Secondary NPL market proposal receives mixed response

The EC has proposed establishing extra-judicial measures to collect collateral to help deal with Europe’s NPL mountain, but not all are convinced this is the solution to kick-starting the much anticipated sell off of toxic assets.

The European Commission has proposed introducing an “accelerated loan security” as a way of boosting the sale of non-performing loans, but some are not convinced it will correct long-standing problems with the inefficiencies in the market.

Data from Deloitte points to a slower start to sales in the first half of this year compared with the same period last year (€42 billion in 2017, €45 billion in 2016).

Clearing underperforming assets from the banks’ balance sheets is a chief priority for the European regulators, but the slow pace has pushed the European Commission (EC) into exploring the possibility of developing a secondary NPL market. The body is undertaking a consultation with the market on how to shape it, which is due to end 20 October.

Among its main areas of concern is wide bid-ask spreads due to a lack of data on assets and a low number of servicers in jurisdictions to monitor the loans. This has led to a concrete proposal for the establishment of an “accelerated loan security”.

An accelerated loan security would enable owners of assets to collect collateral via extra-judicial mechanisms – a method that exists in only a small number of jurisdictions in the EU. The result would streamline the process and, as the EC argued, “improve predictability and timeframes of foreclosure proceedings”.

Out-of-court repossession rights exist already in France, Germany, and the UK and last year Italy revamped its foreclosure laws with the introduction of similar measures. Under the EC’s plan these would be expanded to each member state.

According to an impact assessment report published by the EC, borrowers would benefit from lower interest rates provided by banks, while the latter would be better incentivised to lend across jurisdictions as the risk of providing credit would be reduced.

“A greater convergence in the EU secured loan enforcement system could benefit enterprises and consumers by making credit more readily available. More integrated loan recovery systems play also an essential role for EU capital markets to function efficiently, increasing the attractiveness on a consistent basis in all member states,” the consultation paper said.

However, some are not convinced it will have the positive effect that the market is hoping for. Justin Conway, partner at law firm Jones Day, said he welcomed the opportunity to review the existing mechanisms, but questioned whether it would have a material impact on correcting some of the inefficiencies in the NPL market.

“I’m not convinced having another enforcement tool is going to help considering how rarely it is used. It goes into the modelling but it is not given a huge amount of weighting.”

However, investors argue that it is likely to help with banks offloading toxic assets. Amelia Colvin, global head of distressed and NPL assets at Cadogan Securities, said that the introduction of the accelerated loan security could help with narrowing bid-ask spreads because there would be more clarity on the foreclosure procedures.

“If I look at the loan contracts then I’ll pay more if it is in the terms of the contract that there is an acceleration process.”

Timur Peters, managing director at Frankfurt based marketplace Debitos, welcomed the initiative. “It’s about the efficiency of the secondary market. When trading non-performing loans, the difference between investors’ bids can be as high as 50-60 percent. This bid spread is far too high.”

He added: “A more efficient secondary market could significantly reduce it. Our auction-based exchange shows that the demand for innovative solutions is very high in southern European countries, such as Italy and Span.”

Italy is the market where many investors are focused as estimates place the value of NPL assets sitting on banks’ balance sheets at €360 billion.

The country is keen to make it easier for investors, but many argue more needs to be done to improve confidence among international investors. While improving the legal framework is key for investors, there is still much that needs to be done to kick-start the sales many had hoped for at the beginning of the year.

Colvin said: “There is a lot of dry powder on both sides of the Atlantic and with yields at historical lows many are turning to Italy. Some of this has been fuelled by innuendo and rumour, but few are seriously investigating what is under the bonnet.”