Performance of Italy's biggest bad loan deal deteriorates: Moody's

VENICE, Italy (Reuters) - Loan recoveries are falling short of expectations in a number of Italian bad debt securitizations, including a record deal by bailed-out Monte dei Paschi di Siena BMPS.MI whose performance has weakened further in the past six months, Moody's said.

Italian banks have offloaded 170 billion euros ($186 billion) in bad loans in recent years, often repackaging them as securities in deals that made use of a complex guarantee scheme introduced by the state to ease disposals.

Lower-than-expected collections increase the risk of potential losses for investors in such deals, and may eventually leave Italian taxpayers on the hook were the guarantee scheme to kick in.

In a bi-annual report on the European bad loan securitization market released on Thursday, Moody’s said that nine out of 14 Italian bad loan securitizations examined in the study lagged behind initial projections in terms of the proportion of loans that had been recovered.

“Italian servicers are generally recovering at a slower pace than they initially expected,” Moody’s said, adding it would closely monitor the underperforming deals to see if the difficulties could be a blip or a more lasting issue.

The agency said the slow start may be linked to the complexities of uploading the huge mass of data which collectors need to have access to in order to try to recover the debts.

Moody's said most of the underperforming deals were faring better compared to March, when a similar report was published, with the exception of Monte dei Paschi's 24-billion euro bad loan securitization sale and a 1.4 billion euro deal completed in 2017 by regional lender Creval PCVI.MI.

The 2018 ‘Siena’ deal, Italy’s biggest such transaction so far, was a key plank of the Tuscan bank’s 2017 state bailout.

To help its lenders comply with supervisory demands to shed the legacy of a brutal recession, Italy in 2016 launched a scheme that allowed lenders to buy a guarantee from the state to wrap the least risky notes in sales of bad debts repackaged as securities.

Some 62 billion euros in bad loans have been sold so far under the scheme, leaving the state exposed on 11.7 billion euro worth of notes.

In Monte dei Paschi’s case, the state provided its guarantee on notes worth 2.9 billion euros out of a total of 4.3 billion euros in debt issued to finance the purchase of the 24 billion euro bad loan portfolio from the bank.

Moody’s said estimated recoveries on the Siena deal stood at 1.64 billion euros against a business plan projection of 1.93 billion, pointing to a 15% underperformance. The Creval deal is underperforming its business plan by 28%, the report showed.

That compares with an aggregate performance of the 14 deals which is broadly in line with expectations, Moody’s analyst Michelangelo Margaria said.

Reporting by Valentina Za; Editing by Susan Fenton