The news last month that KKR is working with two Italian banks – UniCredit and Intesa Sanpaolo – on a vehicle to house a portfolio of their restructured loans is further evidence, if it were needed, that private debt funds are playing a key role in banking reform.
As the traditional banking community strives to reconfigure balance sheets and re-home the problem children in their loan portfolios, savvy credit investors are proving increasingly adept at finding ways to house such assets.
Federico Ghizzoni, chief executive of UniCredit, confirmed that his bank and Intesa Sanpaolo were in talks with KKR over a vehicle to house restructured loans from both lenders. “It’s a project concerning [loans to] restructured companies, so it’s not a bad bank,” he told reporters. “There is also the possibility of injecting equity into these companies,” he added.
As of 31 September, UniCredit had a total of €8.1 billion in gross restructured loans on its books, while Intesa had €2.5 billion.
Italian daily La Repubblica, which first reported the talks, suggested KKR would invest in the vehicle with the two banks holding a minority stake that would allow them to remove the loans from their balance sheets. Ghizzoni added that a systemic ‘bad bank’ of the kind set up in Ireland and Spain had not been discussed with Italian prime minister Enrico Letta.
Ignazio Visco, governor of the Bank of Italy, has encouraged Italian banks to clean up their balance sheets by offloading bad loans before European regulators conduct a health check of the country’s banking sector.
KKR’s initiative – which, it should be noted, is at a very preliminary stage – would follow a number of similar deals in recent months.
In January, for example, AnaCap Financial Partners acquired a portfolio of performing loans from Gruppo Monte dei Paschi di Siena, another Italian lender. A few months earlier, GE Capital continued its shift from real estate equity investing to lending when it acquired a £1.4 billion (€1.7 billion; $2.3 billion) portfolio of performing European property loans from Deutsche Postbank. Fortress Investments, meanwhile, is in the process of raising a fund exclusively targeting Italian non-performing loans. It has raised more than $888 million for the vehicle to date.
It’s interesting that in the case of Italy (and Germany) at least, regulators appear to favour private market solutions to the country’s banking woes, rather than a state-run ‘bad bank’.
The stress tests to be carried out by the European Central Bank on the continent’s banks this year are likely to precipitate many more such sales as lenders looks to offload riskier credits which have a punitive effect on their balance sheets thanks to the new capital adequacy ratios.
Europe will be the epicentre of such activity, because US banks have generally been more proactive at cleaning up their balance sheets in the wake of the economic crisis. It also has a more efficient secondary market in such loans, with established institutional players able to call on entrenched relationships. Familiarity also means less likelihood of significant mismatching when it comes the seller and buyer’s pricing expectations.
In Europe, banks have been more reluctant to book writedowns or write-offs, preferring to warehouse bad assets and await a recovery. Time is running out, and with markets improving and fierce competition for such loan portfolios developing (thereby driving up prices), Europe’s banks are starting to shift some inventory.
Lee Millstein, senior managing director at Cerberus Capital Management, is certainly of this view. “We think the biggest opportunity is the deleveraging and cleaning up of the European banks,” Milstein said back in January. “It is not just the NPLs on bank balance sheets – €1.2 trillion and growing – but also huge amounts of real estate and companies that they have taken back through some kind of administration or foreclosure process. Combine that with the need for capital, and we see a huge flow of product coming out of bank balance sheets.”
Increased deal activity of this sort is good news for all concerned. For private debt funds, it provides a ready source of dealflow, although as discounts narrow such deals begin to look less attractive. For the banks, offloading non-performing or even performing loan portfolios frees them up to fund new deals. That in turn is great news for sponsors and European corporates.