The GACS scheme has been a useful tool for dealing with the high stock of NPLs in the balance sheets of Italian banks. Since its activation, the NPL ratio has dropped from 16.8% in December 2015 to a historic low of 2.6% in June 2022, with a total volume of €108.6 billion cleared.
The current situation
Although the option to draw on state guarantees expired on June 14, 2022, no renewal agreement has been reached between the Italian government and the EU. Today, discussions with European authorities are still ongoing, and there is talk of a proposal to renew for 24 months with the option of a further extension of another 12 months.
Although banks and investors are pushing in this direction, Italian politicians are delaying due to three factors:
- The uncertainty of the next wave of NPLs resulting from COVID,
- Instability due to the war in Ukraine, and
- The level of performance of portfolios already securitized through the GACS scheme.
GACS Scheme performance concerns
This last factor causes particular concern for all actors involved. In fact, according to a study conducted by DBRS-Morningstar in September 2022, 14 of the 25 largest GACS in terms of GBV show insufficient performance compared to business plan values. Although the deterioration in performance is significantly influenced by the pandemic crisis, the problem has deeper roots. Scope Ratings already warned in February 2020 that, although profitability was overall solid, half of the transactions were behind expectations of business plans. In particular, the trend worsened with operations such as Elrond (-27%), Aragorn (-20%), 4Mori Sardegna (-18%), and Siena NPL 2018 (-17%), which fall within the cluster of the first GACS operations carried out.
The role of COVID
The spread of COVID has exacerbated this trend even more due to the prolonged closure of Italian courts and therefore the impossibility of recovering the most substantial part of collections resulting from legal proceedings. Two months after the lockdown, Scope Ratings showed a 46% decrease in collections, going from average recovery values of approximately €160 million in the first quarter of 2020 to a minimum of €88 million in April. After a strong rebound in the summer months (with peaks of €200 million in June-July), the situation gradually stabilized on negative performance: at the beginning of 2021, 15 out of 22 operations showed collection values lower than pre-COVID values.
Compared to the pre-COVID average value of €207 million, only collections from 6 months exceed this threshold. Looking more closely, another alarming fact emerges: in the months of December 2020, June 2021, and September 2021, higher volumes were reached thanks to the contribution of out-of-court strategies (DPO and massive sales on the secondary market) or particularly high individual performances (such as Prisma SPV in September 2021, which accounted for half of the collections made). Although out-of-court strategies are a possible exit strategy, they represent a significant trade-off: an anticipated realized cash flow compared to an enforcement procedure balanced by a greater discount of cash flows with a consequent reduction in generated profit.
Latest numbers and figures
The latest data provided by Scope Ratings (November-December 2022) show a now consolidated trend: lower collection values compared to business plans with few performing operations. In particular, from the DBRS Morningstar report, we have analyzed the two key metrics of some GACS:
- CCR ratio
- NPV ratio
The first indicates how much has been collected compared to expected values, while the second evaluates the quality of recovery of closed positions; a cross-reading of these data is essential to understand the performance status of a GACS. Specifically, we have analyzed 2 different trends: operations originated between 2016 and late 2018 show a weighted average CCR value of 71.3% (collections below expectations), while operations originated in the following three-year period show a CCR value of 128.9%. The most encouraging data is the NPV ratio, which consistently stands above the trigger event, if not even above 100% (better quality of collections compared to expectations) in both clusters.
GACS show on average lower revenues than expected, but the quality of the realized values is higher than expected. From the analysis of these metrics, it could be hypothesized that servicers are performing well in credit recovery, but they are unable to develop precise business plans on the actual timing of realization.
The significant disparity between GACS originated before and after 2018 provides another interesting insight: it is possible that over time, know-how has been developed on the management and evaluation of non-performing loans. In addition, another factor to consider may have been the difficulty in managing high volumes of data in a short time.
Managing a portfolio with hundreds of thousands of debtors (to which are added as many guarantors and as many real estate guarantees) is not a simple activity, especially if managed with traditional computer tools, both in the onboarding and ongoing phases of the operation.
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