(Bloomberg) -- Banca Popolare di Bari SCpA, an ailing Italian lender, is in advanced negotiations with an international credit fund over insuring its loans against default, seeking an easier way to reduce risk on its balance sheet.
The potential transaction, known as a synthetic securitization, involves buying insurance from Christofferson Robb & Co, thereby transferring the risk of the loans going sour to the fund in return for a fee, according to people familiar with the talks. Several other lenders are already considering similar deals, the people said, asking not to be named because they’re not authorized to speak publicly.
Popolare di Bari will be the first such transaction in Italy since new European regulations came into effect this year that allow banks using standardized risk models to factor in more relief from synthetic securitizations. The changes make the structure more accessible to smaller lenders.
Those reforms are likely to trigger a wave of small and medium-sized Italian banks signing similar deals aimed at reducing risk on their balance sheets without having to use costlier methods, such as raising new capital.
Italy’s troubled banking sector is facing the conflicting demands of regulators telling them to bolster risk capital but also lend more money just as the country’s economy flirts with recession.
“It would a very positive sign for the Italian banking sector if they address their issues through market solutions,” the head of Italian brokerage firm Alisei SIM Wolfram Mrowetz said, referring to Popolare di Bari’s potential transaction with CRC.
Representatives for Popolare di Bari and CRC declined to comment on the talks.
A synthetic securitization is similar to a credit-default swap, but instead of covering a single credit it insures against the first losses on a group of loans. The debt is securitized, with the original lender keeping the senior notes on its books, while part of the risk is transferred to a third party in exchange for a coupon payment.
Popolare di Bari is seeking to buy insurance on the first losses out of a portfolio of 2.9 billion euros ($3.3 billion) of mortgages and loans to small and medium enterprises by next month, according to a statement published on Thursday. The bank’s total loan book is around 8 billion euros.
Together with other transactions like selling portfolios of debt to investors, and other asset disposals, Popolare di Bari could see its tier 1 capital ratio -- a measure of its financial safety buffer -- rise by more than 2.5 percentage points, the people said.
In December, the ratio was 7.52%, below the minimum required. Measures, including the synthetic securitization, “will allow the bank to rapidly increase its capital ratios above the levels” set by the regulator, Popolare di Bari said in statement on Thursday.
Using this method as a way to transfer risk, has already been adopted by the country’s largest banks such as Intesa Sanpaolo, Ubi Banca and UniCredit. But this wasn’t an option for smaller lenders until earlier this year when regulators tweaked rules on capital requirements.
To contact the reporters on this story: Luca Casiraghi in London at email@example.com;Sonia Sirletti in Milan at firstname.lastname@example.org;Antonio Vanuzzo in London at email@example.com
To contact the editor responsible for this story: Vivianne Rodrigues at firstname.lastname@example.org
©2019 Bloomberg L.P.