THE ITALIAN LEASING MARKET - NAVIGATING THE ITALIAN NPE LEASING OPPORTUNITY - IN COLLABORATION WITH - BEBEEZ.IT
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in collaboration with The Italian Leasing market Navigating the Italian NPE leasing opportunity
Cambiare
immagini e
mettere EY style
Vedere NPE Contents
book style
1. The market and the assets
quality trend
CAMBIARE 2. Transactions
IMMAGINE
3. Legal aspects
4. Tax aspects
5. Regulatory aspects
6. Accounting aspects
7. Appendices
• EY Italy contacts
• Abbreviations and
acronyms
• Notes
1
1 The market and the asset quality trend
The Italian Leasing market
The Italian Leasing market – overview
2018 originated amounts are still far from pre-crisis The 2019 Budget Law refinanced the Nuova Sabatini
levels; however since 2014, the Italian leasing market measure in order to facilitate Italian SMEs access to
recorded a continued growth at a CAGR 2013-2018 of credit on the purchases of new machinery, plants and
15.2%. equipments. In detail, the Law made €480m public
funds available as follow: €48m for 2019, €96m yearly
2018 has been another growth year for the Italian
from 2020 to 2023 and further €48m for 2024.
leasing market in both value (+5.5% at €29.7b) and
volumes (+2.8% at 724k units) terms.
Car leasing contributed to 53% of the total 2018
origination amounts and increased YoY by 4.5%,
Instrumental leasing contributed to 31.4% and Figure 1.1: Leasing origination amounts (€m)
increased YoY by 5.7%, Real estate leasing contributed and volumes (#units) by industry
to 13.8% and increased YoY by 9.9% (see Figure 1.1
and 1.2). Volumes
Origination amounts
The average price increased by 2.6% from 2017 to
2018. Main contributors were car and real estate 488.21
leasing whose average price increased by 2.9% and Automotive 15.043 Automotive
495.21
5
15.722
0.9% respectively. 2
When referring to the number of contracts subscribed 8.836 211.90
Equipment Equipment
9.343 224.36
8
in 2018 data highlight a positive trend for almost all 3
the sub segments; in particular, instrumental leasing
Aeronautical 522 Aeronautical 354
(+5.9% vs PY), real estate (+8.9%), cars (+1.2%),
and railway 516 and railway 436
energy (+25.2%), aeronautical and railways (+23.2%).
In terms of real estate leasing sub segment, the main 3.742 4.205
Real Estate Real Estate
increase observed in 2018 is related to real estate built 4.110 4.578
assets, which reached €2.4b, recording a 13.1%
increase if compared to 2017. A growth was registered Energy
88
Energy
107
also by the “under development” asset class that 83 134
closed the year with a 5.6% growth vs PY (see Figure
1.2). 28.231 704.789
Total Total
29.774 724.723
The incentive plan promoted by the Government
through the introduction, in parallel with the existing 2017 2018
super-ammortamento and the Nuova Sabatini, of the
iper-ammortamento on the assets included within the
2017 Industry 4.0 Plan (the Piano Industria 4.0)
strenghtened the appeal of the leasing as a financing Figure 1.2: 2018 RE origination amounts: Under
option. Development vs Built (€m)
Through the Industry 4.0 Plan, Italian companies have
been encouraged to revive the economy by investing in
new technological assets and increase their
+9.9%
competitiveness in the market.
The Leasing incentive mechanisms contributed to this 4,110
3,741
transformation; according to Assilea, ca. 20% of the +13.1%
2018 instrumental leasing volumes were funded under Increase in RE
the Industry 4.0 Plan new regime. Built
2,419
2,140
2019 Budget Law confirmed the iper-ammortamento
incentive with few adjustments (i.e. new fiscal benefit
+5.6%
percentages based on invested amounts) and marked
Increase in RE 1,691
the farewell to the super ammortamento. 1,602 Under
Development
On the other hand, the 2019 Budget Law introduced
the so called mini Ires for companies investing in new 2017 2018
plants and/or instrumental goods and for those hiring RE Under Development RE Built
new personnel.
Source: data of Assilea’s Centre of Studies and Statistics and UNRAE’s Centre of Studies and Statistics, EY analysis
4
The Italian Leasing market
NPE leasing – a snapshot
As of December 2018, the NPE in the Italian leasing
industry amounted to €19.3b. They mainly referred to Figure 1.4: 31 Dec 2018 Leasing exposures –
bad loans (€12.9b) and UTP (€6.1b). Past due breakdown by risk class (€b)
exposures only represented 1.3% of the total impaired 84,1
exposures (see Figure 1.4). 12,9
4Q2018 figures confirmed the decreasing trend in 6,1
0,2
terms of gross NPE exposures with bad loans decreased 64,8
from €15.1b as of 31 Dec 2017 to €12.9b at the end
of December 2018, UTP from €7.3b to €6.1b and past
due from €0.4b to €0.2b. The overall NPE decrease in
2018 vs 2017 was 15.4% (i.e. €3.6b, see Figure 1.3).
Figure 1.3: 31 Dec 2017 vs 31 Dec 2018 leasing
exposures – breakdown by risk class (€b) Performing Past Due UTP Bad Loans Total
Leasing 31 Dec 2017 31 Dec 2018
Performing 67.2 64.8
Past due 0.4 0.2
UTP 7.3 6.1
Bad Loan 15.1 12.9
Figure 1.5: 31 Dec 2018 NPE ratio – breakdown
Total NPE 22.9 19.3
by industry
Total leasing
90.0 84.1
exposures
Total
22,9%
13,4%
2017 2018 Automotive
8,3%
2,5%
17% 15% Industrial and Commercial
9,1%
7% Vehicles 4,2%
8%
90,0m 0% 84,1m Equipment
0% 11,9%
3,6%
75% 77%
Aeronotical and Railway
33,9%
11,9%
Real estate
The Italian Leasing market
NPE leasing – breakdown by underlying asset
The coverage levels relating to the various products
81% of the overall NPE leasing amount as of 31 Dec
and to the different classes of risk highlight some
2018 was related to the RE segment, with a total value
interesting trends.
of €15.6b (see Figure 1.6) .
