The Bank of Italy has made clear to the market its views on the treatment of repayment clauses in securitization transactions.
Last February the Bank's prudential guidelines on the subject were communicated to Italian banks. The Bank had examined contractual clauses for call options and trigger events.
If a call option is included in the contractual documentation, the transaction may be closed prior to its natural maturity. The vehicle has in this case the right to prepay the asset-backed notes and the originator has the right to repurchase the receivables sold.
The call option may also be associated to a step-up of the yield of the notes related to the exercise or non-exercise of such an option.
The trigger events are the classical pre-identified circumstances that cause the early termination of the transaction when these events arise. If such clauses are introduced in the securitization transaction, the current views of the Bank are that the originator and its banking group will be required to apply an asset allocation equal to that of the portfolio transferred for the securitization. This has a clear and not indifferent economic impact on transactions.
To avoid such negative economic consequences the relevant transaction must contemplate that (i) the originator and the companies belonging to its banking group will never become the assignees of the transferred assets and (ii) should they become assignees of the transferred assets, such assets will not exceed the 10 per cent of the lower value between the nominal value of the transferred assets and the transfer price and will not include bad debts or delinquent receivables unless the repurchase price is lower or equal to their current value at the date of exercise of such clauses.
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