A decree law approved by the Italian government in December foresees a new type of covered bond backed by assets such as SME loans, according to Fitch. The Italian banking association is understood to be broadly in favour of the product, but wants a clear distinction between it and OBGs.

Italian prime minster Enrico Letta and minister of foreign affairs Emma Bonino presenting the Destinazione Italia project

The Italian government on 13 December approved Law Decree 145 “Destinazione Italia”, which includes amendments to Law 130 of 1999 that governs obbligazioni bancarie garantite (OBGs), Italy’s legislative covered bonds.

Fitch today (Tuesday) said that the law decree proposes a new category of Italian covered bonds, and that the “collateralised bank bonds” would be dual recourse bonds similar to OBGs, but secured by assets currently not eligible by law for OBG cover pools.

“These include corporate bonds, loans to small and medium enterprises (SME), shipping loans, and lease and factoring receivables, as well as tranches of securitisations backed by these assets,” said the rating agency.

The new bonds are outlined in Article 12 of the law decree, which adds provisions to Law 130, according to Fitch. They are intended to provide banks with an additional funding tool and to encourage the banks to increase lending to companies. The provisions for the collateralised bank bonds are understood to draw on Article 7bis of Law 130.

An official familiar with the law proposal said that Italian banks are generally in favour of SME-backed covered bonds, but that it is important for a clear distinction to be drawn between OBGs and the new debt instrument.

“We would have liked an entirely new framework for these new bonds,” he said.

The Association of Italian Banks (ABI), though broadly in favour of SME covered bonds in general, is therefore lobbying for modifications to the law decree to try to make clearer the distinction between OBGs and the new collateralised bank bonds, according to the official.

“It’s a good starting point, but we’re trying to improve things,” he said.

According to Fitch, law decree 145 would become law if approved by the Italian parliament within 60 days of its publication in the Italian Official Gazette, and secondary legislation would need to be finalised before issuance of the new debt instrument would be possible.

The rating agency outlined how a new collateralised bank bond might be rated, saying that liquidity gaps and the creditworthiness of the underlying pools, as assessed by Fitch, could limit the uplift above the issuer rating for the new category of covered bonds.

It said that any maturity mismatches between the cover assets and bonds post-issuer default would be difficult to bridge and that the new asset types are less tradable than those eligible for OBGs.

“Therefore the typical soft bullet redemption profiles of OBG rated by Fitch, which have a maturity date extension of up to 15 months, would not result in the same notching differential if applied to the collateralised bank bonds,” it said.

Fitch expects the credit quality of the assets eligible for this debt instrument to be worse or more volatile than those eligible for OBGs.

“Depending on the availability of performance data, this could either lead to higher breakeven overcollateralisation levels for a given rating level or limit the potential rating uplift of the new-style bond above the bank’s Issuer Default Rating (IDR),” it added.

Fitch noted that the decree law does not refer to Bank of Italy capital requirements for issuance of covered bonds and said that “this would suggest that issuance of the proposed new debt instrument might be open to smaller lenders currently not eligible to issue OBGs”.