The Italian Leasing market - BeBeez.it · The Italian Leasing market – overview 4 2018 originated...

The ItalianLeasing marketNavigating the Italian NPEleasing opportunity

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Contents

1. The market and the assetsquality trend

2. Transactions

3. Legal aspects

4. Tax aspects

5. Regulatory aspects

6. Accounting aspects

7. Appendices

• EY Italy contacts

• Abbreviations andacronyms

• Notes

1

CAMBIAREIMMAGINE

Cambiareimmagini emettere EY style

Vedere NPEbook style

1The marketand the assetquality trend

The Italian Leasing market – overview

4

2018 originated amounts are still far from pre-crisislevels; however since 2014, the Italian leasing marketrecorded a continued growth at a CAGR 2013-2018 of15.2%.

2018 has been another growth year for the Italianleasing market in both value (+5.5% at €29.7b) andvolumes (+2.8% at 724k units) terms.

Car leasing contributed to 53% of the total 2018origination amounts and increased YoY by 4.5%,Instrumental leasing contributed to 31.4% andincreased YoY by 5.7%, Real estate leasing contributedto 13.8% and increased YoY by 9.9% (see Figure 1.1and 1.2).

The average price increased by 2.6% from 2017 to2018. Main contributors were car and real estateleasing whose average price increased by 2.9% and0.9% respectively.

When referring to the number of contracts subscribedin 2018 data highlight a positive trend for almost allthe sub segments; in particular, instrumental leasing(+5.9% vs PY), real estate (+8.9%), cars (+1.2%),energy (+25.2%), aeronautical and railways (+23.2%).

In terms of real estate leasing sub segment, the mainincrease observed in 2018 is related to real estate builtassets, which reached €2.4b, recording a 13.1%increase if compared to 2017. A growth was registeredalso by the “under development” asset class thatclosed the year with a 5.6% growth vs PY (see Figure1.2).

The incentive plan promoted by the Governmentthrough the introduction, in parallel with the existingsuper-ammortamento and the Nuova Sabatini, of theiper-ammortamento on the assets included within the2017 Industry 4.0 Plan (the Piano Industria 4.0)strenghtened the appeal of the leasing as a financingoption.

Through the Industry 4.0 Plan, Italian companies havebeen encouraged to revive the economy by investing innew technological assets and increase theircompetitiveness in the market.

The Leasing incentive mechanisms contributed to thistransformation; according to Assilea, ca. 20% of the2018 instrumental leasing volumes were funded underthe Industry 4.0 Plan new regime.

2019 Budget Law confirmed the iper-ammortamentoincentive with few adjustments (i.e. new fiscal benefitpercentages based on invested amounts) and markedthe farewell to the super ammortamento.

On the other hand, the 2019 Budget Law introducedthe so called mini Ires for companies investing in newplants and/or instrumental goods and for those hiringnew personnel.

The 2019 Budget Law refinanced the Nuova Sabatinimeasure in order to facilitate Italian SMEs access tocredit on the purchases of new machinery, plants andequipments. In detail, the Law made €480m publicfunds available as follow: €48m for 2019, €96m yearlyfrom 2020 to 2023 and further €48m for 2024.

Source: data of Assilea’s Centre of Studies and Statistics and UNRAE’s Centre of Studies and Statistics, EY analysis

+13.1%

Figure 1.2: 2018 RE origination amounts: UnderDevelopment vs Built (€m)

1,602 1,691

2,1402,419

2017 2018RE Under Development RE Built

+5.6%

3,7414,110

+9.9%

Increase in REBuilt

Increase in REUnder

Development

The Italian Leasing market

29.774

83

4.110

516

9.343

15.722

28.231

88

3.742

522

8.836

15.043

Total

Energy

Real Estate

Aeronauticaland railway

Equipment

Automotive

2017 2018

Figure 1.1: Leasing origination amounts (€m)and volumes (#units) by industry

724.723

134

4.578

436

224.363

495.212

704.789

107

4.205

354

211.908

488.215

Total

Energy

Real Estate

Aeronauticaland railway

Equipment

Automotive

Origination amounts Volumes

5


As of December 2018, the NPE in the Italian leasingindustry amounted to €19.3b. They mainly referred tobad loans (€12.9b) and UTP (€6.1b). Past dueexposures only represented 1.3% of the total impairedexposures (see Figure 1.4).

4Q2018 figures confirmed the decreasing trend interms of gross NPE exposures with bad loans decreasedfrom €15.1b as of 31 Dec 2017 to €12.9b at the endof December 2018, UTP from €7.3b to €6.1b and pastdue from €0.4b to €0.2b. The overall NPE decrease in2018 vs 2017 was 15.4% (i.e. €3.6b, see Figure 1.3).

The total gross NPE ratio (i.e. the ratio of total grossimpaired leasing to the overall gross leasing exposures)was 22.9% at 31 December 2018. It recorded a 1.7percentage points decrease compared to the gross NPEratio as at 30 June 2018 and a 2.8% percentage pointsdecrease as of 31 December 2017.

The total net NPE ratio (the ratio of net impairedleasing to the overall net leasing exposures) was 13.4%as of 31 December 2018. It recorded a 1.4 percentagepoints decrease when compared to the net NPE ratio asat 30 June 2018 and a 2.8 percentage points decreasewhen compared to 31 December 2017 (see Figure 1.5).

