Securitisation 2021 Comparisons

Last Updated January 12, 2021

Law and Practice

Authors



Studio Legale Cappelli RCCD is a leading player in the financial market, covering a full range of domestic and cross-border transactions relating to debt securities issues, equity and equity-linked instruments, structured finance and regulatory issues. The firm combines strong technical knowledge with a clear grasp of the commercial implications of transactions. Since its founding, Cappelli RCCD has advised leading domestic and international clients on the most prominent capital markets (equity and debt), structured finance, and banking transactions carried out in Italy. It has supported its clients in high-profile, complex and sensitive commercial litigation and has quickly established itself as an Italian market leader for legal services, with particular focus on structured finance, capital markets, banking and finance, regulatory and compliance, derivatives, corporate, M&A and private equity, real estate, litigation, insolvency and restructuring (including banking restructuring). The firm has 85 fee earners, 20 of whom are partners, and includes Italian-qualified lawyers and English solicitors. The main office is located in Milan, Italy.

Law No 130 of 30 April 1999 (the Securitisation Law), sets out the legal framework for Italian securitisation transactions. Under the Securitisation Law, transfers of assets in the context of a securitisation transaction enjoy a special regime benefiting from certain exceptions to the general provisions under the Italian Civil Code (ie, the Royal Decree No 262 of 16 March 1942) and under the Italian Insolvency Law (ie, the Royal Decree No 267 of 16 March 1942).

True-Sale Securitisation

Italian securitisation transactions are commonly structured via a true-sale mechanism with an outright title transfer of the relevant assets from an originator (as transferor) to a special-purpose entity (the SPE) (as transferee) on a no-recourse basis (cessioni pro soluto).

With regard to true-sale structures, the Securitisation Law is designed to achieve the true sale and to facilitate the bankruptcy remoteness of the SPE. In particular, the Securitisation Law provides for the statutory segregation of the securitised receivables from all the other assets of the SPE (including those which are the collateral for different securitisation transactions). Accordingly, no creditors – other than holders of the notes issued to finance the purchase of the receivables securitised in the context of the relevant transaction – may institute any action against the segregated assets.

Pursuant to the Securitisation Law, to ensure that the assignment of the assets is enforceable vis-à-vis the assigned debtors, the insolvency receiver and any third-party assignee, a notice of transfer shall be published, normally by the SPE, in the Official Gazette and the competent Italian Companies Register. The publication requirement overrides the general rules set out in the Italian Civil Code on receivables assignment which require, to ensure enforceability, that each individual debtor is notified of the assignment or accepts that assignment with an instrument bearing date certain at law (data certa).

Accordingly, a transfer of receivables by an originator to the SPE made in accordance with the provisions of the Securitisation Law will constitute an effective assignment of those receivables (ie, a true sale), pursuant to which legal title to the assets is transferred to the SPE and which is enforceable against the originator of the assets, its creditors, its bankruptcy receiver and the underlying debtors.

Claw-Back

From a bankruptcy-remoteness perspective, one must consider claw-back risks both in respect of the assignment of assets and of payments made by underlying debtors. As regards the transfer, it may be clawed back if the insolvency receiver is able to prove that the purchaser was aware or should have been aware of the insolvency of the seller, and the assignment agreement was entered into during the so-called hardening period (eg, one year or six months) set out under Article 67 of the Italian Insolvency Law. Under the Securitisation Law this hardening period is reduced, from one year to six months and from six months to three months, respectively. As regards payments by underlying debtors, no claw-back under Articles 65 or 67 of the Italian Insolvency Law will be applicable in respect of payments made under the assigned receivables by the relevant debtors who have become subject to insolvency proceedings.

More generally, Article 2901 of the Italian Civil Code provides for a general claw-back regime (so-called revocatoria ordinaria). The general claw-back regime permits a creditor, either within or outside a bankruptcy scenario, to demand that acts by which the debtor disposes of their assets to the prejudice of that creditor’s rights be declared ineffective vis-a-vis the creditor if:

  • the debtor was aware of the prejudice which the act would cause to the rights of the creditor or, if the act was made prior to the existence of the creditor’s claim, that this act was fraudulently designed for the purpose of prejudicing the satisfaction of the creditor’s claim; and
  • in the case of a non-gratuitous act, the third party was aware of that prejudice and, if the act was made prior to the existence of the claim, the third party participated in the fraudulent design.

The transfer of receivables under a securitisation should qualify as a “non-gratuitous act” for the purposes of Article 2901 of the Italian Civil Code. A creditor making a demand pursuant to this provision is required to prove that the transfer was prejudicial to its rights as a creditor of the transferor, and that the transferor and the SPE were aware of that prejudice at the time the transfer was made or, if the transfer took place prior to the existence of the creditor’s claim, that the transferor and the SPE fraudulently agreed on the transfer for the purpose of prejudicing the satisfaction of the demanding creditor, and the SPE knowingly participated in the fraud. For the purposes of resisting a claim under Article 2901 of the Italian Civil Code, the economic terms of the transaction should prove to be fair.

Opinion of Counsel

It is market practice that compliance with the requirements of the Securitisation Law for a true sale is confirmed in legal opinions issued by transaction counsels. Such opinions will

  • give comfort that the transfer of the receivables is made in compliance with the Securitisation Law and accordingly constitutes a true-sale; and
  • confirm the special claw-back regime specifically contemplated for securitisation transactions.

Nonetheless, reservations on specific rules of the Italian Insolvency Law are, usually, included in legal opinions.

Alternatives to True Sale

Although true-sale mechanics are the type of structure most often used in the Italian market, the Securitisation Law (as a result of recent amendments) also permits alternative structures which involve the use of an SPE. In particular, SPEs are permitted to:

  • carry out direct lending to companies, provided that they are enterprises that have a balance sheet equal to or above EUR2 million, where the relevant funding for the disbursement of the loan is obtained through the proceeds of the issuance of notes; or
  • implement a non-traditional securitisation through a sub-participation scheme whereby the SPE grants the originator a limited recourse loan for the purposes of acquiring the benefit of the cash flows relating to a portfolio of identified assets, although legal title to those assets remains vested in the originator which may ring-fence such assets for the benefit of the SPE (also, in this case, the relevant funding for the disbursement of the loan is obtained through the proceeds of the issuance of notes).

