Securitization Market Sees Slower NPL Increase
While it’s difficult to be positive on the outlook, securitization market participants expect only a modest increase in nonperforming loans in Europe this year, according to CSC and GlobalCapital’s annual securitization pulse survey.
Distressed debt buyers and debt purchasing firms, however, are gearing up for a bumper year and expecting available volumes to double or more as consumers and SMEs reel from the impact of the pandemic.
A majority of European market participants expected European NPL stocks to increase between 1% and 24%, with none of the respondents expecting more than a 50% increase. By contrast, some estimates elsewhere expected NPL stocks to more than double.
For instance, consultancy Oliver Wyman has said it expected that level of increase—even without a second round of lockdowns in Europe—while bank provisioning figures point to significant rises for 2021.
Experience monitoring consumer credit through 2020 might be giving some market participants confidence. Payment holidays and forbearance measures have been lower than many expected at the beginning of the pandemic, with a rapid return to making payments in many jurisdictions. SMEs have had a tougher time, but they make up a small proportion of the European securitization market, so business failures may not be weighing on investors’ minds.
Securitization market participants expected relatively stable volumes of NPL deal flow as well. Not all NPL portfolios trade in securitized format. This approach to leveraging NPLs is most common in countries with state-backed schemes, such as Italy’s GACS or Greece’s Hercules. But these are also the jurisdictions likely to account for much of the supply.
Survey results indicate that Italy remains the most attractive jurisdiction for NPL opportunities in Europe. Some funds argue that much of the value has already been extracted, and competition for portfolios makes prices too high, but the pandemic’s impact has likely reset expectations.
Leverage has become more expensive, and the poor collections performance of some existing transactions has put off the fainthearted. This has left a market with deep infrastructure and experience in NPL sales, but less competition to buy portfolios.
Several market participants highlighted the U.K. as an attractive jurisdiction for NPL purchases. The truly non-performing market has been small in the run-up to the Covid-19 crisis, but the scale of non-core and legacy asset sales from the banks nationalized in 2008 has been enormous.
By asset class, unsecured consumer loans and residential buy-to-let mortgages emerged as the most compelling opportunities. The latter is directionally pointing to the U.K. since BTL is a relatively underdeveloped market elsewhere in Europe.
Few European respondents saw much value in commercial real estate NPLs, but a more detailed breakdown by sub-asset class might have been helpful. Shopping center valuations and hotel revenues have collapsed, whereas logistics portfolios have performed well, with offices somewhere in the middle.
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About the survey:
The data is based on a market study conducted by GlobalCapital during August and September 2020. A total of 180 responses were collected across 31 countries in Europe and North America, spanning mid- and senior-level executive positions and four core stakeholder types: issuer-sponsor, service providers, investors, underwriters-arrangers-bookrunners-structurers, and other.
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