Figure 1.5: 31 Dec 2018 NPE ratio – breakdownby industry

Figure 1.4: 31 Dec 2018 Leasing exposures –breakdown by risk class (€b)

NPE leasing – a snapshot

64,8

84,1

0,26,1

12,9

Performing Past Due UTP Bad Loans TotalFigure 1.3: 31 Dec 2017 vs 31 Dec 2018 leasingexposures – breakdown by risk class (€b)

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

Total NPE 22.9 19.3Total leasingexposures

90.0 84.1

Source: data of Assilea’s Centre of Studies and Statistics, EY analysis

75%0%

8%

17%

Performing Past due UTP Bad Loan

77%

0%

7%

15%

90,0m 84,1m

2017 2018

6,3%

9,7%

20,8%

21,4%

17,2%

11,9%

3,6%

4,2%

2,5%

13,4%

12,3%

23,0%

31,7%

32,4%

26,3%

33,9%

11,9%

9,1%

8,3%

22,9%

Energy

Under development

Real estate> = 5m €

Real estate 2.5m € <= 5m €

Real estate <= 2.5m €

Aeronotical and Railway

Equipment

Industrial and CommercialVehicles

Automotive

Total

Gross NPE Ratio Net NPE Ratio

81% of the overall NPE leasing amount as of 31 Dec2018 was related to the RE segment, with a total valueof €15.6b (see Figure 1.6) .

The analysis of impaired leasing by segment highlightsthat the aeronautical & railway and the RE industriesare those most affected by NPE.

Looking at the composition of impaired leasing, badloans are the predominant category for all theunderlying asset types with the exception of the energysector, where the UTP category dominates (see Figure1.7).

Provisioning levels on impaired leasing are substantiallystable or decreasing in the automotive, equipment, REbuilt and energy segments; they are increasing in theaeronautical and RE under development segments.

5


6

Figure 1.8: 31 Dec 2018 Coverage ratio –breakdown by underlying asset

52,8%

64,2%

44,4%

43,6%

42,3%

74,2%

72,6%

56,4%

72,3%

48,5%

Energy

Under development


Real estate 2.5m € <= 5m €

Real estate <= 2.5m €

Aeronotical and Railway

Equipment

Industrial and CommercialVehicles

Automotive

Total

Figure 1.6: 31 Dec 2018 NPE – breakdown byunderlying asset

3% 10%

2%

81%

4%Automotive - Industrialand commercial vehicles

Equipement

Aeronautical and railways

Real estate

Energy

Figure 1.7: 31 Dec 2018 Impaired leasing –breakdown by underlying asset

54%67% 70% 69%

37%

42%30% 29% 30%

62%

4% 3% 1% 1% 1%

Automotive -Industrial andcommercial

vehicles

Equipement Aeronauticaland railways

Real estate Energy

Bad Loans UTP Past Due

Figure 1.9: 31 Dec 2018 Coverage ratio –breakdown by underlying asset and risk class

79%83% 84%

51%

74%

40%

53% 53%

29%

41%

27%35%

10%19%

29%

Automotive -Industrial andcommercial

vehicles

Equipement Aeronauticaland railways

Real estate Energy


The coverage levels relating to the various productsand to the different classes of risk highlight someinteresting trends.

The average coverage of impaired leasing exposureswas 48.5% as at December 2018. The averagecoverage ratio on bad loan exposures was 56.1%.

The leasing categories with higher provisioning levelsas of 31 December 2018 were aeronautical andrailway (74.2%), equipment (72.6%) and automotive(72.3%) whilst the category with the lowestprovisioning level was the RE segment (see Figure 1.8).

The overall coverage ratio relating to bad loans isapproximately 75.0%, which is primarily driven by theaeronautical & railway and equipment segments withcoverage ratios of 83.8% and 83.2%, respectively.

The average UTP coverage ratio, without any regard tothe underlying asset, is 43.0% as a result of a highercoverage on aeronautical & railway and equipment(52.8% and 52.6% respectively) and a lower coverageon RE (29.3%). See Figure 1.8 and Figure 1.9.


NPE leasing – breakdown by underlying asset


Figure 1.11: 31 Dec 2018 Bad loans – focus onRE (€b)

RE leasing is by far the main contributor to the overallNPE in the leasing industry.

Approximately 28.9% (€15.6b) of the overalloutstanding RE leasing contacts as of 31 December2018 is related to impaired leasing (see Figure 1.10).

In 2018, shows different factors that positively affectthe RE stock quality at the end of the year, inter alia,impaired RE leasing exposures decreased from 18.0b asat 31 Dec 2017 to €15.6b at the end of 2018 and bothnumber of contracts and amounts originated in 2018highlight a positive trend for almost all the subsegments.

Figure 1.12: 31 Dec 2018 Coverage ratio – RENPE

7

Figure 1.10: 31 Dec 2018 Credit quality of REleasing contracts

RE leasing classified as bad loans amounted to €10.7bas of 31 December 2018, accounting for 19.8% of thetotal RE leasing exposure (€54b). See Figure 1.13.

The main category is represented by exposures with aticket value lower than €2.5m, which representsapproximately 48% of the total bad loans stockfollowed by the exposures with a ticket value higherthan €5m (see Figure 1.11).

In terms of bad loans coverage, data as of 31December 2018 highlighted that the RE bad loansexposures average coverage ratio was higher on largerleasing tickets: 48% on tickets lower than €2.5m, 51%on tickets between €2.5m and €5m and 53% on ticketshigher than €5m (see Figure 1.12).

RE leasing classified as UTP amounted to €4.7b andrepresented 8.8% of total RE leasing as of 31 December2018.

As of 31 December 2018, the RE leasing UTP coveragelevel varied from 26% on the contracts with a REleasing ticket value lower than €2.5m to 32% on REleasing with a ticket value exceeding €5.0m (see Figure1.12).

5,1

10,7

2,0

3,2 0,4

Real estate<= 2.5m €

Real estate2.5m €

<= 5m €


Underdevelopment

Total

48% 51% 53%

67%

26% 25%32%

55%

18%23% 21%

11%

Real estate<= 2.5m €

Real estate 2.5m€

<= 5m €


Underdevelopment


40,6 38,4

0,2 0,1

5,6 4,7

12,210,7

2017 2018

Performing Past due UTP Bad Loan

58.654.0

Figure 1.13: 31 Dec 2017 vs 31 Dec 2018 –Gross RE Exposure (€b)


38,4

10,7

4,7

0,1

Exposure (€b)

Past Due UTP Bad Loans Performing

71,1%

19,8%

8,8%

0,3%

Exposure - %

NPE leasing – RE focus

63,9%

19,5%

3,1%13,5% 0,0%

Once RE assets are repossessed, the remarketingactivity starts.

