Talking about ECB guidelines and Italian Banks

This week I am going to attend the Corporate Parity’s 3rd Annual Global Debt Collection & NPL Portfolio Summit and will present a case study regarding ECB guidelines and potential impacts on Italian Banks.

Link to the Event

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After the speech I am going to post the slides on this blog

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@massimofamularo

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GLG – Gerson Lehrman Group – Council Member

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Largest NPL securitization closed by BMPS

Monte dei Paschi di Siena Group (“BMPS”) has completed the securitization transaction for the sale of a bad loan portfolio of c. EUR 24.1 billion and obtained investment grade ratings on the senior tranche. (press release).

The senior tranche, worth R 2,918 million has received an Investment Grade Rating by 3 agencies:

  1. Moody’s Investors Service: A3
  2. Scope Ratings GmbH: BBB+
  3. DBRS: BBB

According to BDRS Press release 

  • the majority of loans in the portfolio defaulted between 2000 and 2017 and are in various stages of resolution.
  • The receivables are serviced by Credito Fondiario S.p.A. (Credito Fondiario), Italfondiario S.p.A., Juliet S.p.A. (a joint venture between Cerved S.p.A. and the servicing platform of Banca MPS) and Prelios S.p.A. (collectively, the Special Servicers) with Credito Fondiario operating as the Master Servicer in the transaction
  • Approximately 57.8% of the pool by GBV is secured and 51.0% of the secured loans by GBV benefit from a first-ranking lien.
  • The secured loans in the portfolio are backed by properties located across Italy, with concentrations in the regions of Tuscany, Veneto, Lombardy and Campania.

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Italian NPL Update 2018-05

Intrum Lindorff and Intesa Sanpaolo have agreed to establish a servicer of non-performing loans (NPLs) in Italy by merging Intesa Sanpaolo’s NPL recovery operations and all of Intrum’s current Italian operations. The new venture will start with 40 Bn Asset Under Management. The deal includes also that Intrum together with CarVal Investors, will acquire a 51% participation of a NPL portfolio with a Gross Book Value (GBV) of EUR 10.8 billion to be deconsolidated from Intesa Sanpaolo (news in Italian)

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Unicredit is launching project Torino a 1Bn Unsecured portfolio sale and is expected to arrange a new tranche of former project Sandokan with a secured portfolio up to 3Bn that shoud be acquired by the same investors Pimco, Gwm e Finance Roma.

KRUK has signed a contract to acquire 51% stake in Agecredit srl based in Cesena, operating on the Italian third-party debt collection market. The transaction will strengthen the development of the key segment of Group’s operations – third-party debt collection business. Ultimately, within a few months, KRUK will own 100% of the company.

Anacap and Pimco acquired a majority stake in Phoenix Asset Management (Pam) an Italian sprecial servicing company founded by Steve Lennon, Paolo Lo Giudice e Roberto Tavani that will remain as manager and minority shareholders.

Banca IFIS closed 3 NPL deals in the first quarter 2018

  • a twelve-month agreement for the purchase of the annual production of unsecured, consumer, non-performing loans (credit cards and personal loans) of one of the leading Italian consumer credit companies, by forward flow (transfer of loans on a quarterly basis) -the first transfer of these loans was carried out for a value of approximately 35 million Euro (nominal value), corresponding to over 4,500 positions
  • a financing transaction for a portfolio of mainly secured non-performing loans, originated by a leading Italian banking group and acquired by a company affiliated to Cerberus Capital Management.
  • the sale of some consumer-type portfolios having a nominal value of approximately 40 million Euro. The transaction was finalised with an international distressed investor, active in the secondary market.

