Societa di cartolarizzazione dei crediti INPS SpA

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1 This presale report is based on information as of May 14, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Please call Standard & Poor s at (44) for the final ratings when assigned. Profile Expected closing date: May Collateral: A portfolio of social security contributions in arrears owed to INPS (Istituto Nazionale per la Previdenza Sociale) by Italian corporates, self-employed individuals, and agricultural enterprises. Underwriters: Banca d Intermediazione Mobiliare IMI; UBS Warburg, and Morgan Stanley. Seller: INPS. Servicers: INPS and the Concessionari network. Representative of noteholders: San Paolo Fiduciaria SpA. Swap counterparty: To be determined. Collection bank: Tesoreria Centrale dello Stato, acting through the Bank of Italy. Supporting ratings: Bank of Italy [Banca d'italia; AAA/Stable/A-1+], as bank account provider ( A-1+ implied from the Republic of Italy) and the swap counterparty. Analysts: Patrizia Medvedich London (44) Alain Carron Paris (33) Societa di crediti INPS SpA Preliminary rating as of May 14, 2001 Class Preliminary rating * Preliminary amount (Eur Bil.) Series 4 asset-backed floatingrate notes *The rating is preliminary and subject to change at any time. N/A not applicable. Recommended credit support (%) AAA N/A Rationale The preliminary rating assigned to the series 4 asset-backed floating-rate notes to be issued by Societa di crediti INPS (S.C.C.I.) SpA reflects the strong protection for the noteholders provided by a combination of the overcollateralization levels and the Eur516 million debt service reserve that will be funded at closing out of the proceeds from the issuance of the series 4 notes, the suitability of INPS (Istituto Nazionale per la Previdenza Sociale) as servicer and of the Concessionari as special servicers, the sound legal structure, and the sound payment structure and cash flow mechanics of the transaction, including availability of the debt service reserve and mechanics of the swap structure. Final ratings are expected to be assigned on the closing date subject to satisfactory review of all documentation and legal opinions. Strengths, Concerns, and Mitigating Factors Strengths The strengths of the transaction are: Conservative advance rates; Lack of concentration. The underlying pool consists of credits from about 100,000 obligors and is representative of the Italian economy; and The support provided by the debt service reserve, which gives both liquidity and credit support to the structure in case collections are not sufficient to meet interest and principal payment obligations. Drawings may be made under the debt service reserve if available funds are not sufficient to meet the interest payment obligations of the issuer or to meet the expected amortization profile of the notes. This new debt service reserve will be available only to series 4 noteholders. Concerns The concerns with respect to the transaction are: Inability to change the servicer. Unlike a typical private sector asset-backed securitization, because of the public interest nature of the functions provided by INPS, the servicer cannot be replaced; The ability of the debtors to settle income taxes, social security contributions, and other local taxes in a single payment, which may create credit exposure toward other Italian government-related entities; Partially inaccurate information on the collections in the portfolio. Initial performance information on the credits was not totally correct, which may raise Standard & Poor s STRUCTURED FINANCE PRESALE REPORT May 14,

2 some concerns on the reliability of the historical information on which the analysis is based; and Inability to complete a full reconciliation and verification of the receivables transferred to the issuer before September 2001, coupled with the ability to provide different categories of credits than those initially guaranteed by INPS (see Portfolio Details section). Mitigants Factors that mitigate the above concerns are: The Concessionari network now supports the entire collection system in Italy (and about 40% of the portfolio sold to S.C.C.I. SpA). There have been delays in the full implementation of the new system. The framework is now complete, however. In addition, time lags have been modeled in the projected cash flows to provide a buffer against temporary collection delays. Set-off of exposure towards different entities entitled to receive payments for taxes and social security contributions can be made only for amounts due/receivable in the same period, which limits the potential exposure to other entities. So far in this transaction set-off amounts have represented about 10% of total collections. Accuracy of reporting has been addressed by INPS and internal policy and procedures have been reviewed with the assistance of an external auditor. Some of the internal processes have been amended in order to achieve more accurate reporting and transfer of information. Historical information has also been reviewed by an external auditor and the accuracy of the data on which the analysis has been based has been confirmed. The involvement of KPMG as report auditor in future is an additional source of comfort. INPS will replace any nonexistent or noneligible credit, as the type of credit transferred can be different from the one originally guaranteed. The analysis tested the extreme portfolio compositions. Exposure for this obligation is toward an entity that is part of the Italian Government (Republic of Italy; AA/Stable/A-1+). Published by Standard & Poor s, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY Editorial offices: Garden House, 18 Finsbury Circus, London EC2M 7NJ. Subscriber services: (44) Copyright 2001 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Officers of The McGraw-Hill Companies, Inc.: Harold W. McGraw, III, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor, Executive Vice President and General Counsel; Robert J. Bahash, Executive Vice President and Chief Financial Officer; Frank Penglase, Senior Vice President, Treasury Operations. Information has been obtained by Standard & Poor s from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor s or others, Standard & Poor s does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Standard & Poor s receives compensation for rating obligations. Such compensation is based on the time and effort to determine the rating and is normally paid either by the issuers of such securities or by the underwriters participating in the distribution thereof. The fees generally vary from US$10,000 to US$100,000. While Standard & Poor s reserves the right to disseminate the rating, it receives no payment for doing so, except for subscriptions to its publications. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Summary of the Transaction The structure of the transaction is shown in the following chart: S.C.C.I. issued three series of notes (for a total amount of Eur4.65 billion) backed by a portfolio of social security contributions in arrears in November The series 1 notes were entirely repaid in January S.C.C.I. will now purchase an additional portfolio of credits worth Eur3.20 billion and will fund the purchase price for this portfolio through the proceeds of the issuance of the series 4 notes. The new portfolio will be added to the existing portfolio and all the noteholders will have the same rights over the entire portfolio. The existing debt servicer reserve (which had a balance of Eur1.081 billion at May 8, 2001) will continue to be available to meet obligations Standard & Poor s STRUCTURED FINANCE PRESALE REPORTMay 14,

