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

profilo-temporale-recupero-crediti

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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@massimofamularo

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GLG – Gerson Lehrman Group – Council Member

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