Distressed investors are looking to Germany expecting a perfect storm that will ultimately lead to a fresh supply of new product coming out of banks and into the distressed loan market. Public German banks that are set to lose their state guarantees in July 2005 will be looking to sell their problem assets while they still have investment-grade ratings, noted one public-bank loan official. Additionally, the looming Basel II requirements are also expected to encourage sales as banks anticipate new capital requirements. Finally, a general restructuring at private German banks is also creating fresh assets for the taking.
"I think there is a major restructuring going on and will continue to go on," said one sell-side official, explaining that non-core and distressed assets will be rolled off balance sheets in one way or the other. European loan sources have already observed an increase in the number of transactions completed. "It's been a significant increase," said one, noting that Germany has specifically been the source of many assets. He said $20-50 million pieces have been sold in both a mixture of auctions and straight sales. "A number of banks have been selectively selling off portfolios," said the loan official.
Large private banks, including Dresdner Bank, Deutsche Bank, Commerzbank and HypoVereinsbank, do not have state guarantees and therefore are not affected by the their elimination. But market players are observing these banks are "cleaning house" as well. Dresdner Bank has been very open and pro-active about selling down non-core assets through its Institutional Restructuring Unit. Karl-Friedrich Brenner, a spokesperson at Dresdner, said he believed that other banks would look to create similar units. "Investors all over the world are getting more interested in the asset class," he said.
Not everyone is expecting a flood of prime assets out of German banks. "Germany has been the hot thing for the next year--for the last five years," said one European dealer, quoting a popular axiom. One reason some believe the supply will not live up to investors' expectations is that the assets banks sell will be largely smaller enterprises, which will not be useful to the typical institutional investor portfolio, one European buysider explained. The loans will be a lot better for the statistical-type of investor who will buy up blocks of loans, build an infrastructure to service the loans, and play a numbers game, he said. Yet, other market players insist that distressed investors will have to adapt to the supply if they will continue to fill up their coffers. With the economy on the mend, distressed investors are looking for where their next paycheck is going to come from, said one distressed salesman.