Exclusive: Italy mulls tougher terms in extending bad loan program

The Palazzo Chigi in Rome, seat of the Italian government, is illuminated in the colors of the Italian flag on January 15, 2021. REUTERS/Remo Casilli//File Photo

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  • Italy could raise the rating threshold for state-guaranteed banknotes
  • Guarantees can no longer cover 100% of the tranche guaranteed by the State
  • Study a new performance indicator to limit risks for taxpayers

ROME, May 29 (Reuters) – Italy is considering bolstering a state guarantee scheme to help banks rid themselves of bad debts while considering expanding it to cushion the blow of war in Ukraine and the pandemic, according to people familiar with the matter.

Since its launch in 2016, the “GACS” program has helped Italian banks offload 96 billion euros ($103 billion) of bad debts by softening the blow from divestitures to their profits.

At the end of 2021, investors held 11.6 billion euros in GACS-backed debt, according to Treasury data in April. The plan in its current form expires on June 14.

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Four people briefed on talks around renewing the scheme said Rome was considering reintroducing it with adjusted terms to reduce risk to taxpayers, possibly seeking an extension of more than 12 months. One of the options being considered is an 18-month extension.

The extension would require approval from European Union authorities, who first cleared the measure after ensuring it complied with EU state aid rules.

Rome is considering changes that would reduce benefits for banks and increase state protection to reduce the risks of it being left behind, the sources said.

Even under stricter conditions, the GACS program could help Italian lenders, which have sold more than €250 billion in bad loans since 2015, to cope with an anticipated increase in corporate defaults following the pandemic and the Ukrainian crisis.

Italy, which under the scheme guarantees the repayment of the least risky tranche of doubtful loans repackaged in securities, plans to raise the rating required for the “senior” tranche by at least one notch to “BBB+”, indicated the sources.

Rome could also consider reducing the share of the senior tranche covered by GACS state guarantees, currently at 100%.

Collateral reduces risk for those investing in the securities, allowing banks to offload debt at a lower discount.


The success of the GACS program in bridging the price gap between buyers and sellers has made Italy Europe’s largest market for delinquent bank loans. These debts now represent less than 4% of total bank loans, compared to a peak of 18% in 2015.

Government support measures last year pushed bankruptcies to a record high, but companies are now facing capital repayments on part of 280 billion euros in state-guaranteed COVID loans, just like they are grappling with record energy and commodity prices. Read more

While striving to help its banks weather further shocks, Rome is also keen to protect state coffers after loan recoveries from some of the previous GACS-backed deals failed. not met expectations.

Moody’s Investors Service said in April that 15 of 28 Italian bad debt securitization deals it analyzed had fallen short of initial projections on recoveries, with a median underperformance of 35% against business plans.

Italy had already tightened the terms of the scheme in 2019, raising the minimum senior tranche rating and introducing mechanisms to incentivize debt collection companies to stick to business plans.

To further reduce risk, the Treasury plans to introduce a new performance indicator called the profitability ratio, the sources said, to prevent debt collectors from increasing their income by selling the loans rather than collecting them.

If the indicator fell below a certain threshold, turnaround firms would not receive their variable fees and interest payments on medium-risk “mezzanine” tranches would be temporarily frozen, the sources said. ($1 = 0.9320 euros)

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Editing by Tomasz Janowski

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