Banca Popolare di Bari, a small lender from Italy, seems to want to be first to access the new Italian government guarantee scheme for non-performing loans (NPLs), painstakingly negotiated with the European Commission (EC) and carefully structured to avoid the appearance of being state aid.
The board of the bank said it had approved a plan to sell a €800m deal, moving around half the firm’s total NPLs, in a public securitization which targets investors. The Italian finance minister, Pier Carlo Padoan, was quick to praise the bank, and the names of deal parties started to drift out — JP Morgan arranging, Prelios Credit Management and PricewaterhouseCoopers.
That is quick work, by securitization standards. Gathering and checking data for a non-performing portfolio could easily take more than six weeks alone, never mind setting up an SPV, and agreeing a strategy and to any underwriting.
Which is why it has not got there yet. Doubtless Banca di Bari wants to get it done, but the hard work of the transaction has barely begun — the junior notes are nowhere to be seen. In fact, the design of the scheme all but guarantees these will be fiendishly hard to place.
To access the government guarantee on the senior notes (priced at a blended spread related to CDS markets), banks need to prove private sector demand is in place for 50% of the junior notes in a securitization.
But by structuring NPLs into a securitization, rather than selling them as a portfolio, investors are deprived of the main benefit of getting involved — the chance to work out loans themselves, faster or more effectively than the original holders.
This is why private equity firms buying whole loan portfolios tend to own loan servicers, or buy them alongside the assets. Apollo, it seems, is willing to essentially buy the whole of Banca Carige to access €3.5bn (par value) of NPLs.
In a NPL securitization, however, the servicing of the loans would be pre-arranged, and there is little reason to assume banks would up their game just because they had sold a portfolio to the market. That means the non-performing assets would stay non-performing, and little or no cash would flow through the bottom of the capital structure.
“You never particularly want to buy assets from someone who knows far more about them than you,” said one ABS investor focused on high yielding junior assets. “The real value in NPLs is in the ability to service, with maybe senior financing from elsewhere.”
Banca Popolare di Bari might well have solved the data problem — perhaps this book has particularly good information behind it, and perhaps it has solved the servicing problem too. Even if the bank has not solved these problems, it wouldn’t absolutely stop a deal getting done.
The capital markets do have a price for pretty much anything, but it might not be a price that Banca Popolare di Bari likes. The congratulations may be a little premature.