Notable exceptions to this trend include Greece and Spain where opinion is fairly evenly divided as to whether IRRs will increase or decrease in the next two years.
“As the securitisation markets in general continue to open up across Europe following increased activity over the past 12 months, we can expect to see a continued increase in the use of securitisation structures for NPL resolution going forward.”
In each nascent NPL jurisdiction, primarily in Europe, the principal impediments have been the all-important “bid-ask spread”, data quality and insufficient sell-side resources. While those factors clearly still remain, our research suggests that the sell-side community is now finding transaction costs and reputational concerns as more pertinent considerations when bringing NPLs to market.
Therefore, while hospitality assets represent attractive growth potential for investors, there can be an understandable reluctance among sellers to dispose of assets in this sector
In the aftermath of the global financial crisis, NPL transactions were a boardroom priority and budgets, in general, were simply “found”.
In general, there is less appetite for significant outlays. The increased use of securitisation-based structures in some markets also inevitably generates higher transaction costs given the complex structuring required for these types of transaction.
Now, in a more mature market, NPL resolution is perhaps viewed as more business-as-usual and commoditised (with the exception of financial institutions located in jurisdictions with high NPL ratios that are subject to intense regulatory scrutiny and targets to fix their NPL problem)
Reputational concerns are another indication of an increasingly mature market. In recent years, European economies have generally been recovering and individual banks are progressing through their NPL resolution programme. In the mature Western markets, some banks have concluded their processes altogether. It is, therefore, unsurprising that financial institutions are increasingly unwilling, to the extent possible, to show their hand on the extent of their current NPL burden and the impact of declining asset values where that is a consideration.
It is interesting that sellers cite a limited number of potential buyers as an impediment to sales processes. While this sits at the bottom of the list, it was unexpected to see it feature at all, given that there is so much dry powder apparently in the market.
This may be indicative of the difficulty sellers face with niche asset classes such as shipping. Equally, not all investors are prepared to undertake securitisation transaction investments or invest the time and money needed to fully understand and evaluate less mature NPL markets.
There appears to be a broad correlation between the asset classes that sellers wish to sell and the asset classes that investors wish to purchase
Acknowledging that the data on this point looks holistically across all regions, there does appear to be a broad degree of correlation between supply and demand for commercial real estate assets, large commercial credits, SME loans and shipping loans.
Interestingly, however, responses suggest that there may be greater sell-side need than investor appetite for retail assets (ie consumer unsecured loans and residential mortgages) and that there is a greater investor appetite than sell-side need for hospitality sector loans. The hospitality sector has generally out-performed the market and has been a key driver for economic recovery in jurisdictions such as Greece and Cyprus.
Eighty percent of investors favoured secured portfolios as opposed to unsecured NPLs with commercial real estate remaining the most sought-after asset class.
One of the particular challenges for investors in ever-maturing NPL markets is sourcing portfolios with the optimal composition. Our survey demonstrates that investors are most interested in portfolios comprised of a smaller number of borrower connections with higher-value assets (59%) or, alternatively, single name credit sales (41%).