As activity in the UK and Ireland slows, where can we expect to see the next wave of large non-performing loan portfolio transactions?
Europe has experienced a wave of NPL portfolio sales over the past few years, driven by regulatory changes, bank deleveraging, improving market conditions and large sums of capital flowing in from foreign investors. While the UK and Ireland have been experiencing the greatest level of transactions, both markets are nearing the end of their deleveraging cycles, forcing investors to divert their attention to other jurisdictions.
Over the past year alone, hefty sums of money have poured into Spain, resulting in the completion of a great number of significant transactions – such as projects Gaudi and Castle. While there are still large stocks of loan portfolios that represent an attractive proposition (including projects Chloe and Silk), some speculate that the volume of transactions will be lower than in the past 24 months. This is due in part to the shifting investor profile in the market, which will likely feature smaller and more specialised players with less acquisition capacity.
However, after years of limited activity, Italy is poised to serve as the next frontier for large NPL portfolio deals. This is due partly to recent government reforms aimed at reducing the stock of NPLs from the books of Italian commercial banks. Specifically, the Italian government and the European Union have agreed to allow the country’s banks to sell NPL portfolios to private investors, creating a robust new market for these once illiquid assets.
The main reason, however, lies in the need for Italian banks to start cleaning up their balance sheets. Asset Quality Rating evaluations provided a taste of the efforts needed to be deployed, but it was not until the high-profile MPS banking failure that Banca d’Italia started to seriously address the issue of segregating non-core/bad bank balance sheets and stabilise core tier-one capital ratios to allow Italian banks to lend more and fuel growth in the economy.
According to Deloitte, these important regulatory actions – combined with an improving Italian real estate market and more realistic seller price expectations – could cause the total volume of distressed loan sales to reach €25bn (£21bn) in 2016. However, while this volume is increasing, an environment more conducive to facilitating NPL transactions poses a unique set of challenges for potential buyers with limited experience investing in this market.
As with the UK and Ireland, advisers, underwriters, valuers, workout specialists, and servicers will play a central role in helping debt investors and sellers transact in Italy. While macroeconomic bets are sure to remain a common investment theme in those transactions, microeconomic and micro-location analysis will also play a critical role when it comes to making smart purchasing decisions – especially as competition for NPL portfolios intensifies.
But many debt advisers are ill-equipped to provide actionable insight to NPL buyers looking to put their money to work in the country; they are faced with a lack of past exposure to, and in-depth knowledge of, the Italian market. Debt investors who align themselves with operating partners who understand the nuances of Italy’s different property markets will find themselves with a competitive advantage.
But what makes for a good operating partner? In addition to understanding market-specific property dynamics, a strong operating partner must have the ability to efficiently develop and implement sound workout strategies within the confines of Italy’s legal system. Longer workout times increase the risk of mispricing; having an experienced and knowledgeable operating partner can mitigate this risk, yielding optimal returns.
As Italy gets set to take centre stage for the next wave of NPL portfolio transactions, it is incumbent upon debt investors and sellers to align themselves with advisers who can provide them with a sustainable competitive advantage. Failure to do so can mean the difference of being a winner or loser in the high-stakes game of Italian NPL portfolio sales, where time to recovery is long and the processes involved are complicated compared to other European NPL markets.
Blair Lewis is chief executive of Hatfield Philips
