I READ THE other day that European banks had completed €55bn in loan portfolio sales so far this year, 20% up on the same period of last year. That’s pretty impressive, I thought. Much more compelling, though, is that another €84bn is in the works, according to the Q2 market update from PwC’s Portfolio Advisory Group, and total sales this year could hit €150bn. Given the amount of heady activity out there, that may be conservative.
“European banks are disposing on their unwanted loan portfolios at a record rate,” Richard Thompson, global leader of the portfolio advisory group at PwC, wrote in the report.
As economic recovery takes hold, the lack of primary loan activity starts to bite, as better levels of CLO formation kick in, as banks and government asset management agencies continue actively to run off assets, and banks mark non-core assets for potential sale on the back of the ECB’s asset quality review, you’d imagine that bidding conditions are only going to get tighter.
And with good availability of leverage, hedge funds, vulture funds and private equity firms will get the bit even more solidly between their teeth. All told, it looks like the velocity of sales is going to pick up while prices in the secondary loan market as well as portfolio auction prices are going in one direction. And that ain’t down.
BWIC activity out there, meanwhile, suggests some opportunistic trading for gain that has also seen a fair amount of fund and CLO position selling over and above bank activity.
UKAR’s €17.6bn Project Granite disposal out of Bradford & Bingley and Northern Rock assets was a huge boost to the UK total, while RBS has been a super-active seller: US$42bn of US and Canadian loan commitments to Mizuho; a portfolio to a Deutsche Bank-funded entity and funds affiliated with Apollo for £400m; multiple sales to Cerberus (£225m in July; £205m in May; £1.1bn in December 2014); its US$820m UAE corporate loan portfolio to Commercial Bank of Dubai.
Similarly, GE’s massive SIFI-reduction trade has seen the sale of the European mid-market private equity sponsor finance business with a loan portfolio or around US$2.2bn to SMBC; a US$1.2bn sale of loans from its UK home lending portfolio; and BNP Paribas taking on most of the fleet management business (including European vehicle assets of €2.4bn).
Conditions for an acceleration of the asset recycling process – all things being equal – are near perfect
THE UK, IRELAND AND Spain dominate the action, not surprising given those countries’ AMA (UKAR, NAMA and Sareb) have active disposal programmes – and hold 91% of the €233bn of gross non-core real estate exposure (€144bn net after loan-loss provisions) of all European AMA, according to C&W Corporate Finance.
Sareb closed 11 deals last year with major institutional investors, while in May 2015, BFA-Bankia sold a €558m portfolio of 180 doubtful real estate developer loans via competitive tender. In Ireland, Oaktree won NAMA’s Project Albion, a £226m multi-borrower loan portfolio secured mainly by UK and Dutch commercial property for around 51% of face value; Deutsche Bank won Project Maeve, a €785m par debt loan portfolio secured mainly on hotel, commercial and development assets located primarily in Ireland, bidding a reported 88% discount. Project Arch, a €608m par debt multi-borrower loan portfolio, is next up and about done.
But, as I’ve written about this year, Italy is coming up the ranks. UniCredit leads the way with multiple disposals this year and last, and driving that landmark deal earlier this year where, in concert with Intesa Sanpaolo, an initial €1bn of credit and equity exposure to companies in restructuring will transfer to a platform managed by KKR; Intesa, meanwhile, is separately considering the sale of €2bn of broker-originated consumer credit.
Germany is showing solid growth signs, too. Aareal Bank bought the WestImmo platform earlier this year. Commerzbank sold its Hanseatic Ship Asset Management ship restructuring platform to KKR for €233m; a €2.2bn European loan portfolio to JP Morgan and Lone Star as well as a €700m NPL portfolio to Oaktree.
Meanwhile, the Netherlands (Cerberus acquiring a €400m portfolio of non-performing CRE loans earlier this month from F van Lanschot Bankiers) and Eastern Europe (Banca Comerciala Romana’s jumbo €2bn-area distressed loan sale and speculation that Hungary and Poland are set to become focal points) also offer good opportunities.
In mid-April, Thomson Reuters LPC reported that secondary loan prices hit an eight-year high and Europe’s top 40 loans composite was quoted above par. On an individual basis, one in three individual credits were also quoted above par the beginning of Q2, up from one in 12 at the end of 2014.
WHEN YOU SEE the gargantuan numbers thrown out around the level of NPLs in the European banking system – or the €2trn worth and five years of deleveraging still to go – it’s easy for market participants to get a little despondent. But transforming your asset base, having non-bank buyers work through the books and get accommodated on price was always going to be a little messy. In the early days of the post-crisis period, there was a lot of prospecting but little activity.
Conditions for an acceleration of the asset recycling process – all things being equal – are near perfect. How regulators get a handle on the massive asset shift out of the banking sector into the shadow banking arena is going to become an increasingly pressing agenda item. But that’s a story for another day.