3 under the series 2 and series 3 notes, while the new debt service reserve ( S4 DSR ) will be available to meet obligations only under the series 4 notes. Background on INPS INPS is a public body established to collect social security contributions from companies and self-employed individuals. INPS employs about 32,000 people and it is organized in 21 regional offices and 476 local branches. INPS' activity can be divided in two main areas: the first relates to the supply of social security services for retired persons and the second relates to the collection of social contributions from companies and self-employed persons. The latter is the area of activity that is relevant for this transaction, and consists of managing the whole process of filing, monitoring, and collecting payments from enrolled companies. The system is based on monthly budgets that regional offices must adhere to, which are revised on an annual basis by the head office and then communicated to the local network. Social contributions in Italy are paid by every self-employed individual and by every company on behalf of its own employees. This is not a discretionary contribution, but is compulsory and dictated by law. Upon incorporation, any company (or self-employed individual) has to enroll with INPS and is, therefore, included in the contributors database. After that, and on a monthly basis, the company will have to pay the social security contributions for its employees by using a standardized form (DM10), which shows the gross remuneration, relevant contribution-rate, exemptions, and abatements, etc. By completing and presenting the DM10 form to INPS, the contributor is recognizing its debt, and is, therefore, legally bound to pay the amount as calculated. There are also two other ways in which a credit for INPS can be originated. The company (or self-employed individual) can make a declaration stating what contributions are due to INPS in relation to its workforce. This is a situation that may arise when, for example, the employer has not paid the contributions for some time and the employees force him to declare the company's position. A third source of credit origination is the Verbali Ispettivi (inspection reports). These are recorded by INPS inspectors, following a review and verification made at a company s premises. If irregularities are found, the reports quantify the amounts due and are then notified to the debtors. As described above, the DM10 forms represent the main document in which the amount due for social contribution is quantified and accepted by the contributor. The DM10 can be sent directly to INPS or, as happens in the vast majority of cases, taken to a local bank and paid at the same time. In the latter instance, payment can be made for the total amount or partially (in which case the balance is recorded as a credit in INPS' books). Similarly, if the DM10 is sent by post the payment is postponed and a credit is recorded in INPS books. Every single credit is recorded within INPS' database and it is possible to ascertain the phase that the credit is in at any point in time. Alphanumeric codes identify the status of the credit itself, and every single contributor that has enrolled with INPS is tracked on the systems. Further to recent changes to the payment procedures for social security contributions and taxes, debtors can make a single payment offsetting credits and debits to various parts of the public administration using a form called F24. Such set-off is limited, however, to taxes and contributions payable/receivable only for the year in which the payment is done. INPS' Credits and Collection Systems The new portfolio that will be transferred to S.C.C.I. will comprise credits classified in arrears during 2000 of the following categories and in the minimum guaranteed amounts shown in table 1. Standard & Poor s STRUCTURED FINANCE PRESALE REPORTMay 14,

