The estimated €300 billion of non-performing loans on German banks' books looks increasingly ripe for securitization as pressure mounts on issuers to clean up their balance sheets. The first deal could come as early as this fall, predict market insiders.
"We expect Germany will provide a healthy stream of transactions--both loan sales and securitizations--as banks look to restructure their loan portfolios," said Chris Greener, asset-backed research analyst at Royal Bank of Scotland in London. German Landesbanks are due to lose state guarantees next July, which will expose them to closer scrutiny--and likely downgrades--by rating agencies. And to comply with Basel II requirements, banks must categorize any loan that is 90 days past-due as non-performing. Currently, there is no standard definition for what constitutes a defaulted loan in Germany.
Standard & Poor's expects a significant portion of NPL portfolios in Germany to be securitized as lenders focus on the benefits of selling the portfolios off their balance sheets, said Michelle Weston, director in the structured finance group in London. S&P recently published a report discussing rating German NPL securitizations, in anticipation of a spate of new transactions. While Germany has the highest level of non-performing loans of any country in Europe, no public securitizations backed by NPLs have been done to date.
So far the only European NPL-backed securitizations have been out of Italy, where €10 billion of issuance through 25 NPL-backed transactions has come to market in the last six years. Italian issuance was spurred by a legislative change in 1999 that gave banks a two-year window to write off losses derived from NPL securitizations over five years, as well as special tax breaks. Yet the market for potential deals from Germany dwarfs those from Italy, since German banks have about six times as much in NPLs as their Italian counterparts.
Still, some market participants remain skeptical about German issuance, because there is no similar tax or fiscal incentive in Germany. They added there is no debt collection framework in Germany akin to that in Italy to support recovery rates, and point out that the German banking system is very fragmented. The result is a large number of loan portfolios that are too small to securitize individually.
