Having experienced several non-performing loan offload cycles over the past 20 years or so from Latin America through Asia to Europe, the crescendo of interest over the past year or so in Italian NPLs among distressed debt and other investors is worthy of attention.
Italy has certainly moved centre stage in this arena, and competition for assets has intensified, exemplified in narrower bid/offer spreads (particularly for secured consumer loan portfolios).
I question the need for the government-sponsored bad bank which is supported by Economy Minister Pier Carlo Padoan and backed by the ECB’s Ignazio Angeloni. With Fortress having just exhibited the art of the possible by concluding in principle that massive deal to acquire €2.4bn of NPLs from Unicredit at a 90%-plus discount (neutral on reg cap and net income for the group, mind you), with better sentiment around economic growth in Italy, with expectations of a pick-up in Italian real estate, and with talk about more conducive foreclosure procedures, there’s simply no need for a bad bank, and Italy could avoid the vexed issues of state aid.
In fact, I’m curious about the sequencing and timing here. If the issue revolves around dealing with hefty NPL ratios in the mutual banking sector (banche popolare), it strikes me that it’s more a question about the solvency and future prospects of the sector, its governance metrics and consolidation prospects than it is about dealing with NPLs per se.
Depending on whose numbers you follow and their vintage, it’s tough to get a specific hold on the quantum of the Italian NPL problem. I’ve seen data quoted out of the Italian Banking Association, the IMF, PwC, Bank of Italy and others, that the slug of NPLs is variously (in rising order): €166bn, €177bn, €180bn, €181bn all the way up to €333bn; varying from sub-9% of total loans up to a heady 17%.
One thing’s for sure: the number has grown exponentially since before the global financial crisis as Italy’s recession and some truly dumb-ass lending criteria have taken their toll. But that was then and this is now.
Impressive lineup
If you then do a roll-call of the cool names looking to source paper – including Apollo, Anacap, Ares, Centerbridge, Cerberus, Fortress, HIG Capital, KKR, Lone Star, TPG as well as the investment banks – and figure they’ve got around €100bn-plus in latent firepower plus leverage, the gross NPL number – whatever it is – ends up looking like a surmountable challenge.
Prices in Spain, Portugal and Ireland have been run up and the UK continues to offer sound, if fully-priced opportunities. Meanwhile, Italy became the next frontier in 2014 and interest has carried into this year.
The indications are that bidding is going to get more aggressive. But if you’re an Italian bank and you’re largely provisioned – OK, not a given in a world of somewhat make-believe recovery values in some cases – the level of discount matters less if you can avoid realising a capital deficit and then you write back offload values through the P&L.
Unicredit has made most of the running so far. In the past year to 15 months, as well as the Fortress deal, Unicredit has sold a €1.9bn portfolio of NPLs to AnaCap; gone into a deal with Banca Intesa to have KKR manage a €2bn impaired portfolio; sold €910m of junior/mezzanine Italian project finance risk to funds managed by Mariner Investment Group, and done a deal with Cerberus on a portfolio of unsecured consumer and personal loans with a gross book value of around €950m. Not bad.
As regulatory pressure forces other banks not only to sell delinquent or past-due loans but also to optimise business strategies and regulatory capital allocation and look to sell performing portfolios, other banks will surely follow suit.
Sales in 2014 were upwards of €12bn-€14bn last year. That number could and arguably should be significantly higher this year if buyers and sellers work to reach better accommodation. And there’s the rub. We’ve all seen defeat snatched from the jaws of victory over price machismo on both sides of the fence.
This market is there for the taking. Let battle commence.