4 Table 1 Composition of New Portfolio Type of credit Minimum guaranteed amount (Eur Bil.) From corporates From self-employed persons From the agriculture sector The final amounts of the credits will be available by Sept. 30, 2001, when INPS will provide final lists of credits. The receivables purchase agreement provides that at that time any excess in one category can be used to compensate deficiencies in one of the other categories according to a predetermined conversion ratio. In the analysis no credit was given to credits from the agriculture sector due to limited historical information available and the cash flows have been tested assuming the maximum possible variation in the amount of credits from corporates, so that Standard & Poor s places no reliance on the appropriateness of the conversion rates used. In the receivables purchase agreement INPS will represent that if a credit sold to the issuer proves to be invalid, INPS will repurchase it at values below par, but above the advance rate for each category of credit. Standard & Poor s considers that this is not a source of concern as all the credits on INPS' balance sheet are being transferred to S.C.C.I. so that there is no potential for adverse selection. The credits to which this applies are homogeneous as they were all originated in 2000 and are being grouped in three different categories. Additionally there is no concentration in the portfolio, which is representative of the Italian economy. The existing portfolio includes the credits shown in table 2. Table 2 Composition of the Existing Portfolio (Eur Mil.) Type of debtor Administrative phase Legal phase Dilazione and amnesty Corporate 5,833 22,562 1,550 29,945 Self-employed 9,175 1, ,414 Agriculture 2, ,478 Total 17,550 24,461 2,825 44,837 Total Amnesty payments (Condoni) are credits derived from special laws approved by the Italian Parliament allowing for a rescheduling of credits in arrears. No legal proceedings are started on these credits as long as they are performing as planned. Credits in the legal phase include all disputes and credits subject to executive proceedings and will be managed and collected by INPS through the internal legal offices. INPS will also manage all credits that are currently in Dilazione (litigation). Amnesty is an option provided by INPS to the debtors that allows them to pay amounts outstanding in installments. Credits (called Ruoli) enrolled with the Concessionari are the credits that have been transferred to Concessionari for collection. Most payment advices (Cartelle) have been sent to debtors during the last months of According to the terms of the Cartelle, debtors have 60 days to pay without incurring any penalty; if the 60-day period elapses without receipt of payment, then the Concessionari commence legal actions. Portfolio and Cash Flow Analysis The static pool analysis from which Standard & Poor s derived the base case cash flow scenario reflects a collection system that has been in place in the past, and does not take Standard & Poor s STRUCTURED FINANCE PRESALE REPORTMay 14,

5 into consideration the changes that have been introduced in the collection system for these credits. Despite the delays experienced, Standard & Poor s considers that the new collection system will bring more efficiency and improve the collection timing. Therefore, overall amounts that will be collected on the securitized credits should be higher than the historical experience suggests. It is important to underline, though, that the credit analysis performed has not taken into consideration this changing environment and, therefore, no credit has been given to the introduction of the new collection system. The historical information used in the analysis has been reviewed by an external auditor who has also reviewed the internal procedures used by INPS for the collection of the data used. The review substantially confirmed the accuracy of the data used during the analysis for the first securitization completed by S.C.C.I. The ongoing involvement of the external auditor in the review of the performance data provided by INPS is an additional source of comfort. In order to analyze the future collections of the portfolio, the new credits have been added to the existing portfolio and a similar approach to that followed during the rating of the first securitization was applied. Standard & Poor's separately analyzed the two main types of payments: those outside the amnesty system and those within it as the two are considered to be affected by different dynamics. In the analysis, both the expected recovery value as well as the expected recovery timing were stressed. Creditors Who Have Not Signed Amnesty Agreements Recovery of Notional Amounts The analysis consisted of looking at six static pools in the case of credits from corporates and five static pools in the case of credits from self-employed individuals in arrears originated from 1994 to Table 3 Historical Cumulative Recovery Percentages Corporates Minimum N N+2 N/A N+3 N/A N/A N+4 N/A N/A N/A N+5 N/A N/A N/A N/A N+6 N/A N/A N/A N/A N/A Self-employed N+1 N/A N+2 N/A N/A N+3 N/A N/A N/A N+4 N/A N/A N/A N/A N+5 N/A N/A N/A N/A N/A N/A not applicable. The 'AAA' stress case was to take the lowest cumulative payout from the static pools for each year (N+1 to N+6, where N is the year that the credit was originated) and then apply a 30% haircut on recoveries from both corporates and self-employed (a higher haircut at 40% was applied on the data point related to the latest collection period for the recoveries from the 1994 pool for corporates). Standard & Poor s STRUCTURED FINANCE PRESALE REPORTMay 14,

