CV Day 2017 – Metamorfosi

Save the date – 22nd November 2017 – Crowne Plaza Milan Linate – san donato milanese

The “Metamorphosis” will be the common thread of the 11th Edition of the
Credit Village Day, that will be held on November 22, at the Crowne Plaza
Hotel in Milan.

Event Website

Read the full program

See the speakers

CV programma

Press Release

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GLG – Gerson Lehrman Group – Council Member



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Why Carige and Creval experience proves that ECB was right on guide lines

The recent troubles that Carige and Creval experienced in going to the market to raise new capital can be considered a confirmation of how needed and appropriate are detailed guidelines on NPL accounting and why the attempt of undermining this wise practice are senseless.

Cover BCE

This year both Carige and Creval were allowed to offload some relevant NPL portfolios from balancesheet through securitization schemes involving GACs. The presence of Governmente guarrantee (even though paid at market price) has significantly reduced the  impact on P&L and helped to smooth the consolidation process.

Nevertheless when the 2 banks have announced the project of capital increase larger than expected markets started again to question the fair evaluation of their NPL book.

Would the new ECB guidelines be already in place the higher transparency would have spared the troubles the 2 banks are experiencing these days.

Will Italian editors, politicians and bankers learn this lesson?

Yu can read my take on ECB Guidelines in this post

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GLG – Gerson Lehrman Group – Council Member

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Was FINO transfer price fair?

According Bloomberg :

The European Central Bank is examining UniCredit SpA’s landmark sale of 17.7 billion euros ($20.6 billion) of bad loans to assess whether the price the bank reported accurately reflects the terms of the transaction, according to people familiar with the matter.

The same article also pointed out that the Unicredit Deal has been analyzed in a Bank of Italy research paper : “Progetto FINO: definizione del framework per l’interpretazione dei prezzi di mercato e analisi delle principali determinanti”, Note di stabilità finanziaria e vigilanza N. 9 – Giugno 2017

It is not easy to try any comment since the info publicly available are quite limited, nevertheless  I would underline that:

  • the transfer price of some 13% of GBV (as reported in the BOI report) for a mostly corporate unsecured portfolio with almost 1/3 qualified as “old vintage” (defaulted before 2009) can be considered significantly higher than level seen on secondary market for similar portfolios
  • the P&L impact of the deal is one of the key for the business plan underlying one of the biggest capital increase ever seen on Italian Stock Excahge
  • Unicredit is a Systemically important financial institution in a global perspective and the second most relevant Bank in Italy (with a market share of some 1/4 of the toal market) and therefore the transparency of its behavior is definitively worth some additional attention by ECB

Given these premises is very difficult to assess the transfer price level without detailed info on portfolio composition, underlying collateral as well as getting an understanding of the broader strategy of the buyers and the complex structure of the deal. Just to name some potential drivers that can explain the high price:

  • part of the portfolio could be actually secured, PIMCO is said to have taken the part of the portfolio that includes some real estate collateral even though  the entire portfolio is qualified as mostly unsecured by Bank of Italy report – If there is a secured part than the transfer price can be considered fair
  • large corporate typically show higher recoveries – according the BOI research some  9.8Bn out of 17.7 should be large corporations, this is not enough to explain the entire extra price, but could be part of the explenation
  • vintage is positive for bankruptcy price – even though for unsecured portfolios vintage is usually considered a negative element, since bankruptcies need more time to collect (see the blue line in the graph below) if a large part of FINO was composed of Bankruptcies, with relevant amount off so colled “cash in court” (meaning
  • the structure of the deal (vendor financing, deferred price, seller keeping a stake in the vehicles) may also affect the price


Getting back to the main subject, according bloomberg

Some of the commissions the Italian bank will pay to the buyers to manage the loans over coming years could be inflating the price, the people said, asking not to be identified because details of the transaction are private.

This is the most difficult part to verify. Data on market practice on recovery fee are usually not public and may significantly change depending on the nature, vintage, geography and size of the portfolio.

My take on this is that ECB attempt to understand better the economics of the deal are definitely legitimate, but it will be probably not possible to figure out if the suspected extra price paid for the portfolio will be compensated by a reduced purchase price for the credit management platform (doBank) or by inflated fees on future recoveries.

