Law Decree no. 34/2019 (“Decree 34”) providing for new legislative and tax measures in order to boost economic development in Italy was published in the Italian Official Gazette on 30 April 2019.
Among the various provisions included in Decree 34 we would like to highlight some changes made to the Italian Securitisation Law (Law 130 of 1999) which are specifically designed to widen the scope of activity that may be undertaken by Italian securitisation vehicles (SPVs) and supersede some pre-existing legal rigidities which made difficult or inefficient: (i) the securitisation of revenues arising from the disposal of real estate assets and (ii) the employment of dedicated real estate companies in the servicing of NPLs collateralized by real estate assets.
The main changes to the Italian Securitisation Law in connection with Decree 34 may be summarised as follows:
1. Transfer to SPVs of credit facilities in connection with securitisation of NPLs to facilitate disposals of so called “unlikely to pay” loansIn the case of securitisations of NPLs held by banks or financial intermediaries, the seller of the NPLs will now be able to couple the assignment of the receivables to the SPV with the transfer of the underlying contractual obligations as lender to another bank or a financial intermediary. More precisely such new provisions would apply to the so called “aperture di credito” which are the typical revolving credit facilities granted to individuals and corporates for general commercial purposes and managed directly through credit and debit transactions on the main current account of the debtor (including in the form of overdraft facilities). Such change should be construed and read taking into account that under the Italian Securitisation Law only receivables (and not contractual undertakings) can be transferred to the SPV. Such change has been introduced to enable the structuring of securitisations of so called “unlikely to pay loans” (UTP) so to allow the securitisation of underlying loans which are not wholly drawn (because of the revolving mechanism) and which are not terminated or accelerated, as opposed to defaulted loans where the underlying loan agreement has already been terminated and accelerated. The fact that the underlying loan is not terminated would give broader scope to the SPV to implement proper strategies to renegotiate/restructure the distressed debtor position. The new provisions clarify that:
- payments by the assigned debtors can be made on the same account held by the selling bank even if the underlying loan or credit facility was assigned to a new lender;
- any amount collected from the securitised borrowers is fully segregated from the assets of the selling lender (now a mere account bank). Accordingly no claims or actions can be brought in respect of such collections by any creditor other than the ABS noteholders and the bank or financial intermediary assignee of the lending position under the underlying credit facilities.
Main takeaway: more flexibility in the structuring of securitisations of UTPs by combining securitisation structures with the competence and skills of specialty lenders focused on lending to distressed borrowers. Key factor will be to find an efficient and “bankable” way to allocate risks between the noteholders and the new lender.
2. ReoCos and securitisation of cash flows generated by real estate and registered assets
The second important set of changes made to the Italian Securitisation Law concerns the new provisions aimed at facilitating securitisation structures involving real estate or other registered assets. In this respect it is worthwhile to give some background on the reason for such changes.
Development over the years in the strategies of management and recovery of Italian mortgage NPLs have led investors to develop the employment of dedicated real estate companies owned by the investors (so called ReoCos) to be used as purchaser of the mortgaged assets in the context of enforcement proceedings whenever the auction value of the asset was about to go under the allocated purchase price for the corresponding securitised loans. The employment of ReoCos was initially made in the absence of a specific legal framework. At a later stage the role of ReoCos in the context of securitisation has been recognised by Italian law through a previous amendment to the Italian Securtitisation Law made through Law Decree n.50 of 2017 but the relevant provisions have now been improved and expanded in an effort to provide some more clarity and, above all, to clarify the tax treatment of ReoCos following some positions Italian Tax Authorities in recent months which made such structures highly inefficient. This second set of changes is divided into three main areas: (i) clarification of the scope of use of ReoCos, (ii) introduction of the securitisation of real estate or registered assets (i.e. where the SPV issuing ABS holds title in the assets) and (iii) optimisation of the tax treatment of ReoCos in order to supersede certain tax inefficiencies demonstrated in the past.
Scope of action of ReoCos
Securitisations involving NPLs collateralised by real estate assets can contemplate that the SPV would work jointly with one or more ReoCos which would be entitled to acquire, manage, restructure and dispose of the assets securing the securitised receivables. Any proceeds generated by the ReoCo would be segregated in favour of the holders of the ABS notes issued by the SPV so that the ReoCos’ cash flow can be treated - in terms of investor protection – in exactly the same way as the securitised receivables. ReoCos may be used: (i) as purchaser of the real estate assets in relation to enforcement or debt restructuring procedures: in such context it is expressly provided that ReoCos would be entitled to manage the securitised debt together with the asset in order to provide flexibility in the optimisation of debt recovery strategies, or (ii) as purchaser of the assets directly from the seller/originator in connection with the securitisation of NPLs arising from financial leasing facilities (i.e. where the underlying asset is owned by the lending entity rather than secured for its benefit).
The new legislative framework expands the role of ReoCos by providing that: (i) one or more ReoCos can be employed in the same securitization and such entities must be incorporated in the form of limited company with the exclusive corporate purpose of acquiring, managing and developing, in the exclusive interest of the securitisation transaction, the collateral assets (i.e. real estate assets or registered assets, as well as the other goods and rights granted or constituted, in any form, as collateral for the securitized receivables; (ii) the assets acquired by a ReoCo in the context of a securitisation as well as any amounts due or paid to the ReoCo, are to be deemed as a “segregated” (patrimonio separato) at the level of the ReoCo portfolio. and therefore no action by creditors other than the SPV (on behalf and in the interest of the ABS holders; and (iii) amounts in any way deriving from the holding, managing, or disposal of the assets, due by the ReoCo to the SPV, are deemed , for the purposes of the Securitisation Law, to be payments made by the securitised debtors and therefore can be applied exclusively for payment to the ABS holders and for payment of securitisation costs.