The average coverage of impaired leasing exposures
was 48.5% as at December 2018. The average
coverage ratio on bad loan exposures was 56.1%.
Figure 1.6: 31 Dec 2018 NPE – breakdown by
underlying asset The leasing categories with higher provisioning levels
as of 31 December 2018 were aeronautical and
railway (74.2%), equipment (72.6%) and automotive
Automotive - Industrial
4% 3% 10% and commercial vehicles (72.3%) whilst the category with the lowest
provisioning level was the RE segment (see Figure 1.8).
2% Equipement The overall coverage ratio relating to bad loans is
approximately 75.0%, which is primarily driven by the
aeronautical & railway and equipment segments with
Aeronautical and railways coverage ratios of 83.8% and 83.2%, respectively.
The average UTP coverage ratio, without any regard to
Real estate the underlying asset, is 43.0% as a result of a higher
coverage on aeronautical & railway and equipment
(52.8% and 52.6% respectively) and a lower coverage
81% Energy on RE (29.3%). See Figure 1.8 and Figure 1.9.
Figure 1.8: 31 Dec 2018 Coverage ratio –
breakdown by underlying asset
The analysis of impaired leasing by segment highlights
that the aeronautical & railway and the RE industries Total
48,5%
are those most affected by NPE.
Automotive
72,3%
Looking at the composition of impaired leasing, bad
loans are the predominant category for all the Industrial and Commercial
Vehicles 56,4%
underlying asset types with the exception of the energy
sector, where the UTP category dominates (see Figure Equipment
72,6%
1.7).
Aeronotical and Railway
74,2%
Provisioning levels on impaired leasing are substantially
stable or decreasing in the automotive, equipment, RE Real estate
The Italian Leasing market
NPE leasing – RE focus
RE leasing is by far the main contributor to the overall RE leasing classified as bad loans amounted to €10.7b
NPE in the leasing industry. as of 31 December 2018, accounting for 19.8% of the
total RE leasing exposure (€54b). See Figure 1.13.
Approximately 28.9% (€15.6b) of the overall
outstanding RE leasing contacts as of 31 December The main category is represented by exposures with a
2018 is related to impaired leasing (see Figure 1.10). ticket value lower than €2.5m, which represents
approximately 48% of the total bad loans stock
followed by the exposures with a ticket value higher
than €5m (see Figure 1.11).
Figure 1.10: 31 Dec 2018 Credit quality of RE In terms of bad loans coverage, data as of 31
leasing contracts December 2018 highlighted that the RE bad loans
exposures average coverage ratio was higher on larger
0,3% leasing tickets: 48% on tickets lower than €2.5m, 51%
0,1 on tickets between €2.5m and €5m and 53% on tickets
8,8%
higher than €5m (see Figure 1.12).
4,7 19,8
% RE leasing classified as UTP amounted to €4.7b and
10,7
represented 8.8% of total RE leasing as of 31 December
2018.
71,1 As of 31 December 2018, the RE leasing UTP coverage
% level varied from 26% on the contracts with a RE
38,4
leasing ticket value lower than €2.5m to 32% on RE
leasing with a ticket value exceeding €5.0m (see Figure
1.12).
Exposure - %
Exposure (€b)
Figure 1.11: 31 Dec 2018 Bad loans – focus on
RE (€b)
Past Due UTP Bad Loans Performing
10,7
3,2 0,4
2,0
In 2018, shows different factors that positively affect
the RE stock quality at the end of the year, inter alia, 5,1
impaired RE leasing exposures decreased from 18.0b as
at 31 Dec 2017 to €15.6b at the end of 2018 and both
number of contracts and amounts originated in 2018
highlight a positive trend for almost all the sub
segments.
Real estate Real estate Real estate Under Total
= 5m € development
The Italian Leasing market
NPE leasing – RE remarketing activity
Once RE assets are repossessed, the remarketing Figure 1.16 Average remarketing time (months)
activity starts.
26,7
2015-2017 data show that the number of repossessed
22,8
assets increased from #1,167 in 2015 to 1,522 in 21,7
2017 (CAGR of 14.2%).
Repossessed assets re-sold in the same period
increased from #477 in 2015 to #772 in 2017 (CAGR
of 27.2%).
Figure 1.14: Flow of repossessed & resold RE
assets (# of assets)
2.294 2015 2016 2017
1.948
1.167 772
641
477 Figure 1.17: Average remarketing price (€k)
1.307 1.522
1.167 824,3
779,0
2015 2016 2017 597,7
(690) (666) (750)
Resold assets
Repossessed assets
Repossesse - resold delta
2015 2016 2017
Direct resale to third parties remains the most frequent
remarketing solution (63.7% of the cases in 2017).
However few other alternatives are getting a higher Figure 1.18: Preferred remarketing channels
portion of the remarketing activity. In particular, from (more than one answer allowed 1)
2016 to 2017, the number of sales to RE funds
63,6%
increased from 16.9% to 19.5% of the total (see Figure 59,1% 59,1%
1.15)
The time needed to remark repossessed assets
increased from 21.7 months in 2015 to 22.8 months in
31,8%
2016 and 26.7 months in 2017 (see Figure 1.16). 27,3%
The average remarketing price over 2015-2017 18,2%
decreased from €824k in 2015 to €598k in 2017 13,6%
(CAGR of -14.8%). See Figure 1.17,
In terms of remarketing channels, the preferred ones
are reported to be the following: own internet site, third Own Reseller Real Dealer Credit Asta Other
internet company estate network recovery
party reseller company and RE agencies. site agency company
Figure 1.15: Re-location of the repossessed assets
2015 2016 2017
0,0% 0,1%
15,2% 13,5% 0,0%
26,1% 3,1%
51,9% 1,1%
0,8% 16,9%
19,5%
21,2% 66,6% 63,9%
Resold to third party Resold to RE fund Ordinary sale Financially resold Rent to buy
Source: data of Assilea’s Centre of Studies and Statistics, EY analysis
1 Assilea survey questionnaire, March 2018.
8
2 Transactions
The Italian Leasing market
NPE Leasing – Recent transactions
We continue to receive interest from both Italian and In the next page, we summarize the issues we normally
international investors on leasing contracts and face in structuring the sale of a Real Estate Leasing
repossessed assets. Buyers are investment funds and / NPE Portfolio.
