Italy’s New Rules on Bad Loan Sales Could Be Another Blow to Investors

Italy’s government is pushing to approve a borrower-friendly measure on bad loans by the end of the year as part of Prime Minister Giorgia Meloni’s drive to help troubled families and firms amid rising interest rates.

(Bloomberg) — Italy’s government is pushing to approve a borrower-friendly measure on bad loans by the end of the year as part of Prime Minister Giorgia Meloni’s drive to help troubled families and firms amid rising interest rates.

Meloni’s administration is seeking to finalize a new framework that would allow individuals and small corporate borrowers to repay debts that went sour in previous years for a fraction of their nominal value, according to people familiar with the matter, who asked not to be named before the plan is approved.

But the new law could further upset lenders and international investors in a country still reeling from a surprise windfall tax on banks. Investor concerns are focused on the possibility that the measures could wipe out their returns and jeopardize Italy’s market for non-performing loans. 

“Our aim is to lift as many people and firms as possible out of their bad loans, to settle old debts and get them back to work,” Industry Minister Adolfo Urso told Bloomberg News.  

The proposal was originally laid out late last year by lawmakers close to Meloni and it’s been championed by Urso. Opposition lawmakers have presented a separate bill on the matter. While the parliament is set to start discussing the measures next month, the government could decide to accelerate the approval including the bill in one of its next decrees, the people said.

As was the case with the bank windfall tax approved earlier this month, Meloni’s lawmakers are seeking to curb excess profits pocketed by financial players, according to the text of the draft law. Investors in non-performing loans, often international, bought these debts in dramatic circumstances and “speculate over the twin weaknesses” of banks and borrowers making “loan-shark-like margins” which are “frankly unacceptable,” according to the draft.

Buyback Rules

Investors typically buy the loans in portfolios or bundle them into securitizations — often with a state guarantee — for a fraction of their nominal value. Soured unsecured loans, such as credit card loans, change hands for less than 10% of face value, while real estate debts and other debts backed by assets can fetch higher prices. 

The new law would allow Italian borrowers with debts of less than €25 million ($27 million) that went sour between 2015 and 2021 to buy them back from funds that had purchased them from domestic lenders before the end of last year. Debtors would pay a 20% premium to the transaction price, according to the proposal presented by Meloni’s party and first reported by Italian media, including daily la Repubblica. 

“The proposed bill caps the maximum recovery on the best credits, while the loans where recoveries are low remain unchanged — this impacts the rationale for their investments,” said Gregorio Consoli, a Milan-based managing partner for finance at law firm Chiomenti. 

“As long as there’s uncertainty over the rules, funds will likely stop investing, banks would find it harder to sell their bad loans and this may have an impact on their ability to grant new loans,” Consoli said.

The measure would be a fresh blow for the Italian non-performing loan market which has attracted scores of international buyers since 2015. International funds have spent billions of euros to purchase bad loans held by Italian banks over the last eight years, allowing them to exit hard-to-recover positions while spurring new lending activity. 

Disposals helped cut Italian lenders’ non-performing exposure from €341 billion at the end of 2015 to €58 billion in March of this year, according to PricewaterhouseCoopers reports. 

The law could also have an impact on the guarantees provided by the state to help banks offload about €110 billion of debts. Under the so-called GACS program, banks are able to bundle their bad loans into securities for sale, while purchasing a state guarantee for the least-risky portions in order to make them more appealing to investors. 

“In its current form, it’s inevitable that the law would weigh on GACS, although it’s hard to quantify the impact,” Consoli said. 

–With assistance from Chiara Albanese and Tiago Ramos Alfaro.

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