2015-2017 data show that the number of repossessedassets increased from #1,167 in 2015 to 1,522 in2017 (CAGR of 14.2%).

Repossessed assets re-sold in the same periodincreased from #477 in 2015 to #772 in 2017 (CAGRof 27.2%).

Direct resale to third parties remains the most frequentremarketing solution (63.7% of the cases in 2017).However few other alternatives are getting a higherportion of the remarketing activity. In particular, from2016 to 2017, the number of sales to RE fundsincreased from 16.9% to 19.5% of the total (see Figure1.15)

The time needed to remark repossessed assetsincreased from 21.7 months in 2015 to 22.8 months in2016 and 26.7 months in 2017 (see Figure 1.16).

The average remarketing price over 2015-2017decreased from €824k in 2015 to €598k in 2017(CAGR of -14.8%). See Figure 1.17,

In terms of remarketing channels, the preferred onesare reported to be the following: own internet site, thirdparty reseller company and RE agencies.


Figure 1.17: Average remarketing price (€k)

Figure 1.18: Preferred remarketing channels(more than one answer allowed 1)

8

Figure 1.14: Flow of repossessed & resold REassets (# of assets)

Figure 1.16 Average remarketing time (months)

Source: data of Assilea’s Centre of Studies and Statistics, EY analysis1 Assilea survey questionnaire, March 2018.

NPE leasing – RE remarketing activity

Figure 1.15: Re-location of the repossessed assets

21,7 22,8

26,7

2015 2016 2017

824,3779,0

597,7

2015 2016 2017

63,6%59,1% 59,1%

31,8%

18,2%13,6%

27,3%

Owninternet

site

Resellercompany

Realestateagency

Dealernetwork

Creditrecoverycompany

Asta Other

66,6%

16,9%

1,1%

15,2% 0,1%

51,9%

21,2%

0,8%

26,1%

0,0%

1.167 1.307 1.522

477641

772

(690) (666) (750)

2015 2016 2017

Resold assets

Repossessed assets

Repossesse - resold delta

1.1671.948

2.294

2015 2016 2017

Resold to third party Resold to RE fund Ordinary sale Financially resold Rent to buy

Transactions

2

NPE Leasing – Recent transactions

9

Figure 1.19: Main disclosed Leasing transactions in the Italian market (1Q17–4Q18)2

2 This table summarizes the main publicly disclosed transactions and is not intended to be an exhaustive list of completed Leasing transactions.

We continue to receive interest from both Italian andinternational investors on leasing contracts andrepossessed assets. Buyers are investment funds and /or specialized players with expertise in collectionactivities.

Leasing contracts have historically been a complexasset class, given the peculiarity of regulation andlegal framework. In order to partially tackle this issue,in June 2017, an important amendment to the Law130/1999 on securitizations allowed SPVs to acquireand manage (if not directly, through a separatevehicle) leased assets, thus allowing investors a morestandard structuring approach. The first transactionunder this revised scheme was completed by HypoAlpe Adria Bank, which sold a performing leasingportfolio with a GBV of €480m to Goldman Sachs.However, even after this recent update, the regulatoryframework in this field still appears incomplete, withmarket players facing issues mainly related to theeffective transfer and management of underlyingassets.

In the next page, we summarize the issues we normallyface in structuring the sale of a Real Estate LeasingNPE Portfolio.

Bain Capital Credit has been one of the most activeinternational investors with regard to leasingtransactions: first, with the acquisition of HARIT(subsequently renamed Aquileia Capital Services), theservicing platform specializing in leasing andrepossessed assets. Then, with the acquisition, amongothers, of a non-performing leasing and mortgageloans portfolio with a GBV of approximately €0.7bfrom Hypo Group Alpe Adria (Project Terzo) and of a€0.9b leasing bad loans portfolio (Project Morgana)from MPS in late 2018. Illimity has also recentlyannounced investments in this asset class.

The table below summarizes the main transactionsinvolving leasing credit portfolios and/or repossessedreal estate assets occurred in the Italian market in2017 and 2018.

Key messages

• Extensive interest on leasingportfolios and real estaterepossessed assets

• Several transactions started in1Q19

• A wide panel of active buyers,including new players formerlydedicated to servicing activity

Rumors that few players are working on NPE leasingportfolios and few others are bringing additionaltransactions to the market.

We expect 2019 to be a key turning point for this assetclass.

Date Project Name Seller BuyerGBV(€m) Type of portfolio

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


1

2345

67

8

Lessons learned and open Transactional issuesFew examples

10

Key messages

Recurring complexities are:• Assets transferability

criteria• Environmental issues• Pre-emption rights• Litigation/legal issues

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 decisionmaker might lead to:► Longer Transaction processes► Operational complexities in setting up the site visits

Fully settledcredit positions

► Fully settled positions (transazione tombale del credito), if any, represent creditpositions for which the borrower has already signed a settlement agreementwith the Seller (e.g. asset repossession with credit cancellation)

► When positions are finally closed and settled, the sale of such real estate assetswould be “pure” real estate transactions which require specific transactionstructures

Transferability ofthe asset rightsand agibility

► The asset transferability is crucial to properly complete the execution phase

► Transferability and agibility issues often drive to postponed sale of both creditand assets

► Transferability and agibility issues negatively impact the asset pricing

Environmentalaspects

► The Seller should be able to provide a complete set of information related to allthe necessary remediation activities carried out and still to be carried out

► Remediation activities not completed at the time of the Transaction negativelyimpact the asset pricing and may ultimately imply a perimeter change