The exceptions set out in the Securitisation Law regarding claw-back actions are generally applicable, mutatis mutandis, to such alternative structures. Accordingly, payments made by the borrower/originator, are not subject to claw-back. Furthermore, the receivables payable by the borrower/originator arising under such a loan/limited recourse loan will benefit from the statutory segregation available under the Securitisation Law.

Secured Loans

Secured loans structured outside of the provisions of the Securitisation Law are not used in the Italian market as they do not enjoy the same protections contemplated by the Securitisation Law.

In fact, secured loans are typically structured as plain, vanilla, asset-based lending to a company, secured by that company’s receivables. The general rules under the Italian Insolvency Law, in the absence of any derogation from the ordinary regime, shall be applicable (ie, one-year and six-month claw-back periods, upon the insolvency of the borrower). Also, secured loans will be subject to the claw-back of payments by the borrower under Article 65 of the Italian Insolvency Law. Finally, the statutory segregation of assets under the Securitisation Law will not be applicable.

Asset Segregation

The Securitisation Law provides that the portfolio of assets is segregated by operation of law from the assets of the SPE (and from any other assets purchased in the context of other securitisations) in favour of the noteholders of the securitisation and of the other issuer creditors (Articles 1, 3, 4, 7.1 and 7.2 of the Securitisation Law). The segregated assets include the receivables (and the related cash flows) vis-à-vis the assigned debtors, any other claims of the SPE deriving from the securitisation transaction documents and any eligible investment purchased by the SPE through reinvestment of the cash flows generated by the securitised assets in the context of the securitisation transaction.

Therefore, the Securitisation Law ensures the SPE’s bankruptcy remoteness against the credit and financial risk of the assigned debtors, the originator and any third party with whom the SPE may engage. Ring-fencing does not encompass the payments that the servicer/depositary bank might have already received on behalf of the SPE but has not yet credited to the account opened in the name of the SPE.

Pursuant to the Securitisation Law, SPEs are also permitted to implement securitisation transactions of proceeds arising out of, or in connection with, the ownership of immovable property or of registered movable property. In fact, recent changes to the legislation enable an SPE to directly acquire real estate property (or registered movable property) by issuing notes that will be repaid out of the proceeds of the management and/or the sale of the assets transferred to the SPE. Also, in these cases, the Securitisation Law provides that the assets and the rights which are intended to satisfy the rights of the noteholders and the other creditors shall be expressly identified and segregated from the other assets of the SPE.

Corporate Structure

The Securitisation Law does not expressly require the SPE to be a bankruptcy-remote entity: theoretically, an SPE could be subject to formal insolvency procedures. To mitigate this risk, the Securitisation Law provides that the securitisation SPE is incorporated as a corporation (società di capitali) with the sole corporate object of carrying out one or more securitisation transactions. To mitigate the risk further, a common market practice has developed in order to include the structural and contractual features set out below.

An SPE is set up as an “orphan” corporate vehicle whose shareholders are completely separate from the relevant originator/borrower (normally a Dutch Stichting foundation acts as shareholder). This ensures a corporate de-linking from the originator/borrower.

An SPE has very limited corporate operations, no employees or offices of its own and it outsources all of its activities to third-party agents pursuant to agreements which include limited recourse and non-petition provisions.

Limits on Corporate Activities

All corporate activities of the SPE are to be kept separate from those of the other parties involved in the securitisation and the SPE shall produce separate (non-consolidated) accounts. In general, at least one of the directors of the SPE should be independent from the parties involved in the transaction, and the SPE’s shareholder agreement should provide that the independent director’s vote is required for any resolution of the board of directors (in particular, if that could have a negative impact on the securities).

The securitisation documents include specific covenants, such as:

  • non-petition and limited-recourse covenants, although there is no absolute certainty in the legal doctrine that such provisions will be upheld vis-à-vis third parties (in particular, bankruptcy receivers);
  • covenants by the shareholders of the SPE not to engage in any liquidation, merger or asset sale (other than as provided for in the relevant transaction documents) until repayment of the notes is in full;
  • restrictions as to the ability of the SPE to incur indebtedness; and
  • general covenants by the controlling shareholder that it acknowledges the SPE’s obligations deriving from the securitisation, and would not impose any actions on the SPE that would constitute a breach of those obligations.

Risk of Consolidation

The risks of substantive consolidation of an SPE in any insolvency proceedings of the originator or its parent or affiliates is not an issue in Italian securitisations, for two main reasons:

  • the true-sale structure and the asset segregations/ring-fencing operated by the Securitisation Law; and
  • the fact that the SPE shall be (and it is) a distinct legal entity, capable of holding assets and carrying on business separately from the originator.

Typically, a bankruptcy-remoteness legal opinion is not provided in respect of Italian securitisations.

Pursuant to the Securitisation Law, in the context of a true-sale securitisation – to ensure that the assignment of the assets is enforceable vis-à-vis the assigned debtors, the insolvency receiver, the originator and any third-party assignee – a notice of transfer shall be published, normally by the SPE, in the Official Gazette and the competent Italian Companies Register. The publication requirement overrides the general rules set out in the Italian Civil Code, as discussed in the True-Sale Securitisation section of 1.1 Insolvency Laws.

Multiple Disposals

Furthermore, as a general rule, and pursuant to Article 1265 of the Italian Civil Code, if the same assets have been the subject of multiple sales by the same seller/originator, the first assignment in respect of which a debtor has been notified or which has been accepted by the debtor with an instrument bearing date certain at law (data certa) shall prevail.

The translation of this principle into the securitisation space results in the fact that, in the case of multiple disposals (either to different SPEs or to non-SPE purchasers), the assignment in respect of which the debtor has been notified (or the first transfer accepted by the assigned debtor), or in respect of which the notice of assignment has been published in the Official Gazette and registered in the competent companies' register (in the case of true-sale securitisation) first, will prevail and be enforceable vis-à-vis the relevant underlying debtors.

In any case, it is worth noting that the relevant perfection formalities do not affect per se the validity of the agreement between transferor and transferee. In other words, failure to comply with the relevant completion formalities or, in the case of multiple transfers, completing the relevant formalities after another sale has been notified/accepted or published (as applicable) would render the assignment not enforceable vis-à-vis the relevant underlying debtors while the transferee who has not successfully completed the relevant perfection formalities may have a claim for breach of contract against the transferor.

