If NPL’s creditors are not all equal before the law

By Paolo Calderaro and Alberto Del Din

There has been talk for some time of an imminent governmental legislative proposal aimed at allowing debtors in the context of loans which are no longer in bonis to obtain cancellation of their debt by paying a reduced amount compared to that due under the existing loan, regardless of the creditor’s consent. The definitive details of the legislative measure have yet to become known; however, one can formulate plausible hypotheses based on the statements made by some authoritative members of the government on the subject as well as on the legislative proposals on the same topic put forward by the majority.
The proposal would give the possibility to debtors (natural persons – probably, among these, craftsmen only and small-medium enterprises) whose debt is not higher than a yet to be determined amount (there has been talk of 1 million, while the legislative proposals provide for an amount of 25 million) and which is part of a portfolio disposal by the original creditor, to obtain cancellation of the debt by paying an amount proportionate to the price of disposal increased by a specified percentage (presumably 20%).
However unquestionable and largely agreeable principles such intervention might be based upon – supporting debtors in hardship – there is a need to consider, also in light of prior experience, the actual efficacy of the proposed measure against its declared objective and the opportunity cost (understood as the sacrifice of other interests relevant for the system) arising from it.
In such a perspective, the first point to note concerns the regulatory context in which the measure would be introduced: despite its essential theme – exit by the debtor from a crisis of a more or less reversible nature – clearly intersecting with the insolvency events disciplined by the recent code on crises, there seems to be an intention to create an autonomous body of laws, separate from the code on crises and based on specific applicability requirements.
The coordination difficulties that would arise from such an unsystematic intervention are potentially significant: the disposal of the credit relationship as a requirement for the applicability of the proposed measure – an element which is entirely independent from the debtor’s sphere of influence and to some extent of a random nature – risks giving rise to inequality between assigned and non-assigned debtors despite these being in a similar position with regards to any other substantial aspect. It is natural to think about the likely distortions that could arise in the context of the various procedures requiring the creditors’ consent for a specific proposed action regarding the debtor, creating an alteration of each of the creditors’ leverage towards the debtor and in the relationship among creditors. In essence, the legislative proposal would determine a (further and not very rational) weakening of the equality among creditors and towards the debtor.
The mechanics of proportional adjustment of the amount to be paid for the cancellation of the debt appears equally fraught with randomness, being this dependent on the agreement on its price, which might have been freely reached between parties different from the debtor and inevitably arising from contingencies (which may significantly transcend from the evaluation of the merits of the debtor and of its economic and financial position): for instance, the negotiating power of the assignor bank and of its allocation choices, as well as the type of assignee, have an influence on the price of the credit transfer and, therefore, the price of the debt cancellation, thus causing there to be more or less fortunate debtors.
Equally, the requirement of the debt to be of a “deteriorated” nature under the accounting rules of the creditor gives rise to perplexities, as it derives from an evaluation of the debtor’s hardship which is carried out by an external subject and which covers a vast array of situations, ranging from the debt owed by a definitively failed business to that owed by a craftsman who momentarily experiences a recoverable delay on payments. The possible situations are of such wide variety as to make it inevitable to raise perplexities concerning the opportunity to receive allocation of such benefit without discrimination. For instance, what benefit would the proposed measure bring and for whom, in the case of a failed business which has ceased operations pending liquidation (and is thus unable to get back into business as a consequence of the cancellation of the debt, picking up on the assumption of a prior draft law on this subject matter)?
One must also consider that should the new laws also apply to future defaults, debtors would be incentivised not to pay with a view to obtaining a more or less automatic discount on the debt. As such, presumably the benefit would only be available to those debtors whose exposure has become deteriorated prior to the entry into force of the measure. Irrespective of the risk of creating the expectation of subsequent replication of the measure for additional time frames, with a consequent moral hazard risk, there remains an uncertainty as to what reasonableness criterion would guide the determination of the relevant time frame, considering also that the classification of a credit as deteriorated is usually the result of past circumstances.
One cannot omit considering the inevitable knock-on effects on the creditor banks’ ability to carry out transfers of such deteriorated credits deriving from the applicability requirement of there being a disposal of the credit – which appears to be considered as a relevant objective also by the European Union and the BCE. The possibility of obtaining a debt cancellation would cause the determination of a “fixed” price for the portfolio to be highly problematic, being it easily predictable (because rational) that the buyer will want to retain a right to renegotiate the price based on the final – mainly qualitative – composition of the portfolio as a consequence of any debt cancellations carried out, or even based on the lack of interest for purchasing the portfolio with its new composition. Thus might arise the perverse situation where a disposal is made at a certain price, based on which the debt cancellations would take effect, with such portfolio price being subsequently reconsidered as well as the very opportunity of the disposal. The complexities would increase in the case of securitisations aimed at the wider market, having to deal with the procedural stiffness of the capital markets. In addition, should the measure also apply to disposals which have already taken place, for the reasons explained above there might be significant knock-on effects (of a negative nature) on the performance of existing securitisation operations. Many such operations are backed by public guarantees.

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