6 The timing was stressed by delaying part of the haircut payments. For both corporates and self-employed individuals it was assumed that only 30% of the haircut payments appear in the year expected, another 30% one year thereafter, another 30% two years after expected, and the final 10% three years after the expected maturity. Penalties and Interest Collection In addition to the cash forecasts that exclude all penalties and interest, it is known that INPS has regularly received interest and penalties. These have typically constituted 1% of face value of credits at the beginning of each year. In the stress scenario it was assumed that 65% of this amount is collected. Penalties and interest on 2000 credits have been excluded from this calculation. Creditors Who Have Signed Amnesty Agreements In addition, some of the receivables are from the creditors who have signed up condono payments related to the last condonos (Law 140 of 1997, Law 448 of 1999). The schedule of these payments is known. The reliability of these payments has historically been considered high, although initial performance data does not entirely confirm this assumption, hence even payments from this group of creditors have been assumed to be 30% lower than historical levels. Figure: Profile of Cash Flows from Structure The stressed profile of cash flow is shown in the chart below. Figure: Amortization Schedule of Note It should be stressed that the expected life of the notes is significantly lower than implied in the following chart. Standard & Poor s STRUCTURED FINANCE PRESALE REPORTMay 14,

7 Legal Structure of the Transaction The first issuance completed by S.C.C.I. in 1999 has been executed in accordance with the terms of specific legislation enacted by the Italian government. This additional issuance will be completed under the same terms. It is also worth noting that INPS, as a public body, cannot be declared bankrupt. Nevertheless, should it be liquidated according to a special liquidation procedure, the credits sold to the issuer should not be clawed back. Under the terms of a receivables purchase agreement (Contratto di Cessione di Crediti) entered into between INPS and S.C.C.I. SpA, INPS will sell to the issuer the credits related to unpaid social security contributions accrued up to Dec. 31, 2000, and not collected by INPS by April 30, 2001 (credits accrued up to Dec. 31, 1999 were transferred to S.C.C.I. within the first securitization of INPS credits). The issuer will pay an initial purchase price for the assets, which will be equal to the notes issuance amount (net of any expenses) minus Eur516 million to be transferred to a debt service reserve to be used as liquidity source for the payment of interest and principal on the notes. Notes' Structure The series 4 notes will have a legal final maturity of 2008, as with the series 2 and series 3 notes. Series 2 can be subject to full or partial mandatory redemption at the option of the issuer on the interest payment date falling in January Series 3 has a controlled amortization schedule prior to January 2002 and is subject to full or partial redemption thereafter. Unless a trigger event has occurred, available funds can be applied to pay principal on the series 2 notes until they have been redeemed, and finally pay principal on the series 3 notes. The series 4 notes' characteristics have been based upon the expected level of recoveries using the historical data. A trigger event arises when there is either default on any of the series or the occurrence of certain other events related to the insolvency or winding up of the issuer. Importantly, a trigger event is also caused when cash flows collected from the receivables are less than 75% of the expected repayment amounts on two consecutive interest payment dates. Standard & Poor's deems the occurrence of a trigger event to be 'AAA' remote. Standard & Poor s STRUCTURED FINANCE PRESALE REPORTMay 14,

8 If a trigger event does occur, the representative of the noteholders may, in its sole and absolute discretion and, if so requested by the holders of at least one-fifth of the aggregate principal amount outstanding of the notes, may give a trigger notice, the result of which is that the notes become due and payable and that all payments of principal, interest, and other amounts due in respect of the notes are made pro rata without any priority between the series. If any of the notes cannot be redeemed in full by their legal final maturity as a result of insufficient funds, they will be redeemed in full on or before January If by January 2015 there are amounts still outstanding, such amounts will be cancelled. Collection Account All amounts received or recovered by the issuer from INPS or the Concessionari will be paid into a collection account established in the name of the issuer with Italian State Treasury. The collection account will be maintained with the Italian State Treasury as long as the Republic of Italy's short-term unsecured and unsubordinated debt obligations are rated at least A-1+. Liquidity Liquidity is provided by the issuer establishing a debt service reserve as part of the issuer collection account, funded out of the net proceeds of the issue of the notes in the sum of Eur516 million. The issuer will credit the debt service reserve to the extent that funds are available after making repayments according to the payment waterfall. Prior to the full redemption of the notes, the issuer will also be entitled to draw from the debt service reserve in order to pay fees and expenses, interest, and principal due on the notes. Interest Rate Hedging The issuer and the hedging counterparties will enter into the interest rate swap agreements in order to ensure that the issuer is not exposed to any material interest rate exposure in relation to its floating-rate obligations under the notes. The hedging counterparties are yet to be determined. The terms of the hedging agreement will comply with Standard & Poor s swap criteria. If any hedging counterparty s short-term rating is or falls below 'A-1' there is a requirement to either find a suitably rated replacement counterparty, or provide cash collateral. Surveillance Details Continual surveillance will be maintained on the transaction until the notes mature or are otherwise retired. To do this, regular servicer reports detailing the performance of the underlying collateral will be analyzed, supporting ratings will be monitored, and regular contact will be made with the servicer to ensure that minimum servicing standards are being sustained and that any material changes in the servicer s operations are communicated and assessed. Standard & Poor s STRUCTURED FINANCE PRESALE REPORTMay 14,