“We believe the Italian NPL sector will continue to under-perform into the medium term as the consequences of the pandemic have not yet worked themselves through the economy. By the fourth quarter of 2021, we estimate that the share of transactions with collection volumes lagging servicers’ forecasts will align with second quarter figures,” said Rossella Ghidoni, director in Scope’s structured finance team.

At the end of the first half of 2021, 18 out of 30 transactions were lagging servicers’ projections. Scope does not expect this to change by the end of the year.

The NPL Performance Index, which tracks cumulative collections against servicers’ original projections, stands at 94, reflecting weakness in the underlying market. Scope expects it to remain below the baseline of 100 into the medium term. Meanwhile, notes are expected to amortise in six to eight years, based on the Scope NPL Dynamic Coverage Index (SCI), which tracks the speed of note amortisation.

The share of positions closed by servicers remains low. And on those positions that have closed, median profitability has been 87%, below Scope original expectations. This metric still covers a relatively small portion of securitised portfolios as servicers have closed 5.4% of original GBVs on average. However profitability is expected to become a progressively more relevant metric as servicers progress their work-out activity.

Poor transaction performance is not just a function of poor overall market conditions; servicers follow different recovery strategies. “Servicers that are nimbler in adapting to the conditions brought about by the pandemic and have selected the best-suited workout strategies have counteracted some Covid-19 impacts and improved transaction performance,” said Paula Lichtensztein, senior representative of Scope’s structured finance team. “Extra-judicial strategies like discounted-pay-offs and note-sales have helped compensate for slower court proceedings; we expect this to continue until courts fully recover from backlogs.”

So far, the core recovery strategy of servicers has been the judicial route, with an average of 44.9% of transaction collections, followed by DPOs (25.7%), and note sales (8.3%). Other recovery routes such as REO disposals through the implementation of Real Estate Owned Companies (ReoCo) structures and execution of guarantees have occasionally been adopted.

Download the semi-annual Italian NPL collections report here.