Non RE facilitieslinked to portfoliopositions up forsale

► Investors could beinterested in acquiring alsocredit lines not part to theTransaction but related toreal estate assets includedin the portfolio up for sale

► In this case, the Sellershould be ready to provideinformation related tothese credit lines in orderto allow the possibleinclusion within theTransaction perimeter

Pre-emption rights ► Pre-emption rights on pools, rents, urban planning agreement, consortia needto be known and properly managed

► Solutions to manage pre-emption rights on single assets included in Porfolio upfor sale

Price allocation ► The selling price once agreed has to be allocated to the different componentsof the Portfolio. The allocation should take into account relevant tax impacts

Litigation/Legalissues ► Ongoing lawsuits need to be fully mapped and evaluated


Legal aspects

3

12

There are certain main legal issues to be considered in the context of securitization of lease receivables. Someimportant provisions have been enacted recently on the definition of financial lease, the consequences of aninsolvency scenario over the underlying lease agreements and the securitization of non-performing lease receivables.Still some legal uncertainties remain over a potential extensive market.

12

The LeaseCo within the Securitization TransactionLegal Aspects

New Definition of financial lease andconsequences of termination of the leaseagreementLaw No. 124 of 4 August 2017 (the Competition Law)provided a new definition of financial lease.Pursuant to Article 1, para. 136, of the CompetitionLaw, under a financial lease a bank or a financialintermediary enrolled with the register held by the Bankof Italy pursuant to Article 106 of the ConsolidatedBanking Law, purchases or builds an asset according tothe instructions received by the lessee, which assumesall the risks related to such asset and shall be entitledto use the asset against payment of lease instalments.Upon expiry of the lease agreement the lessee shallhave the option to purchase the asset or return it tothe lessor.For the first time, the Competition Law provides a cleardefinition of default under a lease agreement and setout the consequences of such default. A default istriggered: (a) for the real estate assets leases, in caseof non-payment of at least six monthly instalments ortwo quarterly instalments (even if not consecutive) orequivalent amount; and (b) for the other leases, in caseof non-payment of at least four monthly instalments(even if not consecutive) or equivalent amount.In case of termination of the lease agreement as aconsequence of the lessee’s default, the followingevents occur:

► the lessee shall return the asset to the lessor.

► the lessor shall pay to the lessee the amountderiving from the sale or other disposal of the assetat fair market value less (i) the amount ofinstalments overdue and not paid until terminationof the lease agreement; (ii) the amount of principalinstalments not yet overdue; (iii) the final optionprice; (iv) the expenses incurred for the recovery,evaluation and preservation of the asset until thecompletion of the sale. All without prejudice to thecredit rights of the lessor against the lessee whenthe amount recovered after the sale or otherdisposal of the asset is lower than the amount dueby the lessee pursuant to the calculation above.

► the lessor shall sell or otherwise dispose of theasset in accordance with public market valuations. Ifsuch valuations are not available, the sale shall beeffected on the basis of the evaluation of: (i) anexpert appointed by the lessor and the lessee within20 days from the termination of the leaseagreement; or (ii) should an agreement between theparties not be reached by this term, an independentexpert appointed by the lessor among at least threenames communicated to the lessee, who couldexpress his binding preference within 10 days fromthe communication of the lessee. The expert shallnot have any personal or professional connectionwith the lessor.

► the lessor shall sale or otherwise dispose of theasset in compliance with quick, transparent andpublic criteria with the aim to individuate the bestoffer possible and the obligation to inform thelessee.

Specific provisions apply (Article 1, para. 76 to 81 ofLaw No. 208 of 28 December 2015) in case of leasingof principal residential houses.

Insolvency of the lessee

One of the other main legal aspects to be considered isthe consequence of the insolvency of the lessee on thelease agreement.Pursuant to Article 72-quater of Royal Decree No. 267of 16 March 1942 (the Bankruptcy Law), in case ofinsolvency of the lessee the provisions set out in Article72 of the Bankruptcy Law shall apply. Pursuant to suchprovision, in case of insolvency of the lessee the leaseagreement, not entirely executed, is suspended untilthe lessee’s bankruptcy receiver opts to step-in thelease agreement in lieu of the insolvent lessee orterminate the agreement. In case of termination of thelease agreement, the leased asset shall be returned tothe lessor and the lessor shall pay to the lessee’sinsolvency estate the difference, if any, between theamount deriving from the sale or other disposal of theasset at market values and the residual principalamount due. The instalments already paid to the lessorare not subject to claw-back pursuant to Article 67,para. 3, lett. a) of the Bankruptcy Law. The lessor hasthe right to claim from the lessee’s bankruptcy estatethe difference, if any, between the lower amountderiving from the sale or other disposal of the asset andthe amount due pursuant to the lease agreement.In case of insolvency of the lessee, the provisions of theBankruptcy Law on the consequences of termination ofthe lease agreements and sale of the leased assetprevail of the provisions of the Competition Lawdescribed above.

The Insolvency Law provisions will be replaced in thefuture by the provisions of Legislative Decree No. 14 of12 January 2019 (the Corporate Crisis and InsolvencyCode) that, save for certain provisions, will in theirmajority come into force on 15 August 2020.


1313

Specific provisions on termination of the leaseagreements and sale of the asset are contained inArticle 97, para. 12 and Article 177 of the CorporateCrisis and Insolvency Code in case of, respectively,composition with creditors and judicial liquidation(former bankruptcy, since such expression will nolonger be used) of the lessee. In case of termination ofthe lease agreement following the composition withcreditors of the lessee: (i) the leased asset shall bereturned to the lessor; (ii) the lessor shall pay to thelessee (i.e. to the lessee’s composition procedure) thedifference, if any, between the higher amount derivingfrom the sale or other disposal of the asset at marketvalue less the instalments overdue at the date oftermination, the principal instalments still due, the finaloption price, and the residual principal credit. Thelessor shall be entitled to request the differencebetween the amount due at the time of request of thecomposition and the amount deriving from the sale orother disposal of the asset and such amount will betreated as due before the request of composition. Saleand/or disposal of the asset shall take place accordingto the modalities set out by the Competition Law.In case of insolvency of the lessee, Article 172 and 177of the Corporate Crisis and Insolvency Code set outsimilar provisions to those contained in the BankruptcyLaw.

