On finding large gaps in its 1999 budget, the Italian treasury decided to deal with one notorious problem - delinquent social securities payments - in an unusual way, by simply selling them. It was a bold and intriguing deal and led to plenty of arguments among the banks that bid for it. But it produced a hefty cost saving for the Italian treasury.
The securitization of these overdue payments brought the country e4.65 billion in cash. Italy's state pension manager, Istituto Nazionale della Previdenza Sociale (INPS), issued three FRNs at e1.55 billion each. The bonds were secured against delinquent social security payments from corporates, self-employed people and agricultural enterprises. Two soft bullets with an expected maturity of 1.2 and 2.2 years were priced at Euribor minus 5 basis points and Euribor minus 2bp respectively, and an amortizing tranche with an average life of 3.8 years at 11bp over Euribor.
The low borrowing costs on the deal were a tremendous achievement for the Italian treasury. But the price was too tight for the taste of many observers. According to one banker, the deal was very aggressive, because the leads compared it to traditional government bonds.