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Government action key to tackling coronavirus NPLs and investor opportunities

Governments and regulators need to be investors' “best friend” as they face a new wave of non-performing loans, said panellists involved in NPLs in Europe, China, and globally on a webinar, The New Rise of NPLs - Strategies and Investment Opportunities in the Market, aired live yesterday (14 October) during Debtwire Week.

Coronavirus restrictions have led to a slowdown of NPL activity, both for transactions and collections. The first three quarters of 2020 have been the least active for disposals since 2015 with just EUR 39.2bn of NPL and non-core loan sales closed so far, according to the new Debtwire European NPLs 3Q20 Report, presented yesterday. Now, NPLs are on the rise again in Europe for the first time in years, reaching EUR 526.2bn at the end of the second quarter from EUR 522.8bn at the end of March according to the EBA Risk Dashboard.

Moving fast to find solutions to the new NPL problem will be key to improving the economic climate, said the panellists. The recognition and resolution of NPLs will benefit the banking system and investors both, they said.

Coronavirus disruption

Collections activity was strongly reduced in Italy by the closure of courts for three months from March to May, said Riccardo Serrini, CEO at Prelios, which has EUR 40bn of assets under management in the market. Instead, Prelios concentrated on out-of-court solutions, said Serrini. 

“We have been incredibly focused on our existing portfolio,” said Daniel Dejanovic, head of European real estate at Cerberus Capital Management, who said the firm had worked intensely with tech teams to enable daily reporting on REOs and NPLs, especially in the hospitality sector. 

Between 2015 and the end of 2019, private equity funds Cerberus, Lone Star Funds and Blackstone Group made the lion's share of NPL purchases in Europe, buying EUR 160.3bn of loan portfolios between them, almost a third of the EUR 502.5bn sold in total, according to the Debtwire NPL Database. This year, however, the erstwhile top three have not made any significant purchases.

“We have maintained a dialogue with market contacts,” said Dejanovic.

In China, however, it’s a different story. “Today, things are back to normal,” said Ben Fanger, managing partner at ShoreVest Partners. Between February and April, transaction volumes were down as seen in Europe. With courts closed and borrowers unable to meet in person, real estate sales were reduced. However, after the lockdown was lifted, business was back to usual by May, said Fanger.

Rising NPLs

It is still too early to assess the real impact of COVID-19 on loans, said Cerberus’s Dejanovic. Government action to control the spread of the virus has meant that the financial emergency that has emerged is different to others in the past.

“This crisis is outside the control of people and businesses,” he said. “No-one’s immune.”

There will be a broad range of investment opportunities across asset classes and economies, said Dejanovic.

Prelios’s Serrini predicted big opportunities in Italy, with EUR 80bn of new NPEs to be added to bank balance sheets in the next three years.

While Italy's GACS scheme of government guarantees for securitisation will continue playing a major role in banks’ disposals, Serrini said he sees investors focusing on unlikely-to-pay (UTPs) loans, which are not covered by GACS. Another state-run game changer in the Italian NPL market is asset management company AMCO, which this year has been involved in EUR 11bn of closed deals, 28% of the total European volume, according to the Debtwire European NPLs 3Q20 Report. The bad bank has become the most active buyer in Europe, replacing, at least momentarily, the private equity giants.

The presence of AMCO in the market is a “bit scary” sometimes, Serrini said, as it is government-owned and often participating in private processes.

In the Chinese market, despite the swifter recovery, a new surge of NPLs is expected, on top of an overhang of sales of NPLs accrued following the last financial crisis.

“A simply massive amount of transactions are happening in China,” said ShoreVest’s Fanger. 

This year, regulators expect banks to dispose of CNY 3.4trn (USD 505.2bn) of NPLs, jumping up 50% over last year’s total of CNY 2.3trn (USD 341.8bn), said China Banking and Insurance Regulatory Commission (CBIRC) chairman Guo Shuqing in August. Next year, disposals will be even higher as forbearance measures on loans come to an end. However, more than 85% of these deals are done with domestic capital, said Fanger. Despite being the second largest in the world, the Chinese market is highly specialised, with relationship creation and understanding of assets key barriers to entry for foreign firms.

“Unless you have an investment making body in China, they won’t take you seriously,” said Fanger.

Looking ahead to solutions

Ultimately the rising flow of NPLs in China is a function of a large NPL balance and the will and capability of the Chinese government, said Fanger. This has resulted in catalysing regulation, forcing banks to recognise losses and sell.

“The government is your best friend when trying to invest,” he said.

Quick action does not equate to taking advantage of people during a health crisis, said Fanger, arguing that helping banks and repurposing assets is beneficial for the broader economy and linked to GDP recovery after crises.

A working paper by the ECB found that there was a close relationship between elevated and unresolved NPLs and the severity of post-crisis recessions during 88 banking crises since 1990.

“The correlation is hard to deny,” agreed Cerberus’s Dejanovic. A functional banking system with the capacity and ability to lend is how you end up with an economic recovery, he said. “Strict clarity” around the formation of NPLs and a timeline for how and when they are recognised on bank balance sheets will be key. Regulators and governments will implement solutions quicker in this crisis, and they should be laying out their preferred options, he said. While the idea of a European or regional bad bank may not be the right course, it “stimulates” the right thought processes to be having these conversations, he said.

The potential establishment of a network of asset management companies was tabled at a European Commission roundtable on 25 September, as reported. Meanwhile, potential public guarantee schemes modelled on the Italian GACS and Greek HAPS schemes have been discussed at central banks and ministries in several European countries, as reported.

Amy Finch Data Journalist Debtwire

Amy is a data journalist for Debtwire. She covers the sale of NPLs and non-core loans, with a focus on Irish and UK markets and unsecured loans.

Amy Finch Data Journalist Debtwire

Amy is a data journalist for Debtwire. She covers the sale of NPLs and non-core loans, with a focus on Irish and UK markets and unsecured loans.

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