Due to the more restrictive criteria for GACS securitisations, Scope expects that only 15%-17% of bad loans outstanding at the end of 2018 will be securitised in 2019 via the renewed GACS scheme. Including the EUR 8.4bn securitised in February 2019 (before the renewal), Scope expects that around EUR 25bn will be securitised in different GACS (old or new) eligible transactions.

This is significantly lower than 2018 volumes: Scope rated 14 GACS-eligible securitisations last year which had a GBV of around EUR 45bn. An important factor here is that default rates observed in 2018 are back at pre-crisis levels of 2006–2007, which limits the amount of new bad loans eligible for GACS securitisations.

The market will also have to adapt to some of the new elements of the GACS scheme, which will delay and to some extent hamper usage of the renewed scheme. The first key change is that if cumulative collections are below plan for two consecutive payment dates, after the guarantee has been executed, then servicers must be substituted.

“We expect that as a reaction to this structural feature, servicers will craft business plans which are more back-loaded to avoid the risk of a servicer substitution event occurring shortly after notes have been issued,” said David Bergman, executive director in the structured finance team of Scope Ratings.

This will lead to servicer business plans that are more aligned with Scope assumptions, which have typically been significantly more backloaded than those of the servicers. More back-loaded business plans will lead to lower sale prices for NPL portfolios, which could negatively impact the attractiveness of the GACS scheme for banks.

The second key change is that if cumulative collections fall below 90% of the levels in the business plan, at least 20% of servicing fees have to be subordinated to full repayment of the senior notes or, if earlier, until cumulative collections return above 100% of levels in the business plan. “Most GACS-eligible transactions already contain some kind of deferral or haircut on the servicing fees, but the new feature is generally stronger than what has been seen so far,” Bergman added.

The third key change is that interest on mezzanine notes will be automatically subordinated to principal payments on senior notes if cumulative collections are less than 90% of the business plan. Once interest on the mezzanine notes has been subordinated, it will only be paid if the cumulative collections ratio returns above 100% of the business plan, or the senior notes have been fully repaid.

“The new subordination mechanism is more protective of senior notes, which is credit positive. On the other hand, the increased risk that mezzanine notes will be subordinated will reduce investor appetite for mezzanine notes,” Bergman said.

The fourth key change is for transactions to be GACS-eligible the senior notes have to be rated at least BBB, compared to BBB- in the previous version of the scheme. In 13 of the 18 GACS-eligible transactions rated by Scope between 2017 and 2019, the senior notes were rated BBB or higher.

“The lead time to prepare and complete GACS-eligible transactions is generally four to six months. We expect that most of the additional issuance to get to our forecast of EUR 25bn in GACS-eligible transactions will materialise in late summer or autumn,” Bergman concluded.

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