European non-performing loans (NPLs) stocks have increased significantly across Europe since 2008 reaching circa €1 trillion in 2016. This build up was accelerated due to the financial crisis, however the main causes were due to poor supervision and governance, aggressive lending and acquisition strategies, loose credit underwriting policies, high exposure to sectors that were most impacted by the financial crisis (such as real estate) and lax credit controls.
The ECB issued new guidelines in March 2017 with respect to the management of non-performing loans with a clear focus on the main high NPL banks in Europe to aggressively reduce their NPL stocks over a 3-year period through restructuring, sales (loan and assets), enforcement, etc. These guidelines will ensure that banks continue to use loan sales as a key tool in managing their NPL stocks and increased provisions should close any potential ‘pricing gap’ between seller (banks) and buyer (Private Equity investors) expectations.
NPL loan sales market
The investor market has been buoyant over the past four years (2014 – 2017) with loan sales exceeding €100 billion each year. 2017 was a significant year with loan sales of €144 billion dominated by Italy, Spain and UK. 2018 is expected to also exceed €100 billion with strong deal activity in mature markets (Italy, Spain, Ireland) and new markets opening up (Greece (Project Amoeba €2 billion SME loan sale to Bain in May 2018)) and Cyprus (Bank of Cyprus €2.8 billion corporate / SME loans sale to Apollo).
- Over the past year there has been steady M&A activity (e.g. the acquisition of Capita Asset Services by Link, the acquisition of Pepper by KKR).
- Greece, being the country with the highest NPL ratio (45%), introduced a servicing licensing regime two years ago. Over 20 licences have been issued in the past year in order to support an anticipated increase in loan sales (c. €16 billion in 2018). The ECB will be introducing a pan-European servicing legislation later this year.
- As part of the overall loan sales transactions package, banks have also offered to sell their work-out unit (or part thereof), in order to provide a servicing option to investors. These transactions have been prevalent in Spain, Cyprus and Greece.
- In addition, we have seen some interesting new innovations like the Intrum – Intesa JV which may be a template for future bank / servicer co-operation. Intrum, the servicer, recently announced the establishment of a servicer of non-performing loans (NPLs) of Intesa Sanpaolo in Italy, Intrum will own 51% of the Joint Venture Servicer and service Intesa’s NPL flow for 10 years. Intrum, together with CarVal Investors, will acquire a 51% participation of a NPL portfolio with a GBV of EUR 10.8 billion, with the JV and NPLs to be deconsolidated from Intesa’s balance sheet.
Overall the outlook is still good for the European NPL market with a strong pipeline of supply in the main NPL countries (driven by NPL reduction plans), a continued strong demand from investors, renewed regulatory focus on NPL management / sales, remaining benign funding conditions and a growing selection of competent servicers in the main locations.
About the author
Tom McAleese, is Managing Director and Head of European Bank Restructuring in Europe at Alvarez & Marsal. In Europe A&M have been involved in over €350 billion of loan sale transactions in over 20 countries in the last four years.