Patrimonio Destinato

As an alternative to the use of the Securitisation Law for ring-fencing and segregation of the relevant collateral portfolio, Italian law allows, pursuant to Article 2447-ter of the Italian Civil Code, for the creation of a peculiar kind of segregated asset estate: the so-called patrimonio destinato.

The patrimonio destinato is created by way of a corporate resolution of the relevant entity, registered with the competent Italian Companies register, which, inter alia, consists of a pool of assets and liabilities dedicated exclusively to the conduct of a specific business activity (specifico affare).

The major characteristics of the patrimonio destinato are that:

  • its aggregate value shall not exceed 10% of the company’s net worth (patrimonio netto), unless otherwise stated by other special laws;
  • the funding of the patrimonio destinato may be achieved through any kind of financial instrument (either participating or debt instruments); and
  • any liabilities incurred to pursue the specific business activity are of limited recourse, exclusively to the pool of assets allocated to the specific business unless the relevant resolution establishing the patrimonio destinato otherwise provides.

Effectiveness Compared to Securitisation Law SPEs

This scheme is, in principle, aimed at recreating a ring-fencing situation which is similar to that of a securitisation transaction with regard to the segregation of the asset from the general company’s assets. However, the insolvency of the company may trigger the liquidation of the patrimonio destinato, in the event that the insolvency itself will materially jeopardise the going concern of the specific business to which the patrimonio destinato is dedicated. The general company’s creditors will have no actions and rights to attach to the patrimonio destinato, but the business to which the segregated assets and the related cash flows are dedicated may be impaired, and a voluntary liquidation of the patrimonio destinato may become appropriate. Furthermore, according to Italian insolvency law, upon the insolvency of the company, the management of, and the relevant responsibility related to, the patrimonio destinato shall pass to the insolvency receiver.

Due to the limitation of the aggregate value of patrimonio destinato (which cannot exceed 10% of the company’s net worth) and the non-complete isolation of the patrimonio destinato from the insolvency risk of the company and/or originator (compared to that afforded in the context of securitisations pursuant to the Securitisation Law), such a scheme is not frequently used in the Italian market. Legal opinions are not usually issued by practitioners on this structure.

Patrimonio Destinato and Synthetic Securitisation

In addition to the foregoing, pursuant to Article 4bis of Law Decree 162/2019 (as amended pursuant to Law 8/2020), in the context of synthetic securitisation transactions carried out through disbursement of a limited recourse loan by the SPE, the possibility for the financed entity to create an ad hoc patrimonio destinato has been introduced.

Transfers of financial assets from the originator, and any other intermediary operating company or SPE, are subject to:

  • direct taxes, calculated on the difference (if positive) between the purchase price for the transferred assets and their related fiscal value; and
  • indirect taxes (alternatively VAT or registration tax).

For VAT purposes, it is important to distinguish between the transfer of performing receivables and of non-performing receivables In the first scenario, such a transfer represents a supply of services, which is VAT exempt, to the extent that it has a financial purpose and is carried out for a consideration; in the second case, the transfer does not fall within the scope of VAT and is therefore subject to a 0.5% registration tax.

Application of Italian registration tax can generally be avoided if the transfer agreement is formed by way of an exchange of correspondence and is not registered.

The collections, and any other income that fall within a securitisation transaction, are exclusively for the benefit of noteholders and for the payment of the other creditors of the transaction. Therefore, only if there remains a residual revenue within the SPE following the completion of the securitisation, and all obligations vis-à-vis the noteholders and any other creditors are fulfilled, could there be a taxable income at the SPE level. In this case, that revenue would be subject to Italian direct taxes.

In general, any payment of interest due to the notes issued by an SPE in the context of an Italian securitisation transaction, incorporated and operating under the Securitisation Law, is subject to the so-called substitute tax. If particular conditions are met, pursuant to Article 6 of the Securitisation Law and Article 6 of Legislative Decree No 239/1996, an exemption from this substitute tax is provided for interest (and other proceeds) received out of the notes by noteholders that are not resident in Italy.

With regard to any other tax issues that could be applicable, a case-by-case analysis should be provided, which would take into consideration the main characteristics and objectives of the securitisation transaction in question.

Generally, tax opinions issued cover the tax treatment of the notes, SPE and related transaction documents.

There are no specific legal issues relating to the accounting rules that apply to securitisation.

Based on current market practice, legal opinions do not address, or cover, accounting rules matters.

Sources of Disclosure Law

In Italy, the key laws and regulations governing disclosure within securitisation transactions are:

  • the Securitisation Law;
  • Legislative Decree No 385 of 1 September 1993 (the Italian Banking Act);
  • Legislative Decree No 58 of 24 February 1998 (the Italian Financial Act);
  • Consob (Italian Companies and Exchange Commission) Regulation No 11971/1999 (the Issuer Regulation);
  • Circular No 285 of 17 December 2013 of the Bank of Italy (the Supervisory Regulations); and
  • Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 (the Securitisation Regulation).

Disclosure Requirements

The Securitisation Law requires that disclosure be made by publishing an information memorandum (prospetto informativo) containing certain minimum information if the notes are offered to professional investors. In this case the information memorandum must, inter alia:

  • identify the issuer, the originator and the servicer; and
  • contain an overview of the securitisation transaction, the terms and conditions of the notes and the organisation of the noteholders and a description of the relevant costs of the transaction.

If the offer of the notes qualifies as a public offer, or the notes are to be listed on a regulated market, the full disclosure requirements under the Italian Financial Act would apply (ie, a Prospectus Directive-compliant prospectus needs to be drawn up).

If the notes are offered to non-professional investors, the transaction needs to be subject to a rating assigned by an independent rating agency.

Violation of the disclosure regime is generally punished with administrative sanctions. However, if the issuer provides misleading information to investors and acts with wilful misconduct, it may also be subject to criminal sanctions. Moreover, additional sanctions are provided under the Securitisation Regulation in case of breach of disclosure of the relevant risk retention undertakings.

In general, it is market practice that legal opinions do not cover compliance with disclosure rules.

As there is a securitisation-specific disclosure regime in place, general disclosure laws and regulations are not material.

