Will MPS deal unlock Italian NPL market?

A June PWC report claimed “The NPL volcano is ready to erupt”. The statement was based on the following analysis [1]

There is greater government and regulatory support for, and commitment to, the sale and resolution of NPL credits versus prior market cycles to accelerate bank sector rehabilitation and improvement to the real economy. In addition, banking sector wide pressures imply a more comprehensive NPL sales cycle than prior Italian NPL market cycles.

In addition to these market conditions some new elements can be found in the recent bailout of Monte dei Paschi di Siena [2]  approved just before the announcement it was the only bank to fail the EBA stress test [3]

Why saving the oldest bank in the world should give a contribution to local NPL market?

mps-6751-675x275

Al least for 4 precedents established :

  1. The sale of the entire NPL stock below the net book value will not imply a “repricing” of the remaining impaired loans classified as “unlikely to pay” and “past due”
  2. The assignment of junior notes to shareholders mean that at least a portion of the loss arising from the sale can be postponed and amortized in time
  3. Finally, leverage obtained through securitization structures managed to increase sale prices

In addition, we could consider that the more NPLs are managed by independent special servicers the easier should be to market them.

The first point is one of worst fears for banks willing to dispose their NPL portfolio especially secured ones: if they sale a part of their portfolio 10% below the net book value external analysts may think that also the part that has not been sold should be repriced proportionally. Moreover this could negatively affect historical series on collections on bad loans imply additional provisions for the entire book performing loans included. MPS precedent say that if you sale your entire NPL Book  this will be considered an exceptional event and won’t affect historical series and additional provisions will be avoided.

The second point is much about an accounting trick: placing in the junior tranche a part of the loss in nothing new but MPS precedent say that regulators will not blame you for this.

The third point confirms that securitization structures are the best way to provide buyers with leverage (if GACs and Atlante support could be invoked it is nice to have) and that this process definitely allows for higher prices.

It is probably too early to assess if the Italian NPL volcano is ready to erupt, nevertheless the MPS deal is a relevant turning point on the way of creation of a mature market for NPLs

@massimofamularo

Linkedin

GLG – Gerson Lehrman Group – Council Member

Join the Linkedin Group – Entering Italian NPL Market

 

[1] PWC, The Italian NPL Market, June 2016 foreword page 3

[2] MPS PRESS RELEASE Structural and definitive solution to the bad loan legacy portfolio Link

[3] MPS PRESS RELEASE 2016 EBA Stress Test Results Link

 

 

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About Massimo Famularo

Investment Manager and Blogger Focus on Distressed Assets and Non Performing Loans Interested in Politics, Economics,
This entry was posted in Entering Italian NPL Market, Italian Banks and tagged , , , , , , , . Bookmark the permalink.

1 Response to Will MPS deal unlock Italian NPL market?

  1. Pingback: Entering Italian NPL Market (Linkedin Group) | Massimo Famularo (ENG)

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