Potential variables affecting the investment decision like the opportunity to consolidate buyers market share, the expectation on the performance of the servicing platform, that eventually have been listed on Italian stock exchange, as well as private info non publicly available (buyers expected rate of return, forecasts on credit management market and so on)  brings in the matter a level of complexity way to high for the regulator to handle.

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GLG – Gerson Lehrman Group – Council Member

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63Bn in 9 months – is servicing market ready for the workload?

According the Credit Village NPL Observatory (here the press release) by the end or 2017 3rd quarter 137 transfers agreement of NPL portfolios were signed in Italy for a face value of 63Bn.


The main question arising from this exceptional boost in sales is if existing servicing capability available on the market i enough to manage the workload. A partial attempt to answer this question will be discussed in the 11th CV day on 22nd November (here the program)

While most of news sources are focused on upcoming and announced deals, the  Credit Village NPL Observatory tries to understand what part of the told pipeline is actually closed and to spot also smaller transactions that are usually are not reported in newspaper.

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GLG – Gerson Lehrman Group – Council Member

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Excusatio non petita

As widely reported by Italian blog the recent addendum to ECB’ Guidelines on NPL management has triggered several negative reactions from Italian editors and politicians.  The main concern seem to be that new severe regulation may increase significantly the expected provisions and therefore hurt Italian banks and depress their market capitalization. Hence the need to defend local champions against the bad German bureaucrat.

There is a Latin motto to describe this

Excusatio non petita, accusatio manifesta

it means that defensing oneself before anyone have started accusing is equivalent to admit to be guiltily.

So if central bank is simply recommending fair accounting of NPLs those who claim excessive austerity are implying not only that current internal guidelines are inadequate but also that the cost of revising them is hardly bearable, and by contrasting the request of additional transparency they are saying that this issue is not a relevant priority.

My view is in order to take the opportunity to campaign against austerity and European entities little attention has been paid to the detail of the specific document  and to the global framework proposed by ECB.

Let’s try to understand it better.

What exactly is asking ECB in this addedum?

First of all let’s point out that guidelines are not a binding rules: it is a reasonable suggestion on the behavior expected under a prudential approach to NPL provisions. Secondly let’s remember that the last addendum is a draft, open to comments until December 2017.

Then what is ECB asking? That within a reasonable term a non performing exposure should be fully provisioned. The idea is at that point the credit should either be recovered to the possible extent either classified as zero recovery exposure. Please note that, deviations may be considered as clearly expressed in the picture below:


Therefore there is no mechanistic approach as Italian editors seem to believe: if relevant evidence of future collections are available the backstop may not be applied.

Since the basic concept is not too complex the seems quite reasonable according common sense, how about the time frame proposed? The term to trigger the backstop is differentiated between secured and unsecured claim:


Are these deadline appropriates? Let’s give a look to the following graph:


it is taken from a bank of Italy research paper ans shows that 7 years seem to be an appropriate term for secured loans: by that time foreclosures and restructuring agreements in Italy have collected almost everything and only bankruptcies  need more time. Nevertheless enough evidence should have been collected in order to point out  if further recoveries are to be expected or not.

What about 2 years for unsecured loans? It is slightly more complicated because you may have 3 cases:

  1. legal workout process in which enough evidence should be available to decide whether the credit should be fully provisioned or not
  2. positive out of court workout in which 2 years are enough because either the borrower has paid either he is still paying
  3. negative out of court workout where in 2 years you may not be in the position to decide if something will be collected in future or not

what can be conclude? That the suggestions works pretty well with the only issue of unsecured loans with negative out of court workout process. Let’s take a look to a table coming from another Bankit research paper 


Unsecured loans recovered on average 36% in Italy between 2006 and 2015 and recovery rates are going down as also reported in the following graph


We are therefore saying that the most severe issue is 100% provisions on a portion of unsecured loans that, since no legal workout are pending or in progress and out of court recovery process was negative, have low probability to collect anything in future.

Bottom line is that ECB is asking to manage NPLs properly and within a reasonable term (in line with data available for Italy) to book 100% provisions if no relevant evidence are available of further collections (this analysis has been published in Italian on blog).