One point which is not addressed by the new set of provisions applicable to ReoCos is whether a ReoCo can be owned by the SPV itself. Despite such uncertainties there are some legal reasons which might lead one to consider it more appropriate for ReoCos (even if controlled by the ultimate investors) not to be under the direct or indirect control of the SPV in order to preserve tax neutrality and bankruptcy-remoteness of the latter.
One important point to take in mind is that the above changes to the Italian Securitisation Law concerning the use of ReoCos have been introduced in order to provide legal certainty to a legal scheme already broadly adopted by investors active in real estate related NPLs but they are available also to other registered assets such as ships, aircrafts and car fleets.
Main takeaway: more clarity on the level of protection of ABS investors for transactions involving dedicated companies acting as purchaser of the collateral assets (such as ReoCos) and possibility to employ more companies with such role in the same securitisations.
Real Estate Securitisation
With the introduction of a new article 7.2 in the Italian Securitisation Law further clarity has been provided to the securitisation of revenues arising from real estate assets or other registered assets. From an initial interpretation of the new article 7.2 it would appear that SPVs would now be entitled to own directly real estate or other registered assets (e.g. ships, aircraft and cars) in order to carry on securitisations having such types of assets as underlying collateral for the notes (as opposed to secured receivables where the SPV would have just a security right over those assets).
Such securitisations must meet the following requirements:
- the actual management of the securitized assets must be delegated to a professional asset manager (i.e. a bank, a financial intermediary or a regulated asset manager (società di gestione del risparmio);
- for each transaction the assets and revenues to be securitised must be clearly identified so as to give certainty to the perimeter of asset segregation. Securitised assets (including cash flows generated by them) would be segregated in favour of the noteholders, hedging counterparties of the SPV (if any) and third party lenders;
- an SPV carrying on securitisation transactions under the new article 7.2 of the Italian Securitisation Law cannot carry on any other type of securitisation: from an initial interpretation of such restriction it would appear that such SPVs can be used for multiple transactions but not for transactions other than those under the new article 7.2 of the Italian Securitisation Law (so, for instance, an SPV carrying on a securitisation of a real estate portfolio cannot be used for RMBS or CMBS securitisations);
Main takeaway: there are still some points of this new set of changes which give rise to some uncertainties but, overall, these changes constitute an important expansion to the scope of action of Italian Securitisation Law. The new provisions might find room for application also in respect of distressed real estate funds and in the shipping finance industry.
3. New Tax Provisions
With the aim of superseding some pre-existing legal constraints and to support the enhancement of the underlying real estate assets, many important tax law changes have been enacted both in the context of the servicing of NPLs collateralized by real estate assets and in respect of the newly introduced provisions on securitisations of real estate and registered assets.
ReoCo tax treatment for direct tax purposes
The new provisions applicable to ReoCos - as decribed above - provide that the activity of acquiring, managing and developing assets securing NPLs should not be carried out by the ReoCo as its own investment activity, but rather as a service activity in the exclusive interest of the securitisation, with all proceeds (net of incurred expenses) deriving from such activity due and transferred to the securitization vehicle.
In the hands of the ReoCo, the fact that the whole net economic return deriving from the holding, managing, or disposal of such segregated assets should incur an exemption of such proceeds from corporate income tax (IRES) and local tax (IRAP).
This new formulation of the tax legislation on securitization transactions should make it possible to avoid the consequences of the previous clarifications of the Italian tax authorities (see tax ruling No. 18 of 30 January 2019 and No. 56 of 15 February 2019) where they argued that the in the context of a securitization transaction the income of the real estate vehicle should have been subject to ordinary taxation both for IRES and IRAP purposes, since the assets and rights acquired by such corporate vehicle cannot be considered as a “segregated pool of assets” (patrimonio separato).
ReoCo tax treatment for indirect tax purposes
Tax changes to the Securitisation Law have also been enacted in respect of the transfer taxes (registration, cadastral and mortgage taxes) to be applied on the transfer of real estate and leasing agreements to the ReoCo, which are now subject to a fixed sum of EUR 200.00 for each of such transfer taxes.
Under certain circumstances, the transfer of real estate from the ReoCo to third parties is also subject to a more favorable tax regime; more precisely, registration, cadastral and mortgage taxes are subject to a fixed sum of EUR 200.00 for each of such transfer taxes if:
- the purchaser, being an entity carrying out business activities, undertakes to resell the asset within 5 years from the acquisition; or
- the purchaser, being an individual who can benefit from a main dwelling tax incentive, undertakes not resell the asset within 5 years from the purchase.
Real Estate Securitization SPV: tax treatment for direct tax purposes
The assets of the SPVs that carry on securitisations of real estate or registered assets under the new article 7.2 of the Italian Securitisation Law are expressly considered as segregated assets (patrimonio separato) and therefore should not be subject to corporate income (IRES) and local (IRAP) taxes during the securitisation period.