Wait, What? Italy is Turning Bad Debt into Assets

I had to read this one a few times to understand what they’re trying to scheme up here. If I’m reading this correctly, Italian banks are going to be able to magically disappear annoying bad debts from their balance sheets by securitizing them and also retaining the senior notes, by using government guarantees.

They’ll be able to use it as collateral for deals, effectively turning a debt into a fucking asset. Lolz. How wonderful.

Banca Popolare di Bari SCpA is set to become the first Italian lender to use a government guarantee meant to help banks securitize bad loans for sale. Instead of selling the whole lot, the small cooperative bank plans to retain the bulk of the notes, which it can use as collateral in other transactions, according to people familiar with the matter. At the same time, it will wipe the full 480 million euros ($539 million) of bad loans from its books, said the people, who asked not to be identified because the information is private.

The deal may provide a template for Prime Minister Matteo Renzi’s plan to help banks reduce a pile of about 360 billion euros of troubled loans, equal to a quarter of Italy’s gross domestic product. As part of a deal reached with the European Union in January, banks can bundle bad loans into securities and buy state guarantees for the least-risky portions, provided those notes have an investment-grade credit rating.

“The Popolare di Bari deal will set the benchmark for other Italian lenders planning to structure securitizations with state guarantees on senior-ranking notes,” said Jacopo Ceccatelli, chief executive officer of Marzotto SIM SpA, a Milan-based broker-dealer. “It may make the structure more appealing if banks are allowed to remove bad debt from books while keeping the senior tranche.”

Popolare di Bari got informal approval from PricewaterhouseCoopers LLP and the Bank of Italy to keep the senior portion of its securitization, while also removing the entire face value of the bad loans from its books, the people said. The bank plans to sell the mezzanine and equity tranches by Sept. 29, one of the people said.

“The derecognition from the books of the whole debt makes sense, because the senior tranche is backed by a guarantee that removes any risks linked to loan recoveries,” said Vincenzo Longo, a strategist for IG Markets Ltd. in Milan. “These deals in any case will force banks to write down loans.”

The bad loans underlying Popolare di Bari’s securitization were priced at 150.5 million euros, or about 31 percent of face value, according to Moody’s Investors Service. The 126.5 million-euro senior portion of the securitization is rated Baa1, three levels above junk, and pays 50 basis points more than the six-month euro interbank offered rate, Moody’s said in a Sept. 2 report.

The retained senior tranche can be used as collateral for interbank lending, though not for European Central Bank financing transactions, the people said. The structure could also allow banks to reduce interest payments on senior notes and increase them on riskier tranches to attract outside investors, said Francesco Castelli, a London-based money manager at Banor Capital, which oversees more than 4.5 billion euros.

Popolare di Bari will pay about 3 percentage points for the securitization and state guarantee, the people said. JPMorgan Chase & Co. is arranging the deal, while Prelios SpA reviewed the portfolio and will manage the recovery of loans sold to investors.

The bank plans to securitize another 400 million euros of bad debt by March, with a senior tranche covering at least 80 percent, the people said.

Banca Monte dei Paschi di Siena SpA, Italy’s third-largest bank, plans to securitize 28 billion euros of bad debt for 33 percent of the gross value and may seek a government guarantee on as much as 6 billion euros of the 9 billion euro package.

“Retaining the senior tranche may help sellers to make riskier tranches more appealing to external investors,” Castelli said. “If the Popolare di Bari securitization works, many other Italian banks will look to replicate it on a larger scale.”

What does this mean for stocks? Well, it means Italy is on the verge of pulling a gigantic accounting trick with PWC to get bad debts off the books of banks by securitizing them and then retaining the senior tranche on the books to serve as a fucking asset, all the while the state guarantees losses.

Why doesn’t the bastard banks simply sell or write down the loans and move on?

Banksters gotta bank.