue to operate with adequate diligence. Fitch has reviewed the servicing and data processing operations of INPS, the association (consorzio) and some of the concessionari in order to assess their capability as servicers to the transaction. All systems are automated and computerized. Recently, Fitch undertook a second servicer review and met with the management of these organisations and reviewed their systems. Investor Reports & Performance of the Previous Series Following the reporting problems experienced in 20, investor reports are now published on a quarterly basis. KPMG was recruited to review the reporting procedures and to audit reports on a semiannual basis. The last quarterly investor report was published in May 22. The performance of the transaction has been in line with expectation. The Series 1 and 2 Notes were redeemed without recourse to the DSR, whilst the Series 3 has an outstanding balance of EUR536m. As at 10 th May 22 the balance of SCCI s account at the Bank of Italy stood at EUR1,180m, EUR516m of which was the Series 4 DSR. The means that the whole of series 3 and approximately a third of series 4 are fully cash collateralised. Total collections paid to SCCI between 8 November 1999 and 15 April 22 equalled EUR4,465m, net of collection fees. 4

5 Collections (EUR mln) Nov 99 - Jan Feb - Apr May - Jul Aug - Oct Nov - Jan Quarter Feb - Apr May - Jul Aug - Oct Nov - Jan 02 Feb 02 - Apr 02 The delays encountered in the implementation of the concessionari recovery system resulted in lower collections in the first months of 20. However, the completion of the delivery of Ruoli in the last months of year 20, has resulted in increased and relatively stable cashflows. Since January 20 average quarterly collections have been EUR508m, compared to an average of EUR361m in the previous quarters. As of April 22, collections by the concessionari totaled EUR1,042m net of collection fees, 23% of total collections so far, compared to 14% in April 20. Given the full implementation of the concessionari system, it is expected that concessionari will continue to account for an increasing portion of collections. The Collateral The collateral outstanding, as of 15 April 22 had the following characteristics: * As of the last available investor report dated May 22 ** The investor report of May 22 reports this figure as 48,967, as opposed to 47,339, as it did not reflect the adjustment to the final list of credits. The portfolio that will be purchased at closing will be at least EUR3,667m and is estimated to have the following characteristics: Total Portfolio as of 15 April 22* EUR mln Compan. Selfemp. Agricult. Total Adminis. 8,025 11,561 2,984 22,570 Legal 22,292 1, ,164 Amnesty 1, ,233 Total 31,521 13,591 3,855 48,967** New Portfolio Originated During 20 Selfemp. EUR mln Compan. Agricult. Total Total Adm. 1,962 1, ,667 Credit Enhancement To assign the expected rating to the Series 5 and 6 notes and to affirm the outstanding ratings on the Series 3 and 4 notes, Fitch considered the historical recoveries on the claims and the performance of the previous series. Specifically, Fitch compared its stressed expected collections for the year 20 with actual collections. It updated its forecast collections on the outstanding portfolio by applying its stresses and considered expected collections to be derived from the new portfolio. As for the determination of the ratings to the previous series, Fitch divided the collateral outstanding according to the type of claims: amnesties and non-amnesties. For the latter, a further breakdown was made according to the type of debtor (companies or self-employed). The collateral was modelled to capture the specific characteristics of each collateral type. Stresses assumed simultaneous deterioration in the performance of the recoveries in terms of both amount and timing. This is broadly described below. Amnesties In assigning the ratings to the Series 5 and 6 notes, and affirming the ratings of the Series 3 and 4 notes, Fitch considered the actual performance of these claims relative to the projected amounts. Between February 20 and January 22 the actual collection of amnesties was EUR719.5m compared to a projected amount of EUR914m, 79% of the expected amount. Due to the continued underperformance of these credits Fitch applied a recovery rate of 52% across all debtor types for amnesties i.e. two-thirds of the ratio of actual to projected collections, for the period being reviewed. This compares to recovery rates assumed for the Series 4 notes of 72% of the scheduled collection plan for corporate debtors, 70% for the selfemployed and 88% for agricultural debtors. Claims not Subject to Amnesties For the assignment of ratings to the Series 5 and 6 notes, and the affirmation of the Series 3 and 4, Fitch s methodology was consistent with the approach used in the previous SCCI issues. Outstanding credits were segregated into pools by year of origination, and were further broken down by 5