or specialized players with expertise in collection
Bain Capital Credit has been one of the most active
activities.
international investors with regard to leasing
Leasing contracts have historically been a complex transactions: first, with the acquisition of HARIT
asset class, given the peculiarity of regulation and (subsequently renamed Aquileia Capital Services), the
legal framework. In order to partially tackle this issue, servicing platform specializing in leasing and
in June 2017, an important amendment to the Law repossessed assets. Then, with the acquisition, among
130/1999 on securitizations allowed SPVs to acquire others, of a non-performing leasing and mortgage
and manage (if not directly, through a separate loans portfolio with a GBV of approximately €0.7b
vehicle) leased assets, thus allowing investors a more from Hypo Group Alpe Adria (Project Terzo) and of a
standard structuring approach. The first transaction €0.9b leasing bad loans portfolio (Project Morgana)
under this revised scheme was completed by Hypo from MPS in late 2018. Illimity has also recently
Alpe Adria Bank, which sold a performing leasing announced investments in this asset class.
portfolio with a GBV of €480m to Goldman Sachs.
The table below summarizes the main transactions
However, even after this recent update, the regulatory
involving leasing credit portfolios and/or repossessed
framework in this field still appears incomplete, with
real estate assets occurred in the Italian market in
market players facing issues mainly related to the
2017 and 2018.
effective transfer and management of underlying
assets.
Figure 1.19: Main disclosed Leasing transactions in the Italian market (1Q17–4Q18)2
GBV
Date Project Name Seller Buyer Type of portfolio
(€m)
4Q18 Morgana MPS Bain Capital Credit 900 Mixed leasing
4Q18 Confidential UniCredit Leasing Guber Banca 170 Unsecured leasing
3Q18 Confidential Balbec Capital MBCredit Solutions 217 Unsecured corporate leasing
2Q18 Gimli 2 Credito Valtellinese Credito Fondiario 222 Secured UTPs (25% leasing)
4Q17 Confidential UniCredit MBCredit Solutions 250 Unsecured leasing
4Q17 Confidential Intesa Sanpaolo Banca Ifis 85 Unsecured leasing
4Q17 Hemera Intesa Sanpaolo Bain Capital Credit 150 Secured RE (leasing)
4Q17 Confidential Not specified Axactor Italy 80 Secured consumer/SME, leasing
3Q17 Terzo Hypo Alpeadria Bain Capital Credit 750 Mixed (41,5% leasing)
2Q17 Confidential UniCredit MBCredit Solutions 500 Unsecured leasing
1Q17 Confidential Intesa Sanpaolo Provis Credito Fondiario 280 Leasing
Rumors that few players are working on NPE leasing Key messages
portfolios and few others are bringing additional
transactions to the market.
We expect 2019 to be a key turning point for this asset • Extensive interest on leasing
class. portfolios and real estate
repossessed assets
• Several transactions started in
1Q19
• A wide panel of active buyers,
including new players formerly
dedicated to servicing activity
2 This table summarizes the main publicly disclosed transactions and is not intended to be an exhaustive list of completed Leasing transactions.
9The Italian Leasing market
Lessons learned and open Transactional issues
Few examples
1 Transferability of
the asset rights
and agibility
►
►
►
The asset transferability is crucial to properly complete the execution phase
Transferability and agibility issues often drive to postponed sale of both credit
and assets
Transferability and agibility issues negatively impact the asset pricing
2 Environmental
aspects
►
►
The Seller should be able to provide a complete set of information related to all
the necessary remediation activities carried out and still to be carried out
Remediation activities not completed at the time of the Transaction negatively
impact the asset pricing and may ultimately imply a perimeter change
3 Price allocation ► The selling price once agreed has to be allocated to the different components
of the Portfolio. The allocation should take into account relevant tax impacts
4
► Pre-emption rights on pools, rents, urban planning agreement, consortia need
Pre-emption rights to be known and properly managed
► Solutions to manage pre-emption rights on single assets included in Porfolio up
for sale
5
► Fully settled positions (transazione tombale del credito), if any, represent credit
Fully settled positions for which the borrower has already signed a settlement agreement
credit positions with the Seller (e.g. asset repossession with credit cancellation)
► When positions are finally closed and settled, the sale of such real estate assets
would be “pure” real estate transactions which require specific transaction
structures
6 Litigation/Legal
issues ► Ongoing lawsuits need to be fully mapped and evaluated
7
Syndicated loans ► Syndicated loans may increase the Transaction complexity due to:
► Higher number of counterparties to be dealt with
► More structured informational flow to be set up
► More articulated pricing negotiations
► Right of first refusal clauses to be managed
► Credit/real estate positions on which the Originator is not the main decision
maker might lead to:
► Longer Transaction processes
► Operational complexities in setting up the site visits
8
Non RE facilities ► Investors could be
linked to portfolio interested in acquiring also Key messages
positions up for credit lines not part to the
sale Transaction but related to
real estate assets included Recurring complexities are:
in the portfolio up for sale
• Assets transferability
In this case, the Seller
►
should be ready to provide
criteria
information related to • Environmental issues
these credit lines in order
to allow the possible • Pre-emption rights
inclusion within the • Litigation/legal issues
Transaction perimeter
103 Legal aspects
The Italian Leasing market
The LeaseCo within the Securitization Transaction
Legal Aspects
There are certain main legal issues to be considered in the context of securitization of lease receivables. Some
important provisions have been enacted recently on the definition of financial lease, the consequences of an
insolvency scenario over the underlying lease agreements and the securitization of non-performing lease receivables.
Still some legal uncertainties remain over a potential extensive market.
New Definition of financial lease and ► the lessor shall sale or otherwise dispose of the
consequences of termination of the lease asset in compliance with quick, transparent and
agreement public criteria with the aim to individuate the best
offer possible and the obligation to inform the
Law No. 124 of 4 August 2017 (the Competition Law) lessee.
provided a new definition of financial lease.
Pursuant to Article 1, para. 136, of the Competition
Law, under a financial lease a bank or a financial Specific provisions apply (Article 1, para. 76 to 81 of
intermediary enrolled with the register held by the Bank Law No. 208 of 28 December 2015) in case of leasing
of Italy pursuant to Article 106 of the Consolidated of principal residential houses.