Securitization of non performing leasereceivables

Article 7.1 of Law No. 130 of 30 April 1999 (theSecuritization Law) set out specific provisions for thesecuritization of non performing lease receivables bybanks and financial intermediaries enrolled with theregister of financial intermediaries pursuant to Article106 of the Consolidated Banking Law.It is now possible, within the securitization of nonperforming lease receivables to incorporate, along witha typical securitization vehicle, one or more “leasingcompanies” (LeaseCo) with the sole corporate purposeto acquire and manage, in the interest of thesecuritization, leased assets both from terminated andnot terminated underlying lease agreements and thecontractual relationships deriving from suchagreements.Proceeds deriving to LeaseCo by the management ofthe underlying assets may be securitized pursuant to aspecific amendment of the Securitization Lawintroduced by the 2019 “Growth” Decree.

Since LeaseCo is expected to be a single transactioncorporate vehicle with restricted capacities, all theactivities and undertakings set out in the transferredlease agreements shall be performed by the Serviceror by another leasing company.After circa two years from the enactment of the newprovisions on the securitization of non performinglease receivables, it would be interesting to evidencethe major critical points noted on the market:► securitization of so called “jumbo-leases”: in

case of leases granted by multiple banks/leasingcompanies, there might be pre-emptive rights inorder to the transfer of receivables to 130 SPVs.Such pre-emptive rights might be faced also inconnection with the transfer of ownership on theleased asset (both among the multipleoriginators and versus the entity that enteredinto a rental agreement with the lessee,particularly if the asset is destined to publicservices);

► cadastral irregularities: cadastral andenvironmental irregularities may prevent thetransfer of the leased assets. There have beenmany discussions on the markets and the onlyviable solution seems to be to transfer the assetswithin an extraordinary spin-off transactionrather than a straight outrights transfer but thissolution does not seem practicable;

► transfer of assets following settlementagreements: in certain circumstances, the lessorand the lessee enters into final settlementagreements and the lessor remains owner of theleased asset but, following the execution of thesettlement agreement, there are no morepecuniary receivables to transfer to the 130SPV. According to certain practitioners the lackof receivables would render impossible totransfer the leased assets to LeaseCo under theSecuritization Law framework.


Tranfers to LeaseCo may be made also pursuantto Article 58 of the Consolidated Banking Act evenwhen the receivables tranferred cannot beidentified as a “block“ of receivables havingcommon features.If the originator transfers to LeaseCo, togetherwith the leased assets, also the underlying leaseagreements and the legal relationships derivingfrom the termination of such agreements thenLeaseCo shall be consolidated in the balance sheetof a bank or a financial intermediary enrolled withthe register held by the Bank of Italy pursuant toArticle 106 of the Consolidated Banking Law, andshall be destined to specific transactions andliquidated upon conclusion of the Securitization.LeaseCo shall have a limited corporate purposeand restricted capabilities of operation andindebteness which in any case shall be evidencedin the bylaws and transaction documents.

1414

New structures of transfer of leasing NPLs andUTPs through segregated pools pursuant torecent amendment to the Securitization Law

The Securitization Law has been recently amended anda new type of “virtual” securitization is nowcontemplated by the new Article 7, para. 1, lett. a).Pursuant to such provision, the 130 SPV may grant aloan to the originator with the purpose of transferringthe risk on a pool of underlying receivables.The originator may segregate such pool of receivables(including rights and assets securing the repayment ofsuch receivables) in order to protect the rights of the130 SPV (and ultimately of the noteholders). Theoriginator may also pledge such pool of assets andrights to secure the repayment of the loan granted bythe 130 SPV and channel all the collections to the 130SPV (as a virtual transfer).The management and sale of the leased assets could beentrusted to a third party including the servicer of thesecuritization.The “virtual securitization” might help in circumventingsome of the practical issues described above in thecontext of securitization of non performing leases,however this structure would need to be testedparticularly from an RWA’s standpoint.

Key messages

Major legal Issues to be considered arethe following:• Clear definition of default under a

lease agreement and theconsequences of such default

• Consequence of the insolvency ofthe lessee on the lease agreement

• Securitization of non performinglease receivables pursuant to Article7.1 of Law No. 130 of 30 April 1999

• New type of “virtual” securitizationpursuant to Article 7, para. 1, lett. a)


Tax aspects

4

16


The securitization of leasing portfolios has always suffered the lack of a clear juridical and tax framework thus leadingto many uncertainties undermining the full potential of this market. The main issues lie on the fact that, compared tothe mortgages loans, the guarantee does not transfer automatically to the investor because of the transfer of the loanbut it remains in the hands of the juridical owner (the lessor). As a consequence, in order to transfer it to the investortogether with the leasing contracts, a specific deed must be carried out involving direct and indirect taxesconsequences. In 2017 Italy introduced some amendments to the Securitization Law aimed at facilitating thesecuritization of leasing portfolio through the set up of an entity (LeaseCo) operating in the exclusive interest of the130 SPV. The LeaseCo purchases the leasing contracts and the real estate assets from the leasing company and enterswith the 130 SPV into agreements aiming at transferring to the latter all risks and benefit associated to themanagement of the real estate assets. Below a brief summary of the direct and indirect tax consequences of the abovedescribed operating model.