6 historical recovery rates achieved since year of origination of the credit. For example, the table below shows that for credits originated in 1995, after a period of one year (N+1), 5.4% of them were repaid. Fitch assumed as its stress the minimum of the dynamic recovery rate for each year. Furthermore, given the high volatility of recovery rates from year to year, Fitch applied an additional stress of 75% to recoveries for which there was only one year of data available (N+7 for companies). This resulted in a cumulative recovery rate of 37.6% for companies and 14.1% for self-employed. As only a limited amount of data was available for agricultural debtors, a recovery rate of 4.3% was assumed for this type of credit derived in the same manner described above. The table below shows the revised dynamic historical recovery rates (in %) for each type. Companies MIN Static equiv. N N N N N N N N+8 to N Total 37.6 Self -Employed N N N N N Total 14.1 The methodology described above is consistent with the approach used for the assignment of the rating to the Series 4 notes and the affirmation of the ratings for the Series 1 to 3 notes. (See new issue report S.C.C.I. S.p.A. Series 4 dated June 20). Although the methodology remains unchanged, for assigning the ratings to Series 5 and 6, as a result of new historical data available for corporate debtors, Fitch has been able to give additional credit to: (i) (ii) Collections on claims originated between Recovery rates achieved in 20 are now available for credits originated in this period. Recoveries from penalties and interest based on historical collections. For the rating of the previous series a conservative rate of 6% was assumed, given the absence of relevant data. The additional recovery assumptions for (i) and (ii) above have only been applied to recoveries from corporate debtors, while the analysis for selfemployed and agricultural debtors has remained unchanged. Collections originated between i.e. (i) above have been incorporated into the year 20 recovery rates (see table above). Penalties & Interest Fitch determined a stressed level of penalties and interest based on historical recovery performance. The assumed value of penalties and interest was calculated by multiplying the principal value of credits recovered in a period, by the stressed historical penalties and interest rate in that period. For example, in its scenario, Fitch expects that in period N+2, 5.9% of principal will be repaid, and an additional 11.8% of that principal received will be penalties and interest. The table below shows both the historical and the stressed penalties and interest rates. Fitch derived its stressed penalties and interest rates by applying a haircut of 10% to the historical rates. Fitch believes this to be a conservative assumption as the actual calculation of penalties and interest is fixed and governed by Italian law, and consequently a change in the rates would require a change in legislation. Historical recovery rates were taken from a study conducted by INPS in which collections made by a sample of 36 geographically diverse concessionari were broken down into principal, and penalties and interest collected. 6

7 Penalties & Interest as a percentage of principal collected (in %): N+1 N+2 N+3 N+4 N+5 N+6 N+7 N+8 N+9 N+10 N+11 HHistorical: AAssumed: Simultaneously, a one-year delay was applied to all assumed recoveries of principal and penalties. Legal Issues and Change in Law Fitch s rating does not address the possibility of a future change in Italian law that would be detrimental to the transaction. Fitch s ratings would only address the risk of a change in law if such prospective legislation were drafted or publicised. Performance Analytics Fitch will monitor the transaction on a regular basis and as warranted by events. Fitch's structured finance performance analytics team ensures that the assigned ratings remain, in Fitch s view, an appropriate reflection of the issued notes' credit risk. Details of the transaction's performance are available to subscribers at Further information on this service is available at Please call the Fitch analysts mentioned on the first page of this report for any queries regarding the initial analysis or the ongoing surveillance. According to the terms of the Transfer Agreement, the receivables sold to the issuer and all related cash flows are the property of the issuer. These are segregated from all other assets of the issuer and are incapable of being attached or seized in any form by the issuer s creditors, except for the noteholders. Fitch s ratings do not address the possibility of a future change in Italian law that would result in a reduction of the amount due by the obligors of these receivables. Fitch, however, has been advised that a change in the law would be deemed unconstitutional unless such a law were proved to be in the general interest and provided adequate compensation to the issuer. As a result, in spite of the strong link with the Italian government and its entities, the rating on the notes issued by S.C.C.I. is not constrained by the ratings on the Republic of Italy ( AA ). Copyright 22 by Fitch, Inc. and Fitch Ratings, Ltd. and its subsidiaries. One State Street Plaza, NY, NY 104. Telephone: , (212) Fax: (212) Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided as is without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified, and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at any time for any reason at the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,0 to US$750,0 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,0 to US$1,5,0 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services Act of 1986 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. 7