A surge of interest by Italian banks in GACS-eligible non-performing loan (NPL) securitisations prompted Scope to up its forecast by 50% to EUR 60bn in gross book value (GBV) sales. With direct sales, Italian NPL offloads could top EUR 100bn in 2018.

The increase in forecast deal volumes stems partially from the closing of Monte dei Paschi di Siena’s Siena NPL 2018 transaction on 10 May, which had a GBV of EUR 24.1bn. GACS (Garanzia Cartolarizzazione Sofferenze) is a scheme whereby in return for a recurring fee, the Italian government guarantees interest and principal payments at final legal maturity to holders of the most senior notes.

“Accelerated use of GACS-eligible securitisations as a tool to dispose of non-performing assets is driven mainly by increased awareness among the banks that favourable transfer prices available in GACS deals reduce the potential loss versus book value,” said David Bergman, executive director, structured finance, at Scope Ratings.

In addition, there are concerns that the GACS scheme will not necessarily be renewed in perpetuity –the option to apply for a GACS has only been extended to 6 September 2018 – potentially prompting some banks to accelerate their NPL disposal plans. In light of this, GACS securitisations have become a viable option.

Direct sales of NPL portfolios continue to be an alternative way to dispose of NPLs, as evidenced by the sale of approximately EUR 18bn by the insolvent Banca Popolare di Vicenza and Veneto Banca to Società per la gestione di attività (Sga).

One advantage of direct portfolio sales is that positions that are severely delinquent but not yet in default – so-called unlikely-to-pay positions – can be offloaded. On 6 April, for example, Credito Valtellinese announced that it had agreed to sell a portfolio consisting mainly of unlikely-to-pay positions with a GBV of EUR 245m to Algebris NPL Partnership II. Unlikely-to-pay positions are not currently included in the GACS scheme.

The total volume of GACS securitisations and portfolio sales could top EUR 100bn of GBV in 2018. “While some portfolio sales are trades between participants in the secondary market and do not impact reported NPL ratios, we expect the Italian NPL ratio as reported by the European Banking Authority to decrease into single digit territory by the end of 2018,” said Bergman.