Carige approved the Non PerformingExposure strategy for the 2018-2020 period (the “NPE Strategy”) which includes the disposal of an additional bad loan portfolio for a gross amount of up to EUR 1 bn, on top of the already-planned disposal of Unlikely-to-Pay exposures (UTPs) for a gross amount of approximately EUR 500 mln, having assessed the accounting treatment of the effects arising from the First Time Adoption (FTA) of IFRS 9.
To give effect to the NPE Strategy, a portfolio of up to EUR 1 bn will be selected out of a total bad loan portfolio of approximately EUR 1.7 bn as at 31 December 2017, which will be disposed of on the market, with senior notes backed by the Italian Government guarantee (GACS).

Creval has signed an agreement with Algebris Investments for the sale of a portfolio consisting of secured non-performing loans (mainly classified as unlike to pay) for a gross book value (“GBV”) of over EUR 245 million, at a price higher than 43% of GBV.
This transaction allows the realization of approximately 50% of the targets for the sale of nonperforming loan (“NPL”) set for the so-called “Project Gimli” for 2018.

Arrow Global acquired 2 Italian firms,  Europa Investimenti, a manager of Italian distressed debt investments, for an equity value of €62m (£54.7m) and 100 percent of Parr Credit, a Rome-based servicer of Italian non-performing loans for an equity value of €20m.

Stay tuned on Italian Banks and NPL Market  Join the Linkedin Group – Entering Italian NPL Market  and follow  #Liberi Di Scegliere via @blastingnews

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Intrum ready to close the deal with Intesa

As communicated yesterday Intrum has submitted a binding offer to Intesa Sanpaolo regarding the establishment of a servicer of non-performing loans (NPLs) in Italy.

Highlights

  • Intrum and Intesa Sanpaolo have agreed to establish a market leading servicer of non-performing loans (NPLs) in the Italian market, involving the two transactions outlined below:
    1. Merger of Intesa Sanpaolo’s NPL recovery operations and all of Intrum’s current Italian operations* into a leading servicer of NPLs in Italy (Joint Venture Servicer)
      •  Intrum will own 51% of the Joint Venture Servicer.
      •  The Joint Venture Servicer enters into a 10-year exclusive servicing
      • greement with Intesa Sanpaolo for the vast majority of the bank’s new NPL inflow during this period
      •  Intrum will consolidate the Joint Venture Servicer in the financial reporting.
    2. Intrum, together with CarVal Investors, will acquire a 51% participation of a NPL portfolio with a Gross Book Value (GBV) of EUR 10.8 billion to be deconsolidated from Intesa Sanpaolo. The portfolio will be held by a securitization Special Purpose Vehicle (SPV).
      •  Intrum will own 80% of the 51% of the holding in the SPV.
      •  CarVal Investors on behalf of its managed and advised funds including Fondaco SGR S.p.A have committed to co-invest for an amount corresponding to the remaining 20% of the 51% holding in the SPV.
      • The SPV will be financed by non-recourse senior asset backed notes.
      •  Intrum will not consolidate the SPV in the financial reporting.
  • The aforementioned transactions reflect an overall valuation of around Euro 3.6 billion for the Joint Venture Servicer and the NPL portfolio.
  • Intrum’s estimated total net cash investment for its holding in the servicing platform and its interests in the SPV is EUR 670 million. The net investment envisages no further syndication.
  • Intrum will make an initial payment of EUR 156 M at the end of April 2018. The remainder of the purchase price will be paid at closing, which is expected at year-end 2018.
  • The transactions represents a significant reinvestment of proceeds from the remedy units divested in March 2018 and hence a significant contribution to Intrum’s planned M&A and portfolio investments in 2018, in turn supporting Intrum’s ambitions for profitable growth.
  • The transactions are subject to authorizations being received from the relevant authorities.
  • Italy is one of the largest markets for NPLs in Europe which highlights the importance of this long term strategic partnership.

Link to full press release

“This innovative transaction is a milestone for Intrum and provides us with long-term access to the large Italian Credit Management Services market. Together with Intesa Sanpaolo we are building a Credit Management Services provider in one of the largest European markets that will draw on our mutual strengths. The joint venture sets a new standard in the market where two experienced industrial players join forces to create a market leader servicer in Italy,” says Mikael Ericson, President and CEO of Intrum.