1. Direct Taxation of the 130 SPV

16

1 IRES and IRAP rates should be, respectively 24% and 5.57% (if the 130 SPV is incorporated in Lombardy Region).2 Companies 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 theyare in a tax loss position. In addition, unfavorable consequences also apply for VAT purposes.3 See 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 explicitprovision stating the segregation of assets purchase by the LeaseCo within the securitization transaction, denied to ReoCo/LeaseCo the application of the favorable tax treatmentapplicable 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.

The LeaseCo within the Securitization Transaction:Tax Aspects

2. Direct Taxation of the LeaseCo

The 130 SPVs incorporated pursuant to theSecuritization Law are Italian corporate entities and,therefore, are in principle subject to IRES and IRAPaccording to the ordinary rules1.

However according to the Securitization Law, loanspurchased and liabilities issued by the SPV represent apool of asset/liabilities which is segregated from thenet assets of the 130 SPV. That’s because all theamounts deriving from the loans are specificallydestined to the fulfilment of the obligations owed tothe noteholders and to third-party creditors in respectof the securitization. The above segregated nature ofthe 130 SPV’s pool of asset and liabilities is alsoreflected in the relevant off-balance accountingtreatment.

From a tax standpoint, the Italian Revenue Agency fullyrecognized the above segregated nature of the 130SPV’s pool of assets and liabilities and stated that notaxation applies in the hands of the SPV in relation totemporary spreads, if any, deriving from positive andnegative flows in relation to the receivables revenues.That’s because the net proceeds generated by thereceivables may not be considered as legally availableto the 130 SPV, as they are destined by law to thepayment of the noteholders and of the third party.Taxation shall occur only in case, at the end of thesecuritization transaction, it remains an excess spreadwhich is not attributed to the noteholders.

The 130 SPV is not subject to the unfavorable rules ofthe dormant company tax regime2.

LeaseCos are Italian corporate entities subject to IRESand IRAP pursuant to the ordinary rules.

As the 130 SPVs, assets and contracts purchased bythe LeaseCo (and liabilities issued in order to purchasethem) are segregated from the net asset of theLeaseCo3. All proceeds stemming from themanagement by LeaseCo of purchased assets (and paidback to the 130 SPV) are deemed to be paymentsmade by the disposed lessee and are exclusivelydestined to pay interest and reimburse the capital ofABS issued by 130 SPV.

Given the above, LeaseCo should benefit from thefavorable direct tax treatment applicable to the 130SPVs (see above).

LeaseCo

Investor

SPV 130

Notes

LeasingCompany

(Originator)

Funding forthe

acquisitionof assets

andcontracts

Rebate ofcosts andrevenuesstemming

from the REmanagement

activity

17


17

3.2. Transfer of assets and leasing contracts tothe LeaseCo

Registration Tax

VAT

Registration, Mortgage and Cadastral taxes

All trades that fall within the scope of VAT (eventhough at a zero rate) are not subject to a proportionalrate of registration tax, but rather to a fixedregistration fee of €200.All trades that fall out of the scope of VAT trigger inprinciple the application of a 0.5% registration tax ontheir transfer value.The obligation to file for registration and, ultimately,the application of registration tax is usually avoidedthrough the sale of receivables by means of anexchange of correspondence, which is not subject toregistration unless further specific conditions occur(namely, in caso d’uso4 or enunciazione5). However, if atransfer of receivables of a specific kind requires apublic deed or a deed with a public notaryauthentication of signatories, registration in Italy willbe requested directly by the notary public involved inthe deed, ultimately causing the application of the 0.5%charge for those transfers not subject to VAT.

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 mereproduction 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 orregulation, 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 tothe document submitted for registration of such first document are also parties to the document to which reference is made.

The transfer of assets and leasing contracts «en bloc» isconsidered as a supply of service and, therefore, fallingwithin the scope of VAT.Such transaction should be subject to VAT at the rate of22%.

The transfer of assets to the LeaseCo is in principlesubject to registration, mortgage and cadastral taxes at alump sum of €200 each.However, in case the transfer occurs under art. 58 of theItalian Banking Law, mortgage tax should not apply giventhat the regime under art. 58 above does not require toput in place formalities within the relevant real estateregisters for the purposes of the transfer of the assets.

Especially in the assignment of assets withoutrecourse, what differentiates a finance transactionfrom a simple sale of a receivable for Italian VATpurposes is the presence of a financing cause for thetransaction.

Accordingly, whenever it is clear that the purpose ofthe seller is to raise finance through the sale of certainassets and, on the other hand, the purpose of thebuyer is to make a profit from the managing of theNPLs bought at a discount over the principal and theassociated interest payable, it should, in principle, bepossible to apply the VAT regime of a financial service,i.e., VAT at a zero rate.

It is worth noting that the VAT cannot be doubled withreference to the transfer of assets and the transfer ofleasing contracts, since the immovable property isinextricably linked to the execution of the leasing contract.

3. Indirect tax aspect of the transfer of credits,assets and contracts

3.1. Transfer of credits to the 130 SPV

VAT

The qualification of a transfer of receivables underItalian VAT law depends on the purpose for which it isexecuted.According to guidelines issued by Italian RevenueAgency, the transfer can be treated as:

► Debt collection, subject to VAT, if, through thetransfer, the transferor wishes to speed up thecollection of the debts;

► A financial service, exempt from VAT, if the transfer isaimed at satisfying the transferor’s immediate cashneeds. In such a case, the discount with respect to thenominal value of the receivable is considered theconsideration of the transfer;

► A transaction outside the VAT scope, if it does notpursue any of the above aims and is a mere donationor a payment in kind to extinguish a prior obligation.

1818

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 estateproperties, and for those residential properties which have been subject to certain selected renovation/restructuring works, an ad hoc election in the relevant agreement maybe made by the transferor in order to apply VAT.

3.3 Transfer of assets by the LeaseCo

VATThe transfer of assets by the LeaseCo is subject to theordinary VAT provisions.Depending on the nature of the RE assets and on thestatus of the buyer (e.g. VAT taxable person, ecc.), theVAT rate may range between 4%, 10%, 22%.However, the transfer may also be VAT exempted6.