Banking Law, purchases or builds an asset according to
the instructions received by the lessee, which assumes
all the risks related to such asset and shall be entitled Insolvency of the lessee
to use the asset against payment of lease instalments.
Upon expiry of the lease agreement the lessee shall One of the other main legal aspects to be considered is
have the option to purchase the asset or return it to the consequence of the insolvency of the lessee on the
the lessor. lease agreement.
For the first time, the Competition Law provides a clear Pursuant to Article 72-quater of Royal Decree No. 267
definition of default under a lease agreement and set of 16 March 1942 (the Bankruptcy Law), in case of
out the consequences of such default. A default is insolvency of the lessee the provisions set out in Article
triggered: (a) for the real estate assets leases, in case 72 of the Bankruptcy Law shall apply. Pursuant to such
of non-payment of at least six monthly instalments or provision, in case of insolvency of the lessee the lease
two quarterly instalments (even if not consecutive) or agreement, not entirely executed, is suspended until
equivalent amount; and (b) for the other leases, in case the lessee’s bankruptcy receiver opts to step-in the
of non-payment of at least four monthly instalments lease agreement in lieu of the insolvent lessee or
(even if not consecutive) or equivalent amount. terminate the agreement. In case of termination of the
lease agreement, the leased asset shall be returned to
In case of termination of the lease agreement as a the lessor and the lessor shall pay to the lessee’s
consequence of the lessee’s default, the following insolvency estate the difference, if any, between the
events occur: amount deriving from the sale or other disposal of the
► the lessee shall return the asset to the lessor. asset at market values and the residual principal
amount due. The instalments already paid to the lessor
► the lessor shall pay to the lessee the amount
are not subject to claw-back pursuant to Article 67,
deriving from the sale or other disposal of the asset
para. 3, lett. a) of the Bankruptcy Law. The lessor has
at fair market value less (i) the amount of
the right to claim from the lessee’s bankruptcy estate
instalments overdue and not paid until termination
the difference, if any, between the lower amount
of the lease agreement; (ii) the amount of principal
deriving from the sale or other disposal of the asset and
instalments not yet overdue; (iii) the final option
the amount due pursuant to the lease agreement.
price; (iv) the expenses incurred for the recovery,
In case of insolvency of the lessee, the provisions of the
evaluation and preservation of the asset until the
Bankruptcy Law on the consequences of termination of
completion of the sale. All without prejudice to the
the lease agreements and sale of the leased asset
credit rights of the lessor against the lessee when
prevail of the provisions of the Competition Law
the amount recovered after the sale or other
described above.
disposal of the asset is lower than the amount due
by the lessee pursuant to the calculation above.
The Insolvency Law provisions will be replaced in the
► the lessor shall sell or otherwise dispose of the future by the provisions of Legislative Decree No. 14 of
asset in accordance with public market valuations. If 12 January 2019 (the Corporate Crisis and Insolvency
such valuations are not available, the sale shall be Code) that, save for certain provisions, will in their
effected on the basis of the evaluation of: (i) an majority come into force on 15 August 2020.
expert appointed by the lessor and the lessee within
20 days from the termination of the lease
agreement; or (ii) should an agreement between the
parties not be reached by this term, an independent
expert appointed by the lessor among at least three
names communicated to the lessee, who could
express his binding preference within 10 days from
the communication of the lessee. The expert shall
not have any personal or professional connection
with the lessor.
12The Italian Leasing market
Specific provisions on termination of the lease Tranfers to LeaseCo may be made also pursuant
agreements and sale of the asset are contained in to Article 58 of the Consolidated Banking Act even
Article 97, para. 12 and Article 177 of the Corporate when the receivables tranferred cannot be
Crisis and Insolvency Code in case of, respectively, identified as a “block“ of receivables having
composition with creditors and judicial liquidation common features.
(former bankruptcy, since such expression will no If the originator transfers to LeaseCo, together
longer be used) of the lessee. In case of termination of with the leased assets, also the underlying lease
the lease agreement following the composition with agreements and the legal relationships deriving
creditors of the lessee: (i) the leased asset shall be from the termination of such agreements then
returned to the lessor; (ii) the lessor shall pay to the LeaseCo shall be consolidated in the balance sheet
lessee (i.e. to the lessee’s composition procedure) the of a bank or a financial intermediary enrolled with
difference, if any, between the higher amount deriving the register held by the Bank of Italy pursuant to
from the sale or other disposal of the asset at market Article 106 of the Consolidated Banking Law, and
value less the instalments overdue at the date of shall be destined to specific transactions and
termination, the principal instalments still due, the final liquidated upon conclusion of the Securitization.
option price, and the residual principal credit. The LeaseCo shall have a limited corporate purpose
lessor shall be entitled to request the difference and restricted capabilities of operation and
between the amount due at the time of request of the indebteness which in any case shall be evidenced
composition and the amount deriving from the sale or in the bylaws and transaction documents.
other disposal of the asset and such amount will be
treated as due before the request of composition. Sale
and/or disposal of the asset shall take place according Since LeaseCo is expected to be a single transaction
to the modalities set out by the Competition Law. corporate vehicle with restricted capacities, all the
In case of insolvency of the lessee, Article 172 and 177 activities and undertakings set out in the transferred
of the Corporate Crisis and Insolvency Code set out lease agreements shall be performed by the Servicer
similar provisions to those contained in the Bankruptcy or by another leasing company.
