OREANDA-NEWS. Volatile and uncertain cash flows mean Fitch Ratings may not be able to rate new Italian non-performing loan (NPL) securitisations for timely payment of interest on the notes in the absence of substantial cash reserves or liquidity lines, and therefore to assign them high investment-grade ratings. The recent increase in Italian banks' NPLs has put more pressure on the already lengthy and uncertain recovery process.

We understand from some market participants that new deals may limit or minimise the size of cash reserves or liquidity facilities by allowing interest payments on the notes to be deferred. We would rate new deals according to our "Global Rating Criteria for Non-Performing Loan Securitisations", updated earlier this year, and related criteria. Extended periods of interest deferral may further reduce the achievable rating level.

We also expect new deals to have a large component of seasoned, unsecured claims. Recoveries have been negligible or very low for such deals (less than 5% gross recovery rate from fully resolved unsecured claims), and significantly lower than those so far in secured Italian NPL deals (40% gross recovery rate from claims backed by properties).

Together with Italy's sluggish growth outlook, these factors would contribute to Italian NPL deals' struggle to achieve high investment-grade ratings.

Even when claims are secured, some pre-crisis deals have had slower recoveries than the special servicer originally envisaged, as cash has sat in Italian courts awaiting distribution to creditors. Cumulative recoveries have been 35%-40% lower than the servicer's original business plan at the same point in time. We estimate that only 30%-50% of the defaulted amount at closing has been fully resolved within five to seven years, based on the performance of the two outstanding Fitch-rated Italian NPL transactions.

Liquidity lines under the two outstanding deals have recently been drawn to pay interest on the rated notes, which also means investors have not received any principal distribution on some payment dates.

Various private, unrated deals are said to have been placed with specialised investors, and we have received several inquiries regarding possible public ratings for new deals in Italy. We are analysing originators' and special servicers' loan-by-loan data to develop NPL-specific recovery timing assumptions for Italy.

A recent law decree aims to accelerate the property enforcement process. Fitch expects the new rules to shorten the recovery process for new defaulted loans over the medium term. But it is too soon to tell exactly how effective they will be, especially on the huge stock of existing defaults.

The continuing rise in NPL ratios at Italian banks means they may turn to NPL securitisations to try to clean up their balance sheets. The NPL ratio hit a record high of 10.1% in May 2015, according to Bank of Italy data. New defaults are continuing to come through, while Italy's very long recovery process means it takes even more time to clear existing NPLs.