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Ministry of Economy and FinanceGuarantee on Securitization of bad loans: how to calculate the price

Press Release N° 21 of 01/28/2016

 The pricing of the State guarantee on senior notes will be on market terms in order to ensure the aid-free nature of the scheme.
It will include market-conform remuneration for the risks taken by the State and depending on the maturity of the notes.
The market benchmark is given by the following:

  • A basket of single name CDS covering all Italian companies (financial and non-financial) which benefit of at least a rating of S&P, Fitch or Moody's and with a rating equal to BBB/Baa2, BBB-/Baa3 or BB+/Ba1 if the actual rating of the senior tranche is BBB-/Baa3, BBB+/Baa1, BBB/Baa2 or BBB-/Baa3 if the actual rating of the senior tranche is BBB/Baa2, and BBB/Baa2, BBB+/Baa1 or A- if the actual rating of the senior tranche is BBB+/Baa1.The basket composition will be fixed at the time of the approval of the scheme for the duration of the scheme; when the rating for a company in the basket changes so that it falls outside the ratings represented in the basket, it will leave the basket.
  • For each CDS price as part of the benchmark basket, the average over the last 6-month of mid-prices at the time of the transaction is taken from the default database in Bloomberg for each single name CDS. Then a simple average over the resulting prices is taken to arrive at the CDS basket benchmark value.
  • A basic step up fee is charged on the guarantee in the following way:
    • In years 1, 2 and 3, the price of the 3y benchmark CDS is paid on the outstanding amount of the senior tranche
    • In years 4 and 5, the price of the 5y benchmark CDS is paid on the outstanding amount of the senior tranche
    • Thereafter, the price of the 7y benchmark CDS is paid on the remaining outstanding amount of the senior tranche
  • An additional penalty is applied in the following way:
    • In years 4 and 5, if the senior tranche has not been repaid in full by the end of year 3, a penalty charge is added to the basic fee corresponding to making up the difference in payments from a 5y benchmark CDS held over the full period of years 1 to 5 compared to the actual payments made in years 1 to 3.
    • After year 5, if the senior tranche has not been repaid in full by the end of year 5, a penalty charge is added to the basic fee corresponding to making up the difference in payments from a 7y benchmark CDS held over the full period of years 1 to 7 compared to the actual payments made in years 1 to 5.
  • The calculations in d) are made on the basis of the following assumptions:
    • A discount rate of 2%
    • A linear repayment schedule of the senior tranche to be fully paid off after year 7.
Rome 01/28/2016

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