Law. After circa two years from the enactment of the new
provisions on the securitization of non performing
Securitization of non performing lease lease receivables, it would be interesting to evidence
receivables the major critical points noted on the market:
► securitization of so called “jumbo-leases”: in
Article 7.1 of Law No. 130 of 30 April 1999 (the case of leases granted by multiple banks/leasing
Securitization Law) set out specific provisions for the companies, there might be pre-emptive rights in
securitization of non performing lease receivables by order to the transfer of receivables to 130 SPVs.
banks and financial intermediaries enrolled with the Such pre-emptive rights might be faced also in
register of financial intermediaries pursuant to Article connection with the transfer of ownership on the
106 of the Consolidated Banking Law. leased asset (both among the multiple
It is now possible, within the securitization of non originators and versus the entity that entered
performing lease receivables to incorporate, along with into a rental agreement with the lessee,
a typical securitization vehicle, one or more “leasing particularly if the asset is destined to public
companies” (LeaseCo) with the sole corporate purpose services);
to acquire and manage, in the interest of the
► cadastral irregularities: cadastral and
securitization, leased assets both from terminated and
environmental irregularities may prevent the
not terminated underlying lease agreements and the
transfer of the leased assets. There have been
contractual relationships deriving from such
many discussions on the markets and the only
agreements.
viable solution seems to be to transfer the assets
Proceeds deriving to LeaseCo by the management of
within an extraordinary spin-off transaction
the underlying assets may be securitized pursuant to a
rather than a straight outrights transfer but this
specific amendment of the Securitization Law
solution does not seem practicable;
introduced by the 2019 “Growth” Decree.
► transfer of assets following settlement
agreements: in certain circumstances, the lessor
and the lessee enters into final settlement
agreements and the lessor remains owner of the
leased asset but, following the execution of the
settlement agreement, there are no more
pecuniary receivables to transfer to the 130
SPV. According to certain practitioners the lack
of receivables would render impossible to
transfer the leased assets to LeaseCo under the
Securitization Law framework.
13The Italian Leasing market
New structures of transfer of leasing NPLs and
UTPs through segregated pools pursuant to
Key messages
recent amendment to the Securitization Law
The Securitization Law has been recently amended and
a new type of “virtual” securitization is now
Major legal Issues to be considered are
contemplated by the new Article 7, para. 1, lett. a). the following:
Pursuant to such provision, the 130 SPV may grant a • Clear definition of default under a
loan to the originator with the purpose of transferring
lease agreement and the
the risk on a pool of underlying receivables.
The originator may segregate such pool of receivables consequences of such default
(including rights and assets securing the repayment of • Consequence of the insolvency of
such receivables) in order to protect the rights of the the lessee on the lease agreement
130 SPV (and ultimately of the noteholders). The
originator may also pledge such pool of assets and • Securitization of non performing
rights to secure the repayment of the loan granted by lease receivables pursuant to Article
the 130 SPV and channel all the collections to the 130 7.1 of Law No. 130 of 30 April 1999
SPV (as a virtual transfer).
The management and sale of the leased assets could be • New type of “virtual” securitization
entrusted to a third party including the servicer of the pursuant to Article 7, para. 1, lett. a)
securitization.
The “virtual securitization” might help in circumventing
some of the practical issues described above in the
context of securitization of non performing leases,
however this structure would need to be tested
particularly from an RWA’s standpoint.
144 Tax aspects
The Italian Leasing market
The LeaseCo within the Securitization Transaction:
Tax Aspects
The securitization of leasing portfolios has always suffered the lack of a clear juridical and tax framework thus leading
to many uncertainties undermining the full potential of this market. The main issues lie on the fact that, compared to
the mortgages loans, the guarantee does not transfer automatically to the investor because of the transfer of the loan
but it remains in the hands of the juridical owner (the lessor). As a consequence, in order to transfer it to the investor
together with the leasing contracts, a specific deed must be carried out involving direct and indirect taxes
consequences. In 2017 Italy introduced some amendments to the Securitization Law aimed at facilitating the
securitization of leasing portfolio through the set up of an entity (LeaseCo) operating in the exclusive interest of the
130 SPV. The LeaseCo purchases the leasing contracts and the real estate assets from the leasing company and enters
with the 130 SPV into agreements aiming at transferring to the latter all risks and benefit associated to the
management of the real estate assets. Below a brief summary of the direct and indirect tax consequences of the above
described operating model.
1. Direct Taxation of the 130 SPV 2. Direct Taxation of the LeaseCo
The 130 SPVs incorporated pursuant to the LeaseCos are Italian corporate entities subject to IRES
Securitization Law are Italian corporate entities and, and IRAP pursuant to the ordinary rules.
therefore, are in principle subject to IRES and IRAP
As the 130 SPVs, assets and contracts purchased by
according to the ordinary rules1.
the LeaseCo (and liabilities issued in order to purchase
However according to the Securitization Law, loans them) are segregated from the net asset of the
purchased and liabilities issued by the SPV represent a LeaseCo3. All proceeds stemming from the
pool of asset/liabilities which is segregated from the management by LeaseCo of purchased assets (and paid
net assets of the 130 SPV. That’s because all the back to the 130 SPV) are deemed to be payments
amounts deriving from the loans are specifically made by the disposed lessee and are exclusively
destined to the fulfilment of the obligations owed to destined to pay interest and reimburse the capital of
the noteholders and to third-party creditors in respect ABS issued by 130 SPV.
of the securitization. The above segregated nature of
Given the above, LeaseCo should benefit from the
the 130 SPV’s pool of asset and liabilities is also
favorable direct tax treatment applicable to the 130
reflected in the relevant off-balance accounting
SPVs (see above).
treatment.
From a tax standpoint, the Italian Revenue Agency fully
recognized the above segregated nature of the 130
SPV’s pool of assets and liabilities and stated that no
taxation applies in the hands of the SPV in relation to
temporary spreads, if any, deriving from positive and
negative flows in relation to the receivables revenues. LeaseCo
That’s because the net proceeds generated by the
receivables may not be considered as legally available
to the 130 SPV, as they are destined by law to the
payment of the noteholders and of the third party. Rebate of Funding for
Taxation shall occur only in case, at the end of the costs and the
Leasing
Company
revenues
securitization transaction, it remains an excess spread stemming
acquisition (Originator)
of assets
which is not attributed to the noteholders. from the RE and
management contracts
The 130 SPV is not subject to the unfavorable rules of activity
the dormant company tax regime2.
SPV 130
Notes
Investor
1 IRES and IRAP rates should be, respectively 24% and 5.57% (if the 130 SPV is incorporated in Lombardy Region).
2Companies falling in the scope of the dormant company regime (Art. 30, paragraphs from 1 to 7 of Law No. 724/1994), are asked to pay taxes on a deemed income even though they
are in a tax loss position. In addition, unfavorable consequences also apply for VAT purposes.