The Italian securitisation framework falls within the scope of application of the Securitisation Regulation, which, inter alia, replaced, as of 1 January 2019, the risk retention rules set out in the previous pieces of legislation (inter alia, the Capital Requirements Directive IV, 2013/36/EC (CRD IV) and the Capital Requirements Regulation, 575/2013/CE (CRR)). More generally, the Securitisation Regulation has consolidated into a single piece of legislation a multitude of different pieces of European legislation which were relevant in the securitisation space. In addition to the CRR, the Securitisation Regulation has also replaced relevant securitisation-related rules in the Solvency II Delegated Act (Solvency II) and Alternative Investment Fund Manager Regulation (AIFM Regulation).

Risk Retention Obligations on Issuers and Investors

Under the Securitisation Regulation, originators, sponsors and original lenders are under a direct obligation to retain a 5% net economic interest in securitisation transactions and are exposed to penalties in the event of non-compliance, which may consist of administrative (or even criminal) sanctions depending on how the Securitisation Regulation is implemented in each member state in addition to capital charges which remain for investors that fail to conduct proper due diligence. Furthermore, under the Securitisation Regulation, institutional investors (other than originators, sponsors or original lenders) shall, as per the previous regime under the CRR, AIFM Regulation and Solvency II, prior to holding a securitisation position, verify compliance by originators, sponsors or original lenders with the risk retention obligations by originators, sponsors or original lenders under the Securitisation Regulation. Current market practice is to include contractual provisions to that effect in the transaction documentation.

Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest.

Risk Retention Procedures

The relevant methods – through which the risk retention requirements are complied with – have not been changed significantly compared to the previous regime and consist of:

  • retention of no less than 5% of the nominal value of each of the tranches sold or transferred to the investors;
  • in the case of revolving securitisations or securitisations of revolving exposures, retention of the originator's interest of not less than 5% of the nominal value of each of the securitised exposures;
  • retention of randomly selected exposures, equivalent to no less than 5% of the nominal value of the securitised exposures, where such exposures would have otherwise been securitised in the securitisation, provided that the number of potentially securitised exposures is no fewer than 100 at origination;
  • retention of the first loss tranche and, where such retention does not amount to 5% of the nominal value of the securitised exposures, if necessary, other tranches having the same or a more severe risk-profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total no less than 5% of the nominal value of the securitised exposures; and
  • retention of a first-loss exposure of no less than 5% of every securitised exposure in the securitisation.

In general, legal opinions do not cover compliance with risk retention rules.

In addition to the EU reporting required under the Securitisation Regulation, an Italian-specific reporting framework is laid down in the Bank of Italy regulation of 7 June 2017, named “Provisions on statistical and reporting requirements for securitisation SPEs”. This piece of regulation governs Italian SPEs' periodic reporting obligations.

The principal regulator of reporting obligations is the Bank of Italy, which actively co-operates with the European Central Bank.

SPEs are to provide the Bank of Italy with quarterly reporting on outstanding amounts, financial transactions and write-offs/write-downs on the assets and liabilities.

Non-compliance with these rules will cause the European Central Bank to impose certain financial penalties.

Rating Agencies (RAs) are primarily regulated under EU Regulation No 1060/2009, as implemented in Italy by Legislative Decree No 176 of 5 October 2010 and by Consob Regulation No 12175 of 1999. The Italian Securitisation Law and the Italian Financial Act also apply. The Consob Regulation sets out, inter alia, certain professional and independence requirements that RAs must meet.

RAs are under Consob supervision, which is the competent authority for such matters pursuant to the Italian Financial Act; Consob is to act in co-operation with the Bank of Italy, the supervisory authority for the insurance market (IVASS), the supervisory authority of pension funds (Covip) and the European Securities and Markets Authority (ESMA).

Violation of the above-mentioned regulation by an RA may trigger pecuniary sanctions.

The CRR sets the relevant rules on capital and liquidity requirements for banks and investment companies, including with reference to the treatment of securitisations.

In line with Basel III, the CRR provides for two liquidity safeguards:

  • the liquidity coverage requirement (LCR), which improves the resilience of credit institutions to liquidity risks over a short-term period; and
  • the net stable funding requirement (NSFR), ensuring that credit institutions have an acceptable amount of stable funding to support their assets and activities over the medium term.

Liquidity Coverage Requirement

The LCR evaluates if banks have enough high-quality liquid assets (HQLA) in their liquidity buffer to cover the difference between the expected cash outflows and the expected capped cash inflows over a 30-day stressed period.

For LCR purposes, high-quality liquid assets are assets that can be sold on private markets with little or no loss of value, even in stressed conditions. They are made up of three tiers: Level 1, Level 2A and Level 2B.

A securitisation will be eligible as a Level 2B asset if it complies with, inter alia, the following conditions.

  • The designation "STS" or "simple, transparent and standardised", or a designation that refers directly or indirectly to those terms, is permitted to be used for the securitisation in accordance with the Securitisation Regulation and is being so used.
  • The position has been assigned a credit assessment of credit quality step 1 by a nominated External Credit Assessment Institution (ECAI).
  • The position is in the most senior tranche or tranches of the securitisation and possesses the highest level of seniority at all times during the ongoing life of the transaction – the securitisation transaction shall have a minimum issue size (EUR100 million) or a maximum weighted average life (no more than five years).
  • The securitisation position is backed by a pool of underlying exposures and those underlying exposures all belong to only one of the following subcategories:
    1. residential loans;
    2. commercial loans, leases and credit facilities to undertakings established in a member state to finance capital expenditures or business operations other than the acquisition or development of commercial real estate (with at least 80% being SMEs);
    3. auto loans and leases to borrowers or lessees established or resident in a member state; and
    4. loans and credit facilities to individuals resident in a member state.

Net Stable Funding Requirement

The NSFR is designed to avoid issues arising from the drying-up of short-term funding, caused by the banking sector's practice of financing long-term activities through excessive reliance on short-term funding. As a consequence, banks are required to hold sufficient stable funding to support their assets, activities and funding needs over a one-year horizon under both normal and stressed conditions.

A bank investing in a securitisation will have to prove a certain amount of stable funding in connection with the asset (the securitisation holding) in which it has invested. Also, a bank originator will have to prove a certain amount of stable funding in connection with the assets retained by it (whether the securitisation bonds or the underlying assets), pursuant to the applicable risk-retention requirements.