Joint Venture Servicer

Intrum and Intesa Sanpaolo will set up a Joint Venture Servicer into which the bank contributes its NPL servicing platform and Intrum will contribute all its current Italian operations (apart from Cross Factor S.p.A. and the holding company Lindorff Italy S.r.l.). Intrum will own a majority interest of 51% in the joint venture. Intrum will appoint the majority of the board members as well as the CEO. The new company will operate under the Intrum brand and Intrum will consolidate it in the financial reporting.

The Intesa Sanpaolo NPL servicing platform currently has around 600 employees and services a portfolio of non-performing loans of approximately EUR 30 billion. The Joint Venture Servicer will continue to service these volumes and also benefit from a 10-year exclusive servicing agreement with Intesa Sanpaolo in relation to the vast majority of Intesa Sanpaolo´s new inflows.

The Joint Venture Servicer will offer leading specialist servicing capabilities to banks and other creditors as well as portfolio sale services that will allow banks to de-risk their balance sheets through long term established relationships with one of the market leaders.

NPL portfolio

Furthermore, Intesa Sanpaolo will divest a portfolio of non-performing loans with a EUR 10.8 billion gross book value, of which the majority are secured loans. Intesa Sanpaolo will retain a 49% interest in the SPV. The SPV will be participated by Intrum, together with one or more co-investors. CarVal Investors, a leading global alternative investment fund manager with approximately USD 10 billion in assets under management, has provided a commitment to co-invest with Intrum for an amount corresponding to 20% of the 51%.

Intrum will make an initial payment of EUR 156 million at the end of April 2018. The remainder of the purchase price will be paid at closing.

The portfolio acquisition will be part-financed at closing through issuance of asset backed senior notes, the subscription of the notes is guaranteed by a bank consortium with the following key terms:

  • Legal Maturity: 5.5 years, Senior LTV: 60%, Senior Interest Rate: EURIBOR 1m (floored at zero) + 325bps, Undrawn Interest Rate: 325bps and Upfront Fees: 100bps
  • The commitments from the bank consortium are subject to conditions, including but not limited to, satisfactory documentation and regulatory approvals

***

“Italy is one of the largest markets for non-performing loans in Europe with over EUR 300 billion of non-performing loan exposures on banks’ balance sheets. Through this partnership we gain a larger access to the growth opportunities that the Italian market provides. We see that banks are increasingly looking to outsource parts of their receivables management to sophisticated specialist servicers that are able to recover outstanding debts in a professional and compliant manner, and restore bank’s customer’s credit worthiness in an efficient and respectful way,” says Mikael Ericson.

The transaction represents a significant contribution to the group’s planned M&A and portfolio investments in 2018 and will support Intrum’s ambitions for profitable growth.

Intrum remains committed to the long-term target of net debt/cash EBITDA of 2.5-3.5 and whilst immediately after the transaction the net debt/cash EBITDA ratio is estimated to approximately 4.5x for the Intrum Group this is a temporary effect and the net debt/cash EBITDA ratio will decrease in the first 12 months as the cash flow from the portfolio is gradually included in the calculation of leverage. Intrum’s expectation is to be in the middle of the target range by 2020. The transaction is expected to be earnings per share accretive in 2019.

The overall transaction is expected to close at year-end 2018. The Joint Venture Servicer will be consolidated into the accounts of the Intrum Group as per closing date. The NPL portfolio is to be transferred into the SPV in April 2018, with investors being exposed to the risks and rewards of the portfolios from January 1 2018. Net collections between January 1, 2018 and closing will be deducted from the gross purchase price.

The completion of both parts of the transaction is subject to authorizations being received from the relevant authorities.