3See Art. 23, paragraph 1, lett. c) no. 2) of Law Decree No. 34/2019. This amendment has been recently introduced after the Italian tax Authorities, given the lack of an explicit
provision stating the segregation of assets purchase by the LeaseCo within the securitization transaction, denied to ReoCo/LeaseCo the application of the favorable tax treatment
applicable to the 130 SPV. The Law Decree no. 34/2019, although already in force, will need to be converted into law by June 30, 2019.
16The Italian Leasing market
3. Indirect tax aspect of the transfer of credits, Registration Tax
assets and contracts All trades that fall within the scope of VAT (even
though at a zero rate) are not subject to a proportional
3.1. Transfer of credits to the 130 SPV rate of registration tax, but rather to a fixed
registration fee of €200.
VAT
All trades that fall out of the scope of VAT trigger in
The qualification of a transfer of receivables under principle the application of a 0.5% registration tax on
Italian VAT law depends on the purpose for which it is their transfer value.
executed. The obligation to file for registration and, ultimately,
According to guidelines issued by Italian Revenue the application of registration tax is usually avoided
Agency, the transfer can be treated as: through the sale of receivables by means of an
► Debt collection, subject to VAT, if, through the exchange of correspondence, which is not subject to
transfer, the transferor wishes to speed up the registration unless further specific conditions occur
collection of the debts; (namely, in caso d’uso4 or enunciazione5). However, if a
transfer of receivables of a specific kind requires a
► A financial service, exempt from VAT, if the transfer is public deed or a deed with a public notary
aimed at satisfying the transferor’s immediate cash authentication of signatories, registration in Italy will
needs. In such a case, the discount with respect to the be requested directly by the notary public involved in
nominal value of the receivable is considered the the deed, ultimately causing the application of the 0.5%
consideration of the transfer; charge for those transfers not subject to VAT.
► A transaction outside the VAT scope, if it does not
3.2. Transfer of assets and leasing contracts to
pursue any of the above aims and is a mere donation
or a payment in kind to extinguish a prior obligation. the LeaseCo
VAT
Especially in the assignment of assets without
recourse, what differentiates a finance transaction The transfer of assets and leasing contracts «en bloc» is
from a simple sale of a receivable for Italian VAT considered as a supply of service and, therefore, falling
purposes is the presence of a financing cause for the within the scope of VAT.
transaction. Such transaction should be subject to VAT at the rate of
Accordingly, whenever it is clear that the purpose of 22%.
the seller is to raise finance through the sale of certain
assets and, on the other hand, the purpose of the It is worth noting that the VAT cannot be doubled with
buyer is to make a profit from the managing of the reference to the transfer of assets and the transfer of
NPLs bought at a discount over the principal and the leasing contracts, since the immovable property is
associated interest payable, it should, in principle, be inextricably linked to the execution of the leasing contract.
possible to apply the VAT regime of a financial service,
i.e., VAT at a zero rate. Registration, Mortgage and Cadastral taxes
The transfer of assets to the LeaseCo is in principle
subject to registration, mortgage and cadastral taxes at a
lump sum of €200 each.
However, in case the transfer occurs under art. 58 of the
Italian Banking Law, mortgage tax should not apply given
that the regime under art. 58 above does not require to
put in place formalities within the relevant real estate
registers for the purposes of the transfer of the assets.
4 For the purposes of Italian registration tax, in caso d’uso occurs when a document is: (a) deposited with a judiciary office for administrative purposes only (e.g., the mere
production of a document before a court does not represent in caso d’uso); or (b) deposited with a government agency or local authority, unless a deposit is mandatory by law or
regulation, or is required in order for the relevant government agency or local authority to comply with its own obligations.
5 Reference to a document in another document that is submitted for registration (enunciazione) would entail the registration of the first document, provided that all parties to
the document submitted for registration of such first document are also parties to the document to which reference is made.
17The Italian Leasing market
3.3 Transfer of assets by the LeaseCo
VAT Key messages
The transfer of assets by the LeaseCo is subject to the
ordinary VAT provisions.
Depending on the nature of the RE assets and on the
• LeaseCo direct tax treatment
status of the buyer (e.g. VAT taxable person, ecc.), the aligned to the one of the 130 SPV
VAT rate may range between 4%, 10%, 22%. • Contracts / assets transfer to
However, the transfer may also be VAT exempted6.
LeaseCo subject to ordinary VAT,
flat registration and cadastral
Registration Tax, Mortgage and Cadastral taxes taxes (€200 each)
The transfer of repossessed asset by the LeaseCo is
subject to registration tax, mortgage and cadastral • Transfer of assets by the LeaseCo
taxes at a lump sum of €200 each. subject to ordinary VAT, flat
registration, mortgage and
VAT treatment of payments between 130 SPV cadastral taxes (€200 each)
and LeaseCo • Rebates from LeaseCo to 130
Fees paid from 130 SPV to LeaseCo as a remuneration SPV not subject to VAT
of the real estate management activity is ordinary
subject to VAT at 22%.
Payments between the 130 SPV and LeaseCo in order
neutralize in the hands of the latter the result of the
real estates management activity are out of scope of
the VAT.
6 In case of VAT exempt transactions (pursuant to Art. 10, para. 1, no. 8-bis) and 8-ter) of Presidential Decree 26 October 1972, No. 633 of 1972) for commercial real estate
properties, and for those residential properties which have been subject to certain selected renovation/restructuring works, an ad hoc election in the relevant agreement may
be made by the transferor in order to apply VAT.
186 Accounting aspects
The Italian Leasing market
Accounting aspects
Accounting aspects of 130 SPV .
A topical issue highlighted during the implementation of Key messages
a securitization program is how the 130 SPV accounts
for the arrangements that it entered into and
particularly how it accounts for the portfolio of • Although the accounting framework
purchased assets (receivables, property, etc.).
of the 130 SPV has changed, loans
When the Securitization Law came into force in 1999,
the regulation applicable to the Securitization Entities
purchased and liabilities issued
stated that the loans and securities involved in each should continue to be accounted off-
transaction represent, to all effects, a separate equity balance
from that of the Company and from that of the other
transactions. According to such regulation, in the • LeaseCo should account off-balance
Securitization Entities’ financial statements, all the assets and contractual rights
accounting data pertaining to each securitization
transaction are separately reported and disclosed in a
purchased
dedicated section of the illustrative notes to the
financial statements in compliance with the
administrative provisions issued the Bank of Italy based
on Legislative Decree 38/2005, Article 9 (the
“Provision”). The specific section contains a balance
sheet, an income statement and the pertaining notes
providing disclosure of all quantitative and qualitative
information needed to present the transaction in a clear
and comprehensive manner.