Registration Tax, Mortgage and Cadastral taxesThe transfer of repossessed asset by the LeaseCo issubject to registration tax, mortgage and cadastraltaxes at a lump sum of €200 each.

VAT treatment of payments between 130 SPVand LeaseCoFees paid from 130 SPV to LeaseCo as a remunerationof the real estate management activity is ordinarysubject to VAT at 22%.Payments between the 130 SPV and LeaseCo in orderneutralize in the hands of the latter the result of thereal estates management activity are out of scope ofthe VAT.

Key messages

• LeaseCo direct tax treatmentaligned to the one of the 130 SPV

• Contracts / assets transfer toLeaseCo subject to ordinary VAT,flat registration and cadastraltaxes (€200 each)

• Transfer of assets by the LeaseCosubject to ordinary VAT, flatregistration, mortgage andcadastral taxes (€200 each)

• Rebates from LeaseCo to 130SPV not subject to VAT


Accountingaspects

6

Accounting aspects

23

Accounting aspects of 130 SPVA topical issue highlighted during the implementation ofa securitization program is how the 130 SPV accountsfor the arrangements that it entered into andparticularly how it accounts for the portfolio ofpurchased assets (receivables, property, etc.).

When the Securitization Law came into force in 1999,the regulation applicable to the Securitization Entitiesstated that the loans and securities involved in eachtransaction represent, to all effects, a separate equityfrom that of the Company and from that of the othertransactions. According to such regulation, in theSecuritization Entities’ financial statements, all theaccounting data pertaining to each securitizationtransaction are separately reported and disclosed in adedicated section of the illustrative notes to thefinancial statements in compliance with theadministrative provisions issued the Bank of Italy basedon Legislative Decree 38/2005, Article 9 (the“Provision”). The specific section contains a balancesheet, an income statement and the pertaining notesproviding disclosure of all quantitative and qualitativeinformation needed to present the transaction in a clearand comprehensive manner.

Although the Provision is no longer in force, theaccounting approach described above is still validbecause the Securitization Law provides for the legalsegregation of the securitized portfolio of receivablesand this has become the generally accepted accountingpractice (i.e. no recognition criteria are met due to theabsence of any exposure of risk/rewards for the 130SPV).

Accounting aspects of the LeaseCoThe amended Securitization Law offers the possibilityto incorporate a new type of entity (LaeseCo) aiming toimprove the management of the assets (properties)associated to the lease contracts whose loans areincluded in the securitized portfolio. The ring-fencingmechanism applicable to the LeaseCo is similar to thatprovided by the original Article 3 of the SecuritizationLaw and it is valid also in respect to the cash inflowsgenerated by the real estate assets acquired andmanaged by the LeaseCo.

The recent amendment to the Securitization Law hasexplicitly confirmed the above by stating that all assetspurchased by the LeaseCo represent a segregate poolof assets in the hands of LeaseCo. No creditors areallowed to be satisfied over those assets with the onlyexception of the 130 SPV acting on behalf ofnoteholders.

As a consequence LeaseCo should follow the sameaccounting treatment of the 130 SPV (see above).

.


Key messages

• Although the accounting frameworkof the 130 SPV has changed, loanspurchased and liabilities issuedshould continue to be accounted off-balance

• LeaseCo should account off-balanceassets and contractual rightspurchased

Regulatoryaspects

5

Regulatory aspects - overview

20

The on-going regulatory frameworkThe regulatory framework of banks and financialcompanies (e.g. factoring, leasing) has beencharacterized by a multitude of changes andinnovations (both planned or already in place):

► Basel III / IV regulatory framework: overallmeasures taken by regulators in response to theglobal financial crisis, in order to restore credibilityto the calculation of risk-weighted exposures(RWA), and ensuring at the same time a greatercomparability of capital ratios of banks.

► EBA definition of default and materiality threshold:harmonization of the application of the definition ofdefault, which includes aspects such as the dayspast due criterion for default identification,indications of unlikeliness to pay, conditions for areturn to non-defaulted status.

► EBA Forborne and NPE management: tools andframeworks to put in place to manage effectivelynon-performing exposures (NPEs) and to achieve asustainable reduction on balance sheets (NPEreduction strategies, governance and operationalrequirements).

► IFRS9 Accounting principles: methods of“Classification & Measurement”, “Impairment andHedge Accounting” in relation to financialinstruments held by credit institutions, inreplacement of the provisions of IAS39.

► ECB Calendar Provisioning: Supervisoryexpectations for coverage of new bad loans.

► ECB AnaCredit (Analytical Credit Datasets): datasetcontaining detailed information on individual bankloans in the euro area, harmonised across allMember States.

► Guidelines on PD and LGD estimations: definitionsand modelling techniques to be used in theestimation of risk parameters for both non-defaulted and defaulted exposures.

RelevantRegulatory Aspects

EBA Definition of Default& Materiality Threshold

ECBAnacredit

EBA/BCBS Forbearance& NPL

BCBC Review of Standardisedand AIRB approach

SecuritizationTransactions Regulation

Management of Movableand Immovable

Collaterals

IFRS9Accounting Principles

ECBCalendar Provisioning

Challenges for Leasing CompaniesThe regulatory leasing framework is not substantiallydifferent from the one for banks and financialinstitutions, however some features are worthy to behighlighted.

In particular, leasing companies should focus and workon the following aspects:

► Management of movable and immovable propertycollaterals; within the NPE management of securedNPEs, leasing companies are required to put inplace:• Governance, procedures and internal controls

for the valuation of collaterals;• Process of valuation of immovable property

based on indexation;• Use of independent and qualified appraiser;• Proper evaluation methodology and back-testing

processes.

