The GACS: an instrument created to facilitate divestments — what developments lie ahead?

As desired by many, the use of the government guarantee instrument on impaired credit securitisations (GACS) has been extended.

Approved in February 2016 and extended into May 2019, it will now be valid until 14 June, 2022.


While the GACS instrument has helped to reduce or at least mitigate the NPL problem on the balance sheets of Italian banks, it has now been reported from various quarters that most of the recoveries of portfolios with GACS are going worse than expected, which, given the number of portfolios that have been sold, is certainly not something to be underestimated. Indeed, according to Banca Ifis’ latest Market Watch of January 2021, with the exception of two, all the other GACS portfolios suffered a drop in performance.

On the other hand, BRS Morningstar, analysing the performance of a total of 22 NPL securitization transactions with GACS which were evaluated between 2016 and the first half of 2020, calculated that, to date, servicers of 21 of those transactions have modified their businesses recovery plans, forecasting a decrease in the amount of gross recoveries compared to the original business plans of up to 20.4%.

GACS provides for the intervention of the State, and more specifically of the MEF, to guarantee the repayment of senior notes in securitisation transactions of loans classified as non-performing. The main risk of a GACS, therefore, is that portfolio receipts will be lower than the initial business plan. This means that the bonds may be partially reimbursed and therefore, the coffers of the State and therefore of the taxpayers, already burdened by a high public debt, could suffer shocks of hundreds of billions of euros. This is the main, but not the only, source of alarm over the GACS instrument.

According to Clemente Reale, who leads Hoist Finance in Italy, public guarantees on securitisations “are a cause for concern, there may be a risk for the State” since “prices have been too high and recovery curves are underperforming”. In fact, the use of GACS has also affected the prices of divestment transactions. Also according to Banca Ifis, transactions with GACS contributed to the increase in the average price of transactions on secured Npl portfolios to 36% (from 27% in 2019) and the average price of mixed secured and unsecured portfolios to 30% (from 24%) . “Times are not easy, due to the pandemic which has lengthened the recovery time,” and now “even professional investors are losing their money: if the state loses it, they lose it too.”

In an interview with “Republica” given by Raffaele Mazzeo, Partner at RSM Italy, we read: “With the GACS, the market has taken off and large investors and well-equipped servicers have entered the field, but it seems clear to me that many transactions will fail: the initial prices were too high, the recovery curves inadequate, the courts remain slow and the weak economy is punishing.”

Among the possible causes of the unsatisfactory performance of the GACS, in addition to the pandemic and the slowness of judicial recovery, there is the imbalance between the volumes being managed and the objective management capacity of the servicers involved in this type of operation, which to date only number 7!

As Avv. Dino Crivellari of Master Legal Service also noted, what is astonishing is that no one, when the GACS were repeatedly extended, was concerned about the fact that transferring almost 200 billion Npls from banks to servicers in a few years could have entailed the risk of a loss of efficiency in the debt recovery industry. In recent years, massive divestments have forced servicers to grow in size and technology in a very short time, which has probably not allowed them to adequately test organizational models and select resources with the necessary skills.

The GACS therefore helped to create a real credit management industry geared towards handling large volumes with a standardised approach.

In the processing of positions with GACS with underlying real estate, precisely because of the high load of positions under management, the tendency is to recover them by means of judicial auctions rather than by looking for “tailor made” solutions, designed to bring the debtor back to performing status or, alternatively, by seeking solutions capable of creating greater value for the underlying real estate, thus also reactivating the economic fabric surrounding the company in default.

This condition of “massive” and undifferentiated processing is turning into a kind of “net/parachute” that does not encourage the search for new models that are more effective in terms of profits for investors and that have positive social consequences.

In addition to all this, the management of bank credit recovery is a complex procedure that runs into various difficulties: from the quality of the information and data transferred from the originator to the servicer; to the alternation of lawyers on the same case which also has repercussions on the duration of the procedures (which are already not particularly short); to the tendency of the large servicers to manage credits on a massive scale.

The Bank of Italy’s announced checks on the actions of the servicers managing these loans are therefore welcome as a guarantee for the State and all taxpayers.

At the same time, it is hoped that better use will be made of the GACS instrument, perhaps along with a gradual reduction in its use, in order to stimulate the credit management market towards a much-needed evolution that has to take into account the specific skills in the (debtor’s) sector and new operating models.




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