Although the Provision is no longer in force, the
accounting approach described above is still valid
because the Securitization Law provides for the legal
segregation of the securitized portfolio of receivables
and this has become the generally accepted accounting
practice (i.e. no recognition criteria are met due to the
absence of any exposure of risk/rewards for the 130
SPV).
Accounting aspects of the LeaseCo
The amended Securitization Law offers the possibility
to incorporate a new type of entity (LaeseCo) aiming to
improve the management of the assets (properties)
associated to the lease contracts whose loans are
included in the securitized portfolio. The ring-fencing
mechanism applicable to the LeaseCo is similar to that
provided by the original Article 3 of the Securitization
Law and it is valid also in respect to the cash inflows
generated by the real estate assets acquired and
managed by the LeaseCo.
The recent amendment to the Securitization Law has
explicitly confirmed the above by stating that all assets
purchased by the LeaseCo represent a segregate pool
of assets in the hands of LeaseCo. No creditors are
allowed to be satisfied over those assets with the only
exception of the 130 SPV acting on behalf of
noteholders.
As a consequence LeaseCo should follow the same
accounting treatment of the 130 SPV (see above).
235 Regulatory aspects
The Italian Leasing market
Regulatory aspects - overview
BCBC Review of Standardised
and AIRB approach
IFRS9 EBA/BCBS Forbearance
Accounting Principles & NPL
EBA Definition of Default Relevant Securitization
& Materiality Threshold Transactions Regulation
Regulatory Aspects
Management of Movable
ECB
and Immovable
Anacredit
Collaterals
ECB
Calendar Provisioning
The on-going regulatory framework ► Downturn estimation: specification of the nature,
severity and duration of an economic downturn and
The regulatory framework of banks and financial requirements to identify the economic downturn
companies (e.g. factoring, leasing) has been how to incorporate the identified economic
characterized by a multitude of changes and downturn into the credit risk modelling
innovations (both planned or already in place):
► Securitization Transaction Regulation: EU
► Basel III / IV regulatory framework: overall Regulations 2017/2041 and 2017/2402, both
measures taken by regulators in response to the entered into force on 1st January 2019, modify
global financial crisis, in order to restore credibility and integrate the previous Regulation (CRR –
to the calculation of risk-weighted exposures Capital Requirement Regulation) in terms of capital
(RWA), and ensuring at the same time a greater requirements related to securitization transactions.
comparability of capital ratios of banks. In particular, they open to non-AIRB banks the
► EBA definition of default and materiality threshold: possibility of carrying out capital optimization
harmonization of the application of the definition of operations through securitization transactions
default, which includes aspects such as the days (although they appear as more limited than AIRB
past due criterion for default identification, banks).
indications of unlikeliness to pay, conditions for a
return to non-defaulted status.
Challenges for Leasing Companies
► EBA Forborne and NPE management: tools and
frameworks to put in place to manage effectively The regulatory leasing framework is not substantially
non-performing exposures (NPEs) and to achieve a different from the one for banks and financial
sustainable reduction on balance sheets (NPE institutions, however some features are worthy to be
reduction strategies, governance and operational highlighted.
requirements). In particular, leasing companies should focus and work
► IFRS9 Accounting principles: methods of on the following aspects:
“Classification & Measurement”, “Impairment and
► Management of movable and immovable property
Hedge Accounting” in relation to financial
collaterals; within the NPE management of secured
instruments held by credit institutions, in
NPEs, leasing companies are required to put in
replacement of the provisions of IAS39.
place:
► ECB Calendar Provisioning: Supervisory • Governance, procedures and internal controls
expectations for coverage of new bad loans. for the valuation of collaterals;
► ECB AnaCredit (Analytical Credit Datasets): dataset • Process of valuation of immovable property
containing detailed information on individual bank based on indexation;
loans in the euro area, harmonised across all
• Use of independent and qualified appraiser;
Member States.
• Proper evaluation methodology and back-testing
► Guidelines on PD and LGD estimations: definitions
processes.
and modelling techniques to be used in the
estimation of risk parameters for both non-
defaulted and defaulted exposures.
20The Italian Leasing market
Regulatory aspects - overview
► Credit Risk Mitigation: within the Funded Credit • SEC-SA methodology penalizes exposure to
Protection discipline, specific requirements are by the NPLs securitizations. Starting from January 1st
CRR (Capital Requirements Regulation), in order to 2019, a new EU regulation applies to capital
treat lease exposures as collateralized by the type of requirement calculation for exposures to
property leased and, then, benefit from credit risk securitizations. The new methodology consents
mitigation techniques (or is better to say that forces) the application of
an analytical risk approach (similar to the
► IFRS9 Impairment: since the nature of lifetime Supervisory Formula) also to financial companies
expected credit losses that characterizes the “Stage applying Standard approach to calculate credit
2” positions means that medium-long term loans risk capital requirement (SEC-SA methodology).
(which are typical for leasing business) are likely to be Application of SEC-SA approach to NPLs
more penalizing in terms of ECL, than the average exposure, anyway, implies a capital requirement
banking loans, leasing companies should assess the significantly higher than that would be defined
possibility to: for a financial company applying IRB.
• review their portfolio composition by encouraging
short-term duration loans;
• make their pricing policies consistent with the ECL
computation which derives from IFRS9.
