“ReoCos act exclusively in the interests of securitisation noteholders. Their sole purpose is to participate in property auctions and manage and dispose of the properties they buy,” said Rossella Ghidoni, a director in Scope’s structured finance team. “But because payment is typically deferred until properties are sold, securitisation noteholders are directly exposed to real-estate risk. On top of that, high costs represent a major risk for ReoCos because they can erode net sale proceeds, resulting in a loss for the issuer if the net exit value of the asset is below its sale value at the next auction.”

Ghidoni adds that ReoCo structures contain covenants to mitigate such risks, including limits to the aggregate value of properties that can be acquired; incentive fees to align the interests of the ReoCo servicer and noteholders; cross-collateralisation mechanisms, and required approval by mezzanine and junior noteholders if expenses are higher than forecast in ReoCo business plans.

“The intervention of ReoCos at property auctions supports the value of assets by stimulating participation at auctions and acquiring assets if there are no other bidders,” said Leonardo Scavo, a senior specialist in Scope’s structured finance team. “Their strategies are defensive in that they are principally aimed at preventing excessive price discounts and drawn-out court procedures that result from empty auctions, since this avoids properties going to the next auction with a 25% reduction in opening bids.”

ReoCos can generate profits for noteholders if assets are sold with a net surplus, although this is not the principal driver of their activity. On average, ReoCos plan to sell assets at 63% above their acquisition price. So far, ReoCos sold only 11% of properties acquired between 2019 and 2022 at an exit price 58% below the acquisition price. Commercial property sold slightly better than residential.

“The gap between exit values and adjudication prices corresponds to about three deserted auctions, bearing mind opening bids decrease by 25% at each auction” Scavo said. On the plus side, ReoCos were generally able to sell assets more quickly than forecast in their business plans, while costs came in at expected levels.”

ReoCo activity in the Italian NPL market has been limited, with 131 properties awarded for EUR 31m. Currently, seven out of 47 securitisations envisage using a ReoCo structure while four ReoCos have already acquired assets. They have mainly participated in cases involving residential assets in the north of Italy. ReoCo participation has resulted in the award of assets via debt assumption in 52% of cases, and in sales to third parties in 36%. In the commercial segment, assets were acquired by third parties in 35% of cases with ReoCo participation.

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Join us for a webinar on Tuesday 5 September at 15:30 CET when Rossella Ghidoni and Leonardo Scavo will outline the advantages of using ReoCos and explain why they believe the structure has potential. Click here to register.

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