Enforcement

The authorities in charge of regulating the liquidity and capital requirements for banks and investment firms are the European Commission and the European Banking Authority. Violation of these rules may be sanctioned through pecuniary and administrative sanctions, and may be enforced by the European Central Bank and the Bank of Italy.

No specific laws or regulations provide an ad hoc disciplining of the use of derivatives in the context of securitisations. The Financial Act, Consob Regulation No 20307/2018 (Intermediary Regulation) and EU Regulation No 648/2012 (EMIR), generally apply to derivatives regulation.

The main items provided by the Securitisation Law, in order to ensure protection for investors in securitisation transactions, are those referring to the bankruptcy-remoteness regime, asset segregation and the disclosure requirements, both described in 1 Structurally Embedded Laws of General Application.

Furthermore, it is common practice in the Italian market to appoint a representative of the noteholders (RON) that has, within its remit, the general duty to represent the holders of the notes and to generally co-ordinate and protect investors’ interests.

Banks are generally subject to CRR and Securitisation Regulation rules on securitisation transactions, both when they act as originators and/or as investors in securitisation positions.

With specific reference to investment in a securitised asset, it is worth noting that the Consob communication No 0097996/2014, about the distribution of financial instruments to retail clients, states that securitised assets shall fall within the definition of “complex products” under the ESMA opinion on Markets in Financial Instruments Directive (MiFID) practices for firms selling complex products, dated 7 February 2014.

According to the ESMA opinion, there is a high likelihood that retail investors may not be able to understand the risks, costs and expected returns of complex products and/or the drivers of risks and returns; as a consequence, those retail investors cannot make informed investment decisions, and this increases the likelihood of consumer detriment (such as unexpected losses).

The Consob recommendation is that banks should not sell securitised assets to retail clients. Should the banks not follow this recommendation, they will be subject to strict supervisory controls in their selling activity in terms of organisation and internal controls, suitability and appropriateness checks, and disclosure and compliance risk assessment.

Article 2 of the Securitisation Law provides that SPEs shall be incorporated as a corporate entity (such as a joint stock company or as a limited liability company) or co-operative company.

It is common in the market that the SPEs are structured as limited liability companies (società a responsabilità limitata) with a corporate object limited to the activities permitted under the Securitisation Law. SPEs are usually thinly capitalised with the minimum corporate capital requirements and a very simple corporate structure, activities related to the securitisation transaction are often delegated to other entities (see the Corporate Structure section of 1.2 Special-Purpose Entities).

Article 3 of the Securitisation Law provides that Italian SPEs’ sole corporate objective shall consist in the implementation of securitisation transactions, or the other activities specifically set forth in the Securitisation Law (eg, granting of loans). No other activities may be carried out by Italian SPEs.

The key material forms of internal credit enhancement used by SPEs in the context of a securitisation transaction include:

  • over-collateralisation;
  • subordination through tranching of the various classes of notes issued;
  • spread accounts or reserve accounts;
  • definition of pay-out events; and
  • liquidity lines.

The key material forms of external credit enhancement used by SPEs in the context of a securitisation transaction include:

  • related party guarantees (rarely used because of possible conflicts of interest);
  • letters of credit (which require the originator to pay attention to the intermediary rating);
  • performance triggers;
  • monoline insurance; and
  • recently, with respect to securitisation of non-performing assets, government guarantees (ie, the so-called garanzia sulla cartolarizzazione delle sofferenze (GACS)).

Public entities often participate in the securitisation market in the role of originator and, sometimes, as originator and servicer. In addition to the Securitisation Law, the applicable rules are Law No 409 of 23 November 2001 and Law No 410 of 23 November 2001.

The main features of securitisation transactions involving public entities include:

  • the formalities to be performed in order to make the assignment effective, provided, however, that recent amendments to the Securitisation Law have simplified such formalities; and
  • the statutory participation of the Ministry of Economy and Finance in determining the characteristics of the securitisations of public receivables.

Either private or institutional investors may invest in securitisation transactions. Risk-spreading principles and regulatory requirements on investment limits may apply to institutional investors, depending on the legal status and qualification of the entity wishing to invest in such transactions.

Please see 1 Structurally Embedded Laws of General Application.

Each transaction document entered in the context of a securitisation transaction contains a set of representations and warranties which may vary depending on the subject matter of the relevant transaction document.

Typically, the most important set of representations and warranties is the one relating to the transfer of assets from the originator to the buyer.

In this respect, the originator is usually required to represent and warrant that:

  • it is duly incorporated;
  • it has powers and authorities to enter into and perform the securitisation documentation;
  • the relevant receivables exist and are valid and have been originated in compliance with all applicable relevant provisions of law and regulation;
  • it has full and unencumbered legal title to the receivables and that the receivables are freely transferable; and
  • it is solvent (ie, it is not subject to any insolvency proceedings).

Moreover, depending on the composition of the portfolio, certain representations and warranties are generally included; these may depend on the nature of the portfolio (secured or unsecured, performing or non-performing), each collateral security being the subject matter of the transfer.

The SPE usually gives corporate and authority representations and warranties.

Enforcement

Breach of representations, which results in a loss for the SPE, entitles the SPE to claim for an indemnity from the originator. The receivables transfer agreement sets forth the validity period for representations and warranties. Most transactions, especially in the non-performing loans (NPL) space, also include cap thresholds to the maximum amount indemnifiable, de minimis and other timing limitations for the notification of an indemnity claim.

In some instances, additional protection for breach of representations may take the form of an escrow account where, at closing, a portion of the purchase price payable by the SPE will be deposited and may be retained by the SPE towards satisfaction of indemnity payments which become due or, otherwise, be finally paid to the originator.

Identifiability as a Block of Receivables

The formalities required to ensure enforceability of the transfer of receivables under the Securitisation Law are governed by Article 58 of the Italian Banking Act (which is recalled by the Securitisation Law). Pursuant to Article 58 of the Italian Banking Act, in the case of securitisation of performing assets it is required that the assigned receivables be identified as a block of receivables (in blocco) having similar characteristics as a requirement of the assignment (ie, the eligibility criteria). Recently, the Securitisation Law has been amended in relation to the securitisation of deteriorated receivables (eg, non-performing and unlikely-to-pay receivables). For these transactions, given the issues around the ability to design appropriate eligibility criteria to identify a block, the portfolio is identified directly by reference to a list of included assets and there is no need to identify the portfolio as a block through eligibility criteria.