► ReoCo establishment: within the NPE management
strategies, leasing companies should evaluate the
set-up of ReoCo with the aim of focusing on the
enhancement and management of non-performing
exposure assets and collaterals. Main objectives could
be:
Key messages
• Maximization of the credit recovery;
• Reduction of write-offs;
Main challenges arising from the
• Potential assets derecognition.
evolving regulatory framework are:
► Setting-up a synthetic securitization of NPLs Leasing • Management of movable and
could lead to significant advantages in terms of
reduction of capital requirement on the securitized immovable property collaterals
assets. Anyway, the following issues should be for NPEs
considered:
• Successful portfolio composition
• Retention rule applies. Originator must invest in and pricing processes, due to
the notes issued under the securitization. Invested
amount must be at least equal to 5% of the IFRS9 framework
nominal amount of each tranche of notes issued. • Establishment of separate entities
If this condition is not satisfied, all investor must
weigh securitization exposures at 1250%; for the NPLs management
• Originator must demonstrate substantial
(ReoCo, 130 SPV)
transfer of underlying risk. The minimum • Securitization could provide
requirements set by the Regulators to support relevant advantage in capital
substantial transfer of risk in a securitization
contest are the transfer of at least 50% of the requirement calculation, but must
exposure on mezzanine tranche risk or (if no be supported by a strong risk
mezzanine exposure exists) the retention of no transfer analysis
more than 20% of the junior exposure (if it is
possible to demonstrate that the junior exposure
covers a significant margin of loss over the first
loss). In any case, minimum requirements are not
enough by themselves to support derecognition of
securitized assets with respect to capital
requirement calculation; Regulators
discretionarily decide case by case and may
require more tests and details. A strong risk
transfer analysis framework, including triggers
stricter than those defined by the Regulators is
strongly recommended before setting up the
securitization;
217 Appendices
The Italian Leasing market
EY Italy contacts
Transaction Advisory Services Tax and Legal
Katia Mariotti Giancarlo Tardio
Partner Partner
Restructuring & NPE Leader FSO
Transaction Advisory Services Transaction Tax Leader
Direct Tel: + 39 3400603049 Direct Tel: +39 3356793658
Email: katia.mariotti@it.ey.com Email: giancarlo.tardio@it.ey.com
Franco Grilli Cicilioni
Erberto Viazzo
Partner
Partner
Legal
FSO
Transaction Advisory Services FSO Leader
Direct Tel: +39 348 2302537
Direct Tel: + 39 3481911479
Email: franco.grilli@it.ey.com
Email: erberto.viazzo@it.ey.com
Real Estate
Luca Cosentino Marco Daviddi
Partner
Partner
Transaction Real Estate Leader
FSO - Transaction Advisory Services
Direct Tel: + 39 3356081314
Email: luca.cosentino@it.ey.com Direct Tel: +39 3355761059
Email: marco.daviddi@it.ey.com
Regulatory & Accounting
Andrea Ferretti
Partner
How can EY help?
Banking & Capital Markets Advisory Leader The Italian leasing NPE market is a core market for
us
Direct Tel: +39 3351230862
Email: Andrea.Ferretti@it.ey.com
Deleveraging is at the centre of several Leasing
institutions’ agenda. Transactions emerging from
this process are often complex and require both
breadth and depth of leasing expertise to deliver
Ettore Abate value for vendors and purchasers.
Partner EY teams can provide services to investors and
MED IFRS Desk leasing companies as well as their shareholders,
including:
Direct Tel: +39 335 12 33 101
• Remarketing process optimization and re-
Email: Ettore.Abate@it.ey.com engineering
• Portfolio analysis and segmentation
• Data analytics & business modelling
• RE Valuation
• Process management
• Tax, structuring and legal support
• Leasing expertise
25The Italian Leasing market
ASSILEA contacts
ITALIAN LEASING ASSOCIATION
Assilea is the Italian Leasing Association. The principal aims of Assilea are
to inform and assist its Members, presenting at various levels, both
nationally and internationally, all the problems related to leasing activity.
It pursues these aims by fostering studies and research, keeping up
relations with private and public institutions, drafting codes of behavior
and undertaking specific initiatives to promote and regulate leasing
activity in line with the particular nature of leasing operations.
At national level, Assilea is a member by right of the Italian Bankers’
Association (ABI) and within that participates in all technical commissions
of direct and indirect interest to the leasing sector. Assilea is also a
Founding Member of the O. I.C., Italian Accounting Body. It collaborates
institutionally with Confindustria and with the main National Associations
of producers and distributors of goods and markets of interest to the
product. Internationally, Assilea is represented in Leaseurope (European
Federation of Leasing Company Associations) and it has direct
collaborative relationships with the main international leasing institutions.
Roma - Via D'Azeglio, 33
Tel +39 06 9970361
info@assilea.it
www.assilea.it
26The Italian Leasing market
Abbreviations and acronyms
AIRB: Advanced Internal Rating Based
Bankruptcy Law: Royal Decree No. 267 of 16 March 1942
BOI: Bank of Italy
BCBS: Basel Committee on Banking Supervision
Competition Law: Law No. 124 of 4 August 2017
Consolidated Banking Law: Legislative Decree No. 385 of 1 September 1993
Corporate Crisis and Insolvency Code: Legislative Decree No. 14 of 12 January 2019
CET1: common equity tier 1
CRD: capital requirements directives
CRR: capital requirements regulation
ECB: European Central Bank
ECL: Expected Credit Loss
EBA: European Banking Authority
FYs: fiscal years
GACS: garanzia cartolarizzazione sofferenze
GBV: gross book value
GDP: gross domestic product
HICP: harmonized index of consumer prices
IBL: Italian banking law
IFRS: International Financial Reporting Standards
LeaseCo: Leasing Company
LGD: Loss Given Default
MEF: Ministero dell'Economia e delle Finanze
NPEs: non-performing exposure (i.e., the sum of bad loans, UTP loans and past due loans)
NPL: non-performing loan (or bad loans)
PD: Probability of Default
ReoCo: real estate owned company
RE: Real Estate
RWA: risk weighted assets
Securitization Law: Law No. 130 of 30 April 1999
SME: small and medium enterprises
130 SPV: special purpose vehicle
SREP: supervisory review and evaluation process
TULPS: testo unico delle leggi di pubblica sicurezza
UTP: unlikely-to-pay
27The Italian Leasing market
Notes
28EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY’s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you're preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda. EY is a leader in shaping the financial services industry Over 30,000 of our people are dedicated to financial services, serving the banking and capital markets, insurance, and wealth and asset management sectors. At EY Financial Services, we share a single focus - to build a better financial services industry now and for the future. © 2019 EYGM Limited. All Rights Reserved. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.. ey.com
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