Moody's: Weak economy is the main drag on Italian SME deals, not originator placement under supervision

The weak, albeit gradually improving, macroeconomic conditions in Italy (Baa2 stable) will continue to affect the performance of securitizations backed by loans to small and medium-sized enterprises (ABS SME) that Italian banks have originated, even if the bank has been put under administration by the Bank of Italy (BoI), says Moody's Investors Service in its new report, "Still-Weak Economy Will Weigh on Italian SME Deals, Rather Than Originator Placement Under Supervision".

"Weak domestic macro conditions are the main, primary driver reflected in the financial strength of Italian SME borrowers, which is negatively affecting loan collateral performance in the ABS SME deals that we rate," says Monica Curti, a Moody's Vice President - Senior Credit Officer. "But, servicing has continued despite the placement under administration. Typically, deals from Italian banks under the BoI's supervision feature structural mitigants, such as arrangements with an appointed back-up servicer. The latter is either nominated at closing or appointed following the breach of a rating trigger, and aims to stem the risk of payment disruption, allowing continuity of note payments".

"A bank under administration is generally in a very weak financial situation. In this scenario it's possible that borrowers might be less likely or willing to service their debt, because they might anticipate or suspect that the lender might default. Or, servicing personnel might be less motivated to effectively and efficiently service the loan portfolios, leading to potential asset-quality and timely collection problems," says Gregory Davies a Moody's Assistant Vice President - Research Writer. "But, the 90+ day arrears levels stayed broadly flat for the vast majority of the deals before and after the BoI's intervention, albeit that the metric was slightly higher for those banks' loans", he adds.

"The fundamental reasons why a bank enters administration also determine the performance of its deals," adds Ms. Curti. "If a bank enters administration for reasons unrelated to its SME loan portfolio, performance remains steady. Furthermore, since banks under administration have very little financial flexibility and liquidity, it would be reasonable to assume that few securitized loan repurchases would occur. In actuality, the repurchases have continued to occur, within the limit provided by the deal documentation, and they have helped reduce default numbers," she explains.