Notice of Assignment

The enforceability of the assignment against the relevant debtors, an insolvency receiver, any subsequent transferee of any of the receivables transferred and any other third party, is effective on the later of the date of the publication of the notice of assignment in the Official Gazette of the Republic of Italy or the date of registration of the notice of assignment in the competent companies' register.

As mentioned above, in the case of securitisation of performing receivables, the notice of assignment will include the eligibility criteria to identify block receivables, the date of effectiveness of the transfer, and the procedures (including location and opening times) whereby any person affected by the transfer of the receivables can obtain information on the status of such a receivable.

In the case of securitisation of non-performing receivables, the notice shall include indicative information on the transferred receivables (in lieu of the eligibility criteria), the date of effectiveness of the transfer, and the transferor’s/transferee’s website – where the relevant list of transferred receivables is indicated and whereby any person affected by the transfer of the receivables can obtain information on the status of such a receivable (these simplified formalities are also applicable in the case of securitisation of trade receivables pursuant to Law No 52 of 21 February 1991).

Therefore, there is no need to implement any further individual action vis-à-vis the assigned debtors and any subsequent transferees in order to ensure the enforceability of such a transfer, as the relevant publication produces the same effect as Article 1264 and Article 1265 of the Italian Civil Code.

It should also be noted that these formalities are now applicable to all type of debtors, including the Italian public administration, provided that the Law Decree 91/2014 has recently deleted the additional formalities that were previously required for public administration debtors.

SPE Notice

Finally, the SPE (also through its servicer) generally undertakes to deliver a notice (a so-called welcome letter) to each of the underlying debtors, within a predetermined timeframe, to inform them that the receivables have been sold to the issuer, and to specify that any future payment should be made into an account which is indicated in that letter. It remains understood that any failure to provide such notice does not affect the validity and effectiveness of the transfer.

The market standard securitisation transaction documents contain different covenants and undertakings both on the side of the originator and the SPE.

First of all, in order to protect the interests of the SPE (and, therefore, the noteholders), apart from the representations and warranties given by the seller in relation to the receivables, the originator usually undertakes, pursuant to the transfer agreement, to transfer to the SPE any collection received in respect of the transferred receivables. Moreover, the originator undertakes not to transfer or encumber the receivables to, or in favour of, any third party (other than the SPE). In addition, the originator often provides a post-sale obligation to co-operate in good faith with the servicer in the management of the receivables.

Further covenants and undertakings are tailored to the SPE, such as negative undertakings (not to incur further obligations apart those arising out of the transaction documents) and similar covenants as to compliance with corporate formalities, financial indebtedness and registration.

Depending on the nature of the covenants, their breach can cause the termination of the relevant contract, which is generally enforced before an Italian court (or an arbitration governed by Italian law). However, parties generally recur to the indemnification procedure.

The Securitisation Law provides that a servicing agreement has to be entered into between the SPE and the servicer on the date on which the receivables' sale occurs. This agreement contains the main terms of the appointment of the servicer, which, by operation of the Securitisation law, has regulatory monitoring duties over the transaction, including verification of the compliance of the transaction with the law.

The servicing agreement governs the main duties of the servicer, which consist in:

  • the administration of the receivables or other assets constituting the collateral pool;
  • the collection and recovery of amounts due and payable under the receivables; and
  • the implementation of procedures and actions to be taken for the recovery of such receivables, including how to deal with late and defaulted receivables.

The servicing agreement also sets out certain ongoing reporting duties of the servicer, such as information covenants vis-à-vis the noteholders, reporting obligations and auditing procedures.

Failure to comply with the relevant covenants and duties may be subject to indemnity payable by the servicer and, in the case of severe defaults, may trigger the termination of the appointment of the servicer. In this regard, it should be noted that, in order to ensure the continuity of the servicing of the receivables, the termination of the servicer’s appointment usually takes effect only when a successor servicer has accepted the appointment.

Dual Layer Servicing Agreements

Depending on the relevant underlying asset class, the servicing agreement may contemplate a dual layer role with the appointment of a master servicer and a special servicer. In general terms, the master servicer is vested with the regulatory duties provided in the Securitisation Law, which can only be performed by banks or regulated financial intermediaries (eg, monitoring and guaranteeing/controlling the correct operational functioning of the transaction). The special servicer is responsible for the collection, recovery and administration of the receivables. The master servicer will also have to monitor the activities of the special servicer and the quality of the information supplied, and it remains responsible vis-à-vis the Bank of Italy and the SPE for the overall servicing activity.

The following is a summary of the typical “trigger events” provided within a securitisation transaction:

  • failure to pay any interest or principal amounts due on the notes;
  • breach of any obligation set forth in the securitisation documentation;
  • insolvency of the issuer;
  • winding-up of the issuer; and
  • unlawfulness.

After the occurrence of one of any of these events, the terms and conditions of the notes provide for the acceleration of the notes and payment of accrued interest thereon.

The transfer agreement contains the key set of representations and warranties in respect of the transferred assets and, accordingly, usually provides for a structured indemnity procedure which regulates:

  • the submission of indemnity claims by the SPE (usually via the servicer),
  • how these claims may be challenged by the originator (if deemed ungrounded); and
  • the dispute resolution mechanics in the case of challenges (either a third-party arbitrator or ordinary jurisdiction).

In addition to the indemnities relating to the transferred assets, the contractual documentation provides for other contractual indemnity obligations by the servicer or the other agents of the SPE. General indemnity clauses are included in the securitisation documentation providing for an obligation to reimburse, upon demand, all costs and expenses properly incurred by the representative of the noteholders, except insofar as any such expense is incurred as a result of gross negligence or wilful misconduct, and to the extent that all such costs and expenses are duly documented. Breach (in whole or in part) of one or more of these provisions can cause the termination of the relevant contract, which is generally enforced before an Italian court (or an arbitration governed by Italian law).

The Securitisation Law sets out the main requirements that an SPE must comply with: it must be a company incorporated as a corporation (società di capitali), and its corporate scope must be limited exclusively to the execution of one or more securitisation transactions or any other kind of transactions set out under the Securitisation Law (ie, the sub-participation).