Accusatio manifesta

As I tried to explain, ECB is only trying to propose commonsense elements in NPL management in order to achieve higher transparency and fair representation of Non Performing Exposure values on balance sheets.

Those who deem this as austerity or bureaucracy excess  or mechanistic approach have either misunderstood the content of the document (and the nature of guidelines that are not binding neither unconditional automatic rules) either accused Italian banks of beeing unprepared to apply fair accounting rules. In this last option they believe that transparency is low priority issue and “not hurting banks” is so important that keeping NPL on book at unrealistic values may be accepted.

PS this blog is just a place where I propose my comments and views and cannot compete with large newspapers and Pundits columns so if you like it just share  my posts.

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GLG – Gerson Lehrman Group – Council Member

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Why the Prudential provisioning backstop won’t hurt (too much) Italian Banks

ECB published on 4th October an addendum to the Guidelines on NPL Mangement published the last march. A public consultation will be open until 8th December.

The main point of this update is the suggestion of Prudential provisioning backstop for
non-performing exposures.

Table on Backstop

This basically means that, within a certain amount of time, Non performing exposures will have to be fully provisioned. The time frame is different between secured and unsecured loans.


Should Italian banks worry about this?

Current best practice already sets provisioning of unsecured loan at 80-90% at the Unlikely To Pay and 90-100% at Non Performing Loan classification date while coverage of secured loans is normally driven by Collateral Assets’ expected liquidation value.

After 2 years for unsecured loans and 7 years for secured ones

  1. either the collection process should be finished
  2. or at least it should be quite clear if further collections have to be expected or not

In the first case it is correct to write off any residual claim if there are any. In the second case banks should be able to provide enough argument to justify the deviation from the recommended 100% provisioning.

Considering that the new guidelines will be applicable only to newly classified at Non Performing Exposures and that the 100% provisioning is strongly suggested, but not mandatory significant consequences can hardly be expected for Italian Banks.

Additional comments in the folllowing post

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GLG – Gerson Lehrman Group – Council Member






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Italian NPL Market Update 2017-10

Quaestio Capital SGR, on behalf of the Atlante II Fund, has signed a binding agreement
to purchase approximately Euro 2.7 billion of non-performing loans from Cassa di Risparmio di Cesena, Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato. According Citywire website Algebris Investmests will buy further 290m from the same banks.

The securitization of the non-performing loans allows the sale of the three banks to Crédit Agricole Cariparma SpA possible, as happened when the three good banks were sold to UBI and Cariferrara to BPER (full press release).


Carige is said to have shortlisted 4 bidders for a portfolio worth 1.4Bn that should be sold in boundle with the credit management platform named Gerica. The 4 are said to be Davidson Kempner with Prelios, Bayview Capital with Crif, Lindorff-Intrum Justitia and  Credito Fondiario.

Credit Village has published the 2017 edition of its NPL Onservatory: transactions have increased in 2017 (114 from January to August, compared to 62 in the same period in 2016) and GBV is €31.2 billion. But, only €21.2 billion has actually “changed hands”. (here the press release).

Banca IFIS has concluded its first senior financing transaction in the NPL sector. Moreover, the bank has acquired 3 non-performing/performing portfolios, totaling a nominal value of over 1,7 billion Euro. (full press release).

  • The senior financing operation is a loan to finance the acquisition, through a securitization company, of a NPL secured portfolio (mortgages loans) originated by an Italian banking group by affiliates of Cerberus Capital Management, L.P., a leader in global alternative investing.
  • The first 2 NPL profolios were purchased from an international fund dealing in distressed loans through a securitisation company, for an overall nominal value of 1,5 billion Euro The third portfolio purchased by Banca IFIS has a nominal value of 192 million Euro, corresponding to 1.300 positions. It is made up of 71% secured retail loans and 29% unsecured loans and was sold to Banca IFIS by a leading European bank.

logoB2 Kapital SRL, the Italian subsidiary of B2Holding ASA, has signed agreements for acquisition of non-performing loan portfolios from Credit Agricole and Banco Desio Group with combined face value of EUR 175M. The transactions include both secured and unsecured positions.

Best Capital Italy srl, italian branch of Best SA has acquired 170m NPLs  as secondary trad from Palamon Capital.

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GLG – Gerson Lehrman Group – Council Member


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