European NPL market quieter in 2019 so far, as activity in emerging markets grows

According to the Debtwire European NPLs 3Q19 report presented at Debtwire Week, as of early October, 92 deals totalling EUR 67.9bn have closed so far this year. Overall, the first three quarters of the year have been quieter than the same periods in 2018 and 2017. As was to be expected, the record of more than EUR 200bn seen in 2018 is not going to be broken any time soon.

In Italy, as of 9th October, EUR 17.7bn of NPL transactions had closed during 2019, and EUR 44.7bn were ongoing. Yet, 2019 has long been said to be the year of unlikely-to-pay (UTPs) in Italy. About a third of the total volume of deals closed so far this year has comprised UTPs – EUR 6.4bn out of EUR 17.7bn. The most notable of the already agreed deals was the sale and transfer of management of an UTP loan portfolio by Intesa Sanpaolo to Prelios backed by Davidson Kempner. In contrast, the Cartolarizzazione delle Sofferenze (GACs) scheme has had a major impact on Italian banks’ NPL disposals, but the trend has slowed down in 2019. BNL’s 968m Project Juno was the last to close. The pipeline is active once again, though, with six deals with a GBV of EUR 9.8bn currently tracked.

In 2019 so far, deals in Greece totalling EUR 5.3bn have closed, with a total of EUR 34.7bn live deals. The largest expected transaction was due to close in the third quarter, however in early October, Eurobank Ergasias announced the expiration of exclusive negotiations with PIMCO to buy 20% of the mezzanine and junior notes of a securitisation of a EUR 7.4bn portfolio as well as its NPL servicer, Financial Planning Services (FPS).

In the third quarter there was increased activity in the securitisation of NPLs, mostly in Greece and Italy. Of those, Alpha Bank and UniCredit are leading a wave of newly planned deals bringing the share of expected NPL securitisations over the total loan disposal in the pipeline to 2018 levels. So far this year, securitisations have dropped to 9% of total disposed loans, from a peak of 31% in 2018, or EUR 5.9bn out of the EUR 67.9bn so far in 2019, from EUR 63.5bn out of the EUR 208.2bn in 2018. Greece is replicating Italy’s GACS asset protection scheme, with the creation of Project Hercules. The programme will allow Greek banks to transfer up to EUR 30bn of bad loans to SPVs.

With closed deals for EUR 9.3bn so far in Ireland, the 2019 total has already topped 2016 and 2017, which saw EUR 8.3bn and EUR 7.6bn traded respectively. Residential NPL sales have made up the bulk of sales this year, at EUR 5.5bn, over half the total. Ulster Bank agreed to sell a EUR 800m residential NPL portfolio, Project Dinish, to CarVal Investors at the start of the October. The sale of residential loans after initial hesitation from the banks has raised political debate and controversial proposals to slow down the acquisitions of private equity funds. Potential “ethical buyers”, for the sale of home mortgage have emerged and have been in negotiation with Allied Irish Bank for a potential first deal.

While European NPL volumes have decreased in the past few years, opposite trends are emerging in Asia. Chinese and Indian banks now hold the highest level of bad loans on their balance sheets. With a total volume of USD 325bn of NPLs as of 1H19 up from USD 238.7bn in December 2018, according to the Chinese Banking and Insurance Regulatory Commission (CBIRC), Chinese banks have the highest amount of NPLs globally. India has taken over from Italy as the world’s second-largest holder of NPLs. However, activity in India is relatively slow, with just a volume of USD 2.37bn equivalent in 32 deals mainly focusing on corporate loans so far this year. Year to date, 10 sellers have sold over USD 50m equivalent, with state-owned Central Bank of India topping the list, amassing USD 566.9m in five sales.

“With the European NPL market maturing and increasing amounts of distress building up in other geographies, investors keep adapting to new opportunities while shifting attention to developing markets like Asia and South America,” said Alessia Pirolo, Head of NPL Coverage, Debtwire.

Giovanni Gilli, CEO at Intrum, said: “NPLs in general, but particularly UTP’s remain a dominant theme in the Italian market. In my opinion, a particular angle that will soon become relevant for the market will be the set up of new partnerships in the field of UTPs. I predict new joint ventures between servicers and banks, a scheme that has proved to be very efficient and mutually successful for Bad Loans. I would also expect the industry in Italy to go through additional steps in the consolidation process, in a business where size and scale count. Considering this, Intrum Italy is always ready to evaluate opportunities.”

Riccardo Serrini, Prelios Group CEO, said: “Italian Banks have significantly reduced NPL exposure on their books, with a 1.7% net NPL ratio over total loans, whilst the deleverage wave on UTPs is still in an early stage. At Prelios, we clearly see a strong growth in NPL secondary market transactions, mainly through digital platforms like BlinkS developed by the Prelios Group, and structured deals with UTPs, where servicing capabilities to manage ‘alive’ credits with an industrial approach is key.”