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GLG – Gerson Lehrman Group – Council Member

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NPL Investing & Collection Summit

#savethedate April 13, Milan, Palazzo Mezzanotte,Italian Stock Exchange Building, Parterre Hall – NPL Investing & Collection Summit 

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  • SESSION 1 UTP: The new path for originators,investors & servicers
  • SESSION 2 M&A: are servicers sold out and is
    carve out the best alternative?
  • SESSION 3 Exploring new borders of collection

Link to the program

Stay tuned on Italian Banks and NPL Market  Join the Linkedin Group – Entering Italian NPL Market  and follow  #Liberi Di Scegliere via @blastingnews

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GLG – Gerson Lehrman Group – Council Member

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DBRS positive outlook on ECB guidelines

DBRS has recently published a commentary titled “DBRS: New Coverage Rules for NPLs Positive , but Uncertainty Remains.”

According to the Rating Agency, in essence:

  • the new rules from the ECB and EC for minimum loss coverage are positive and the impact across banks is expected to be manageable;
  • both authorities are targeting the same goal, but applying two different sets of rules and this may create some regulation uncertainty;
  • while the EC Proposal will be the minimum standard for Banks, the ECB has the means to go further on a case by-case basis for affected Banks.

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While I can somehow agree on the potential confusion between the 2 sets of rules, I would stress that ECB Guidelines are more focused moral suasion and aimed to promote best practices in risk understanding and management rather than prescribing mandatory accounting standards.

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GLG – Gerson Lehrman Group – Council Member

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Why ECB guidelines on NPL are so much about moral suasion

Some commentators are worried about the impact that recently published Addendum to ECB guidelines on NPL management could have on banks provisions and lending capacity. The idea is that stricter requirements could push banks to increase provisions on NPEs and, especially for unsecured loans, reduce the convenience of lending.

My take on this is that direct effect will be quite limited while the most relevant perspective should be Moral Suasion.

First and Foremost, guidelines are not binding rules like those included in European Commission NPL Package (statutory prudential backstops)

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therefore no bank will be forced to increase provisions on NPL due to some mechanic application of an updated accounting principle.

Secondly, as I explained in this post the timeline proposed to increase provisions is consistent even with Italian sluggish Judicial system so what is ECB asking is supposed to be already in place in the most advanced banks and should not require an exceptional effort for other players.

profilo-temporale-recupero-crediti

Finally, the way asset quality review works is applying a detailed analysis of  single relevant roles assessing the updated an most realistic liquidation values of existing guarantees.  If an updated and realistic forecast of expected recoveries on the single loan justifies a level of provision lower than the one set by guidelines than this will be accepted by ECB.

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So what is all this fuss about?

ECB is suggesting that banks should have a proactive approach to credit management and that the improvement in workout efficacy and efficiency should allow to update provisions in order to make them more consistent with what will be actually collected.

It is not about increasing provisions for sake of austerity or excessive caution, but much more about running properly credit management process and updating accounting values in order to maintain a fair representation of financial situation.

Within 2 years the workout process for an unsecured loan should have been either completed either brought to a stage in which is pretty clear the extent of claim residual claim that can still be collected. If this is true than ECB guidelines are even redundant (as they could actually be they could actually be after the new European Commission package).

If this is not true then the problem is not only the lack of efficiency but  mostly the unfair representation of financial situation: balance sheet include claims that will never be collected and when the level of trust from market operators fells below a critical threshold we will experience real troubles and  the recent experience of Monte dei Paschi di Siena and Venete Banks stand as hard lesson on this.

My conclusionas are that

  • ECB Guidelines will not have a dramatic impact because they are based on best practices already existing and not really difficult to match
  • they will have a cost due to investments in workout operations and/or outsourcing fees as well as limited increase in prudential capital buffers
  • they will bring substantial gains due to increased transparency of balance sheets and via augmented trust by market operators, reduced cost of funding as well as increased equity evaluation

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GLG – Gerson Lehrman Group – Council Member

 

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