Eastern Europe NPL’s – Opportunity

I recently had the opportunity to sit on a panel in Bucharest and discuss the opportunities around Eastern European nonperforming loans. I believe this is an area investor should focus on as outsized returns can be made, and a very consistent structural and regulatory framework is in place as a result of the ECB and other participants.

The nonperforming loan and emerging-market conference was very interesting. The main theme was that there are extremely attractive investment opportunities, experienced professional players both in servicing and sourcing debt, and a willingness to follow in the ECB framework around restructuring nonperforming debt in Eastern Europe.

Here are excerpts from my presentation:

Overview

  • NPL slower than expected
  • Highest NPL levels are in Cyprus Greece Portugal Ireland Italy and CEE
  • Banks are not all equally prepared – lack of workout teams, lack of partners
  • Structural impediments remain such as heterogeneous insolvency regimes, protection against foreclosure, court limitations, insufficient skills
  • Prices not attractive enough – different macroeconomic outlooks, lack of incentive to dispose, state aid, bailout
  • Limitations on government assistance legal constraints on government assistance, EU state aid rules, EU fiscal capacity, AMC formation slow
  • Unwind momentum continues in in Italy, Spain, Portugal
  • Reduction in unwinds in Ireland and UK
  • Deleveraging pressures include more stringent accounting rules, higher capital adequacy rules, regulatory pressure, and ECB intervention
  • More complex portfolio’s coming to the market as more difficult and distressed loans come to market
  • EUR 2 trillion in unresolved non-core assets in Europe remaining* ( *2017)

Geographic overview

  • Expectations favour southern Europe, Spain, Italy, Portugal, Greece, Cyprus
  • Ireland and United Kingdom expected to continue but in more complex transactions in residential loans (Bradford and Bingley, PFI ect)
  • Brexit affected Ireland and United Kingdom NPL resolution
  • Germany much lower unwind levels than would be expected given size of market, EAA & FMS slow pace with long-term wind down mandates
  • Netherland dominated by real estate ABN and Rabo main players
  • Portugal has regulatory and political restrictions on NPL sales, expect increase in loan disposals
  • CEE expect deal opportunities in Serbia, Slovenia, and Croatia
  • Greece, Cyprus present huge opportunities, however banks reluctant to dispose of loans after ECB bailout, huge valuation differentials

Italian market biggest potential, legal reforms have helped begin to unlock market. Biggest NPL ratio of large European economy

Market dynamics

  • ECB “whatever it takes” effect is tapering
  • New tail risks exist due to volatile political environment
  • Uncertainty creates investing opportunities
  • Forced sellers, debt reduction targets,
  • Huge demand from dedicated distressed and NPL investors globally
  • Residential transactions are on increase in larger more developed NPL markets
  • Fewer deals more competition in Western Europe large economies
  • Legal jurisdiction still makes a difference
  • Heterogeneous bank attitude towards disposals some banks motivated some banks complacent
  • Italy, Greece and Austria are being “forced” to become more realistic in price expectations

Industry sector overview

UK and Ireland residential is attractive, other sectors have been picked clean

Germany low volume, problem loans in shipping , aircraft, energy, commercial real estate

Netherlands disposals in commercial real estate, residential mortgage loans

Spain & Portugal Real Estate, with increase in SME, and corporate NPL’s

Italy dominated by SME and Real Estate but banks slow

Austria & CEE is dominated by corporate residential & consumer

Greece & Cyprus unclear all sectors exposed disposals slow no clear sector bias

Please let me know if you like to receive the presentation. I can be reached at [email protected] or +442078393456