The SPE must be enrolled within a specific registry with the Bank of Italy. Regulatory requirements for securitisation SPEs mainly relate to reporting obligations. These requirements are set out in the Bank of Italy provisions of 7 June 2017, named “Provisions on statistical and reporting requirements for securitisation SPEs”.

The SPE is an orphan entity (managed by a corporate servicer and separate, from a corporate and legal perspective, from the originator) and, therefore, is not part of any corporate group to which any other transaction party belongs.

The SPE will issue notes to investors and the proceeds of that issue are used to fund the purchase of the relevant portfolio of receivables from the originator. The notes are normally issued and held in dematerialised form, and wholly and exclusively deposited with Monte Titoli S.p.A. in accordance with Articles 83 bis and following of the Italian Financial Act, through the authorised institutions listed in Article 83 quater of the Italian Financial Act (for example, banks or regulated investment firms). The notes are held by Monte Titoli on behalf of the noteholders until redemption for the account of the relevant Monte Titoli account holder.

In order to structure the transaction, it is often the case that the originator or the investor of a securitisation transaction will mandate an arranger or sponsor. The arranger also acts as placement agent (as to which, see 6.3 Underwriters and Placement Agents) to find potential investors interested in investing in the securitised portfolio through the purchase or subscription of the notes.

The sponsor could be a bank or a financial institution, and its main responsibilities include the arranging of:

  • the structure of the risk profile of the receivables to create different tranches of notes;
  • the economics of the transaction;
  • credit enhancement;
  • liquidity support; and
  • profit extraction methods.

It also ensures the transaction proceeds through each step to its close.

The underwriters or placement agents are also fundamental players within a securitisation transaction, in particular with regard to the structuring of such transaction. Their main tasks are:

  • seeking out originators for securitisations;
  • usually (but not always) drafting the primary documentation; and
  • generating the offering documents (private placement memorandum or offering circular in a private placement, registration statement and prospectus in a public offering), purchase agreements, custodial agreements, etc.

The counsel also frequently opines on securities and tax matters.

This role is frequently covered by brokers, investment banks or banks that sell or place the notes in a public offering or private placement, often retaining portions for their own account.

The Securitisation Law, in particular Article 2, provides that the SPE shall appoint a bank or a regulated financial intermediary (ie, enrolled in the register set out in Article 106 of the Italian Banking Act). These entities are subject to the supervision of the Bank of Italy, and are subject to minimum capitalisation and professional requirements.

The servicer, in the context of a securitisation transaction, has the main task of collecting principal and interest payments from obligors, and administers the portfolio in the interest of the SPE, thereby dealing with the receivables on a day-to-day basis. The terms and conditions of the appointment of a servicer are set out in the servicing agreement (which also includes performance indicators that the servicer should meet). In addition, the appointment also covers the requirement for the servicer to monitor the portfolio of receivables and loans and all planned deadlines, by producing reports for the issuer and the investors.

The remuneration of the servicer may be fixed or variable, depending on the agreement between the parties.

As stated, in 5.5 Principal Servicing Provisions, Italian transactions may contemplate the appointment of a master servicer and a special servicer.

Investors are the purchasers of the notes issued by the SPE and are therefore the parties that receive the repayments and interest based on the cash flow generated by the securitised portfolio. The segregated assets within the SPE are the main collateral to serve payments of the principal and interest under the notes. The nature of the investor may vary depending on the nature of the portfolio (performing, NPL, leasing, etc). In general, the largest investors in securitised assets are often alternative investment funds or hedge funds, but also pension funds, insurance companies and, to a lesser degree, commercial banks.

Italy does not have a complete framework on trusts, so Italian securitisation transactions do not generally contemplate the role of the trustee. However, the SPE often appoints a representative of the noteholders, who is tasked with protecting noteholders’ interests within the securitisation and generally representing the noteholders vis-à-vis the SPE. The representative's main tasks include executing the resolutions of the noteholders' meeting and co-ordinating the actions that noteholders intend to undertake; both tasks are to be undertaken having regard to the interests of the noteholders.

Synthetic securitisations are permitted in Italy. However, with the exception of Article 7, paragraph 1, letter a) of the Securitisation Law (that sets up a securitisation structure through subparticipation, which can be easily utilised as a synthetic structure, as no transfer of underlying assets is envisaged), synthetic securitisations are not expressly regulated either by the Securitisation Law or by the Italian legal framework in general.

From a structural standpoint, the main advantage of synthetic securitisations compared to traditional ones relies on the fact that, by maintaining the ownership of the assets, the originator continues to benefit from the proceeds arising from the securitised portfolio, mitigating meanwhile the risk-weighted requirements applicable to it.

From a legal standpoint, synthetic securitisations, in particular those not envisaging the issue of notes by SPEs, are less complex to document than traditional ones, thus the operational and legal costs of such structures tend to be lower compared to true-sale transactions.

The main drawback of synthetic securitisations is that they do not ensure segregation of the underlying exposures from the originator’s assets, embedding in the structure an insolvency risk for the originator. Such risk can, however, be mitigated by the implementation of appropriate contractual safeguards, such as rating triggers or collateralisation of claims due by the originator to investors (see 1.4 Construction of Bankruptcy-Remote Transactions).

Synthetic Securitisation Structures

In Italy, synthetic securitisations encompassing unfunded credit protection are always set up through financial guarantee agreements entered into between originators and investors. Two structures are utilised on the Italian market in order to realise synthetic securitisations encompassing funded credit protection (which constitute by far the majority of the transactions):

Firstly, the direct granting of credit protection by the investor, through the conclusion of collateral arrangements or collateralised financial guarantees between the originator and the investor (ie, a structure in line with the one utilised in the context of unfunded transactions).

Secondly, granting of credit protection through an SPE constituted under the Securitisation Law, via a limited recourse loan (ie, effectively, a subparticipation arrangement) disbursed by the latter (the subparticipation structure). The subparticipation structure is more complex from a documental standpoint as the involvement of an SPE (and the relevant agents) is necessary; though, it also envisages an issuance of credit-linked notes by the SPE, which, for many investors, constitutes a more suitable form of investment than direct granting of guarantees/collateral; as a consequence, the subparticipation structure is, overall, more appealing.

Recent developments

It should be noted that the Securitisation Law has been recently amended in order, inter alia, to allow, also with respect to subparticipation structures:

  • segregation of the securitised receivables from the assets of the originators; and
  • constitution of securities over such assets.