► Downturn estimation: specification of the nature,severity and duration of an economic downturn andrequirements to identify the economic downturnhow to incorporate the identified economicdownturn into the credit risk modelling

► Securitization Transaction Regulation: EURegulations 2017/2041 and 2017/2402, bothentered into force on 1st January 2019, modifyand integrate the previous Regulation (CRR –Capital Requirement Regulation) in terms of capitalrequirements related to securitization transactions.In particular, they open to non-AIRB banks thepossibility of carrying out capital optimizationoperations through securitization transactions(although they appear as more limited than AIRBbanks).


Regulatory aspects - overview

21

Key messages

Main challenges arising from theevolving regulatory framework are:• Management of movable and

immovable property collateralsfor NPEs

• Successful portfolio compositionand pricing processes, due toIFRS9 framework

• Establishment of separate entitiesfor the NPLs management(ReoCo, 130 SPV)

• Securitization could providerelevant advantage in capitalrequirement calculation, but mustbe supported by a strong risktransfer analysis

► Credit Risk Mitigation: within the Funded CreditProtection discipline, specific requirements are by theCRR (Capital Requirements Regulation), in order totreat lease exposures as collateralized by the type ofproperty leased and, then, benefit from credit riskmitigation techniques

► IFRS9 Impairment: since the nature of lifetimeexpected credit losses that characterizes the “Stage2” positions means that medium-long term loans(which are typical for leasing business) are likely to bemore penalizing in terms of ECL, than the averagebanking loans, leasing companies should assess thepossibility to:

• review their portfolio composition by encouragingshort-term duration loans;

• make their pricing policies consistent with the ECLcomputation which derives from IFRS9.

► ReoCo establishment: within the NPE managementstrategies, leasing companies should evaluate theset-up of ReoCo with the aim of focusing on theenhancement and management of non-performingexposure assets and collaterals. Main objectives couldbe:

• Maximization of the credit recovery;

• Reduction of write-offs;

• Potential assets derecognition.

► Setting-up a synthetic securitization of NPLs Leasingcould lead to significant advantages in terms ofreduction of capital requirement on the securitizedassets. Anyway, the following issues should beconsidered:

• Retention rule applies. Originator must invest inthe notes issued under the securitization. Investedamount must be at least equal to 5% of thenominal amount of each tranche of notes issued.If this condition is not satisfied, all investor mustweigh securitization exposures at 1250%;

• Originator must demonstrate substantialtransfer of underlying risk. The minimumrequirements set by the Regulators to supportsubstantial transfer of risk in a securitizationcontest are the transfer of at least 50% of theexposure on mezzanine tranche risk or (if nomezzanine exposure exists) the retention of nomore than 20% of the junior exposure (if it ispossible to demonstrate that the junior exposurecovers a significant margin of loss over the firstloss). In any case, minimum requirements are notenough by themselves to support derecognition ofsecuritized assets with respect to capitalrequirement calculation; Regulatorsdiscretionarily decide case by case and mayrequire more tests and details. A strong risktransfer analysis framework, including triggersstricter than those defined by the Regulators isstrongly recommended before setting up thesecuritization;


• SEC-SA methodology penalizes exposure toNPLs securitizations. Starting from January 1st

2019, a new EU regulation applies to capitalrequirement calculation for exposures tosecuritizations. The new methodology consents(or is better to say that forces) the application ofan analytical risk approach (similar to theSupervisory Formula) also to financial companiesapplying Standard approach to calculate creditrisk capital requirement (SEC-SA methodology).Application of SEC-SA approach to NPLsexposure, anyway, implies a capital requirementsignificantly higher than that would be definedfor a financial company applying IRB.

Appendices

7

25

Transaction Advisory Services Tax and Legal

EY Italy contacts

Giancarlo TardioPartner

FSO

Transaction Tax Leader

Direct Tel: +39 3356793658Email: [email protected]

Franco Grilli CicilioniPartner

Legal

Direct Tel: +39 348 2302537Email: [email protected]

Marco DaviddiPartner

Transaction Real Estate Leader


Real Estate

Regulatory & Accounting

Katia MariottiPartner

Restructuring & NPE Leader

Transaction Advisory Services

Direct Tel: + 39 3400603049Email: [email protected]

Ettore AbatePartner

MED IFRS Desk

Direct Tel: +39 335 12 33 101Email: [email protected]

Andrea Ferretti

Partner

Banking & Capital Markets Advisory Leader



How can EY help?The Italian leasing NPE market is a core market forus

Deleveraging is at the centre of several Leasinginstitutions’ agenda. Transactions emerging fromthis process are often complex and require bothbreadth and depth of leasing expertise to delivervalue for vendors and purchasers.EY teams can provide services to investors andleasing companies as well as their shareholders,including:• Remarketing process optimization and re-

engineering• Portfolio analysis and segmentation• Data analytics & business modelling• RE Valuation• Process management• Tax, structuring and legal support• Leasing expertise

Erberto ViazzoPartner

FSO

Transaction Advisory Services FSO Leader


Luca CosentinoPartner

FSO - Transaction Advisory Services


ASSILEA contacts

26


ITALIAN LEASING ASSOCIATION

Assilea is the Italian Leasing Association. The principal aims of Assilea areto inform and assist its Members, presenting at various levels, bothnationally and internationally, all the problems related to leasing activity.It pursues these aims by fostering studies and research, keeping uprelations with private and public institutions, drafting codes of behaviorand undertaking specific initiatives to promote and regulate leasingactivity 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 commissionsof direct and indirect interest to the leasing sector. Assilea is also aFounding Member of the O. I.C., Italian Accounting Body. It collaboratesinstitutionally with Confindustria and with the main National Associationsof producers and distributors of goods and markets of interest to theproduct. Internationally, Assilea is represented in Leaseurope (EuropeanFederation of Leasing Company Associations) and it has directcollaborative relationships with the main international leasing institutions.

Roma - Via D'Azeglio, 33Tel +39 06 [email protected]

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

Abbreviations and acronyms

27


Notes

28


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