“Indemnities are intended to protect issuers from credit losses but according to our calculations relating to closed indemnity processes, indemnity payments do not always ensure full protection hence fully compensate issuers for the shortfalls caused by breaches of representations and warranties (R&W),” said structured finance analyst Davide Nesa.

Sellers of Italian non-performing loan securitisations provide R&W on the portfolios they dispose of as standard practice. If a breach of R&W materially and adversely affects the workout process of the underlying loans and consequently the issuer’s expected recoveries, the seller must contractually indemnify the issuer for any loss.

Indemnity processes have also taken longer than expected. “For more than 30% of transactions, the process has taken longer than the weighted average life in business plans. Delays are credit-negative,” said structured finance analyst Rossella Ghidoni. Indemnifiable amounts typically correspond to the purchase price of the loans, which is lower than the expected cash flows in servicers’ original business plans.

“The difference should in principle be covered by shorter collection periods. Longer indemnity processes limit this compensation mechanism,” added senior structured finance representative Paula Lichtensztein. On a weighted-average basis using data to the end of 2023 on closed indemnity processes, issuers received 62.8% of indemnity amounts requested, 4.3 years after closing. On average, issuers experienced a shortfall in terms of net cash flow of 2.3% of the original notional of the Class A notes.

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