No. 9 - Project FINO: defining a framework to understand market prices and analysing the main drivers

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by Andrea Rafaniello, Giovan Battista Sala, Marco Scotto di Carlo June 2017

On 13 December 2016 the UniCredit Group announced that an agreement had been reached to sell to PIMCO and FORTRESS (the Investors) a bad loan portfolio relating to Italian firms for a gross book value (GBV) of €17.7 billion (Project FINO). In order to prepare the pro forma statements for the capital increase prospectus, an average price of approximately 13% of the gross book value was assumed. This value is much lower than the average recovery rate of Italian banks’ bad loans reported in recent papers published by the Bank of Italy. According to Ciocchetta et al. (2016), the average recovery rate for all bad loans written off by all Italian banks in the decade 2006-15 is 43% of GBV. The rate falls to 34.7% in 2014-15, partly due to an increase in the value of positions sold on the market (selling prices are typically much lower than recovery rates on positions worked off internally).

The purpose of this note is to examine the specific features of the FINO operation to see whether they can explain the difference between the selling price and these average recovery rates. The analysis finds that most of the difference can be justified by a number of factors: the bank’s decision to sell the portfolio on the market; the fall in market-wide recovery rates in 2014-15; the specific features of the FINO portfolio (it consists entirely of exposures to firms; the positions are less collateralized and have a higher vintage than average). A quantification of these effects is provided. Other specific features of FINO, which cannot be quantified, also played a role. Specifically, UniCredit retains an upside in the operation. Other things being equal, this probably persuaded the bank to accept a lower upfront price.

These results have two main implications. First, the price of the FINO operation broadly confirms the available evidence on bad loan recovery rates in Italy. Second, the operation illustrates the bespoke nature of transactions in this market. Owing to these specific features of FINO, its average price cannot be deemed ‘representative’ of the bad loan market and be automatically applied to other securitizations of NPLs by other banks.