NPL securitizations to ‘reignite and grow’
After slowing down in 2020, the outlook for publicly distributed securitizations of non-performing loans is expected to improve, along with the breadth of assets and structures on offer
Bankers are hopeful that the pace of non-performing loan securitizations will improve over the course of 2022, particularly with respect to debt that does not benefit from a state guarantee and is more fully distributed in the public market.
According to data collated by DBRS Morningstar €101.6bn of NPLs were securitized between 2016 and 2020.
At €95.8bn, the vast majority of this was from Italy where banks took advantage of the government’s Garanzia Cartolarizzazione Sofferenze (GACS) programme. GACS is similar to the Greek government’s Hellenic Asset Protection Scheme (HAPS) programme.
The Greek and Italian governments guarantee the investment grade rated senior tranche of the NPL securitization, enabling the originating bank seller to hold this debt on their balance sheet with no capital charge. The junior portion is often placed with an investor in the form of a bilaterally negotiated private placement.
Deals that do not benefit from a state guarantee and are more fully placed in the public market have been slow to get off the ground but the picture should improve.
According a report published by consultants, Deloitte, NPL transaction activity came to a halt during the second quarter of 2020, but in the second half of last year activity sprang back. Even so, NPL sales for 2020 as a whole “marked a major slowdown” compared to previous years.
The European Banking Authority’s fourth quarter 2020 Risk Dashboard suggested that the total stock of European bank NPLs including the UK fell by €56bn to €528bn as of December 2020 but this “likely masked the true picture,” said Deloitte.
NPL deal flow to reignite
Based on their analysis €900bn of European loans received support through EBA-eligible moratoria of which 70% were granted by banks in France, Spain and Italy, “making these jurisdictions potential hotspots as measures are unwound,” said Deloitte.
Rating agency analysts also anticipate a pick-up. “Most moratoriums are expected to end this year, so it’s likely we’ll see an increase in NPLs at some stage in 2022,” said Maria Rivas, who works in the global financial institutions group at DBRS Morningstar.
Rivas did however concede that the composition of NPL assets and the proportion that were likely to be securitized was difficult to assess.
In a report published this week DBRS said that that the effects of the unwinding down of the relief measures on NPLs on banks' balance sheets were yet to be seen.
As the moratoria and public guarantee schemes expire and other measures reverse, DBRS expects to see NPLs increase with the pace of asset deterioration dependent on a range of factors, including the full country's economic recovery.
A senior securitization banker told GlobalCapital this week that he was also optimistic on the outlook for NPL securitizations in 2022 — without public guarantees.
“We can now see a re-emergence of those transactions,” he said, with reference to a few trades secured on Italian and Iberian collateral that asset manager, Oaktree, is believed to be working on. “It’s a natural evolution for institutional investors to get involved in liquid rated structures, the market will reignite and grow”.
The Bank of Cyprus is in the process of selling a mixed €2.2bn NPL portfolio to Pimco.
According to DBRS Hestia Financing will offer €475m of triple-B rated class A notes, below which stands an unrated ‘Z’ class of €1.725bn.
The deal is being arranged by Barclays and Alantra.
The Cypriot deal follows two recent Irish NPL transactions. On November 11 Goldman Sachs priced Portman Square 2021-NPL-1, a portfolio of Irish NPLs originated by Allied Irish Bank. The deal followed Rathlin Residential 2021-1 DAC which was another Irish NPL of loans originated by Ulster Bank and arranged by Morgan Stanley issued on October 20.
New assets, new structures
NPL securitizations have typically been secured on residential portfolios but DBRS expects the NPL market to evolve with new asset types and new structures.
“We expect structures to be adapted to accommodate the needs of the market,” said Sinem Erol-Aziz, who works on the European Structured Finance team at DBRS.
Erol-Aziz pointed to two GACs-compliant leasing deals that had surfaced earlier this year and said that forthcoming transactions could be expected with real estate companies (RealCos) or lease companies (LeaseCos) “attached to the structure”.
RealCos, or LeaseCos are specialist companies that have a mandate to improve auctions bids, reduce delays and prevent unnecessary discounts to enable best pricing and in theory should lead to a better recovery.
The market for NPL securitizations should also benefit from the European Commission’s Action Plan which is mainly aimed at improving transparency through the provision of a central hub.
Each country has its own way of presenting data, so in order to improve cross border investment, “it would be helpful to see this information presented in a standardised format,” said Erol-Aziz.