The aim of this reform is to ensure insulation of the portfolio risk from the originator’s insolvency risk, also with respect to synthetic securitisations; in particular, the constitution of a pledge on the segregated assets may contribute to qualifying the limited recourse loan granted by the SPE in the context of a subparticipation structure as a secured claim, carving out the loan from the scope of bail in of the originator.

The assets most commonly involved in Italian securitisation transactions are:

  • credit facilities and mortgage loans;
  • non-performing loans;
  • residential and commercial real estate loans;
  • receivables arising from leasing contracts;
  • consumer credits; and
  • trade receivables.

Distressed Assets

Non-performing loans

In recent years, the Italian securitisation market has seen a massive increase in transactions regarding distressed assets (in particular non-performing consumer and commercial loans), which is reflected in the main recent reforms to the Securitisation Law, enacted in order to facilitate such transactions. These reforms involved, inter alia, Law Decree No 50 of 24 April 2017 whose main changes have been

  • the introduction of rules governing the use of real estate owning companies (the so-called ReoCos) which are real estate operating vehicles that purchase, manage and value real estate assets and registered assets securing the securitised receivables;
  • the introduction of the possibility of enhancing the value of the collateral securing (from an economic standpoint) the receivables arising out of finance lease contracts, consisting of the assets being the subject matter of such contracts, through the assignment of such assets to so-called LeaseCos, which are companies that purchase, manage and value the underlying assets of leasing agreements together with the relevant contracts, with a view to broadly and effectively ring-fencing the same in respect of the originator’s assets; and
  • facilitation of turnaround transactions for entities under financial constraints, by allowing the SPE to purchase equity or equity-like instruments issued by such entities and provide new financing to the same.

Unlikely-to-pay receivables

As a result of further recent amendments to the Securitisation Law, the disposal of unlikely-to-pay receivables has been fostered by permitting the transfer of outstanding loan commitments to banks or financial intermediaries enrolled in the register of financial intermediaries held by the Bank of Italy, pursuant to Article 106 of the Italian Banking Act, without having to transfer the account with which the relevant loan is associated. Therefore, the new provisions are aimed at facilitating the transfer of unlikely-to-pay receivables, in all those situations in which the transferor intends to transfer the working capital facilities, which are typically linked to a deposit account and which are still outstanding as of the date of disposal. The new rule establishes two essential principles for the functioning of the transfer scheme:

  • extension of the principle of segregation to receivables arising from the transferred working capital facilities; and
  • predetermination of the allocation of the collections received on the deposit accounts domiciled within the bank to the debts arising from such transferred working capital facilities.

In addition, the Securitisation Law, as recently amended and supplemented, sets forth that the SPEs are allowed to purchase – and have title to – immovable property assets, registered movable property assets and other real or personal rights over those assets and to carry out a securitisation of the related proceeds. It has been also specified that

  • the SPE incorporated for the purposes of carrying out securitisation of the proceeds from immovable property assets and registered movable assets may not carry out other types of securitisation transactions; and
  • the assets and rights intended to satisfy the rights of the noteholders and the other creditors shall be identified and segregated from the other assets of the SPE.

"Social value" securitisation

Finally, a specific legal framework for securitisation transactions with “social value” (valenza sociale) has been introduced within the Securitisation Law, as recently amended and supplemented. This applies where the supporting vehicle company (a ReoCo or LeaseCo), after the purchase of the real estate asset securing the receivables, rents the same to the debtor to allow the latter to continue to occupy the mortgaged real estate asset.

As the Italian securitisation market is currently focused on the non-performing loan (NPL) market, the Italian legislature has recently implemented several reforms, with the aim of maximising NPL recovery times and rates, as well as cash flows. In addition to the above, among the main reforms, it is worth mentioning the newly introduced state guarantee scheme (Garanzia Cartolarizzazione Sofferenze, or GACS) that might be granted in the context of a traditional securitisation structure.

GACS concerns only senior tranches of NPL portfolio securitisations with investment grade rating for a period of 18 months from the date of the relevant Decree, which was in 2016, but this has, previously, been extended to March 2019 and then to May 2021. A fee for the guarantee has to be provided so that it does not qualify as state aid. It should be noted that in the wake of the COVID-19 pandemic, in any transactions for which a public guarantee has been (or will be) obtained, the Italian Ministry of economics and finance is entitled to authorise certain amendments which derogate from the current mandatory capital structure and the relevant documentations for the purposes of introducing a temporary moratorium of the subordination or the postponement mechanism of the servicer’s fees, provided that:

  • the payment dates in which the mechanisms in question apply fall between May 2020 and July 2021;
  • it does not affect the rating of the senior tranche of the ABS notes (which benefit from the public guarantee); and
  • the temporary moratorium is justified by a delay in collection activities caused by the limitations introduced during the COVID-19 pandemic.

As a result of the recent amendments to the Securitisation Law referred to in 8.1 Common Financial Assets, the legal regime applicable to the ReoCos and LeaseCos has been updated. In particular, it is envisaged that it is possible to:

  • set up more than one Reoco or Leaseco, which may acquire, by assuming all or part of the original debt, any immovable property assets, registered movable assets and other assets and rights granted or pledged as security for the underlying receivables; and
  • transfer assets to the ReoCos and LeaseCos pursuant to Article 58 of the Italian Banking Act.
Studio Legale Cappelli RCCD

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+39 02 321 60 400

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Law and Practice in Italy

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Studio Legale Cappelli RCCD is a leading player in the financial market, covering a full range of domestic and cross-border transactions relating to debt securities issues, equity and equity-linked instruments, structured finance and regulatory issues. The firm combines strong technical knowledge with a clear grasp of the commercial implications of transactions. Since its founding, Cappelli RCCD has advised leading domestic and international clients on the most prominent capital markets (equity and debt), structured finance, and banking transactions carried out in Italy. It has supported its clients in high-profile, complex and sensitive commercial litigation and has quickly established itself as an Italian market leader for legal services, with particular focus on structured finance, capital markets, banking and finance, regulatory and compliance, derivatives, corporate, M&A and private equity, real estate, litigation, insolvency and restructuring (including banking restructuring). The firm has 85 fee earners, 20 of whom are partners, and includes Italian-qualified lawyers and English solicitors. The main office is located in Milan, Italy.