European NPL report highlights investment appetite

6th March 2019

With established markets in Italy, Spain and Greece still at the at the forefront of investor’s attention for Non-Perfoming Loans (NPL) investment, there is increased appetite to seek out new markets according to a new research report from law firm Ashurst.

The report, A Global NPL Perspective, compiled the views of senior executives across the industry about where the future pipeline will come from and where the investment priorities of buy-side clients currently lie.

Mark Edwards, global loans partner at Ashurst, said that with levels of undeployed capital in the market generally remaining high and European interest rates remaining at sustained lows, it’s unsurprising that investors continue to seek new opportunities in non-performing asset classes and geographies.

“In Europe, 43% and 33% of investors have already invested in Italy and Spain and over 50% and 45% respectively are likely to invest in those two jurisdictions going forward, with a correlation for continued investment appetite in Portugal and Cyprus. Given that the Greek market remains at its formative stages, it’s notable that some 39% of investors report that they already invested in Greece. Appetite there remains high with almost half of investors stating that they are likely or more to invest there in the next two years.”

The research shows that investors are positive about the rates of return in respect of such portfolios, with over three quarters in Italy expecting a target rate of 16% or higher for a secured NPL, while over half would set their target return at the commensurate level for NPLs in Greece (64%), Spain (67%) and the UK (55%).

With new markets in focus, China stands out as the target investment country for the next two years and out of the 56% investors who are at least likely to invest there, over a third state that they are certain to do so. The research also indicates that some 57% of investors have already invested in Chinese NPLs in the last two years – higher than expected.

As Asia seems set to outpace Latin America on volumes over the next two years, each of China, India, Thailand, Indonesia, Brazil, Argentina and the Middle East will each see a constant or increasing number of investors looking to invest in NPLs when compared to the last two years.

In terms of rate of return for emerging markets, over half (53%) stated that they would expect 16-20% for Chinese NPLs, with the range lower in India and Latin America, where the majority reported they would expect 11-15% for secured deals.

The research shows that globally 44% of financial institutions regard outright loan sales as their preferred strategy for NPL reduction, demonstrating the importance of the ‘clean break’ principle to sellers which prevailed in the early Westerns European NPL transactions.

Restructuring and special situations partner Olga Galazoula noted that almost a third of financial institutions are seeking to enter into synthetic transactions or joint venture arrangements.

“As the securitisation markets, in general, continue to open up across Europe following increased activity in the previous 12 months, we can expect to see a continued increase in the use of securitisation structures for NPL resolution. The fact though that almost a quarter of financial institutions have a preference for work outs handled internally – higher than seen in previous years – demonstrates increased confidence by banks in their own internal infrastructure to manage NPL positions.”

With over a third (39%) of investors favouring commercial real estate, there appears to be a broad correlation between the asset classes sellers wish to sell and that investors wish to purchase. The survey demonstrates though that there is greater sell-side need than investor appetite for retail assets and greater investor appetite than sell-side need for hospitality-related loans.

Callum McPherson, Global loans partner, observed that although significant milestones in NPL resolution have been reached, challenges clearly remain, with almost half of financial institutions (44%) citing the commercial credits sector as presenting their greatest challenge. Many of the historical obstacles to an active NPL market continue – including bid-ask spread, data quality and insufficient sell-side resource.

“Globally, financial institutions are now finding transactions cost as being the most pertinent consideration when bringing an NPL to market. By contrast in Asia, 43% of respondents state that the resource-intensive nature of NPL sales has made it difficult for the continent to handle sales internally. Conversely in Latin America, the least relevant concern in Asia comes out top, with over half (55%) of respondents stating that the greatest challenge is the macroeconomic outlook.”

NPL sales may have peaked in 2018, but concerns around high ratios clearly continue to dominate the European agenda on banking stability and prudential measures. The European Central Bank introducing regulatory measures to tackle future accumulation of NPLs is clearly welcome, with over a quarter of respondents (27%) stating that EC’s Directive on credit servicers, credit purchasers and recovery of collateral will have the biggest impact on the market – 61%

Edwards said, however, that while the securitisation market has developed at pace last year, the development of clear guidelines relating to the NPL market has lagged behind the rest of the market.

“The issues of significant risk transfer in the NPL market will be addressed when the European Banking Authority reports on its findings in 2021 and, it is hoped, clarifies the position with regard to NPL securitisation. While the EC is committed to an action plan to reduce NPLs and wants to see further developments in the banking sector as part of the move to a more stable EU financial system, it is hoped that further specifics on when to expect more tailored proposals for SRTs in NPL transactions is delivered well before the 2021 deadline. This is clearly an area requiring a level of clarity not currently provided.”