After a year lost as we all awaited the result of Italy and Brussels arguing about what did and did not constitute state aid, everybody has now figured out the limited impact of the Treasury guarantee, and estimates are getting bigger of how much recapitalization the Italian banks are going to need. After Barclays’ initial estimate of 24Bn Euros estimates are now circulating that more than 50Bn will be needed.
Possibly as a result of banks deciding there is little alternative to simply getting on with it, the flow of portfolios being offered for sale is now showing signs of increasing with growing opportunities for the investor, with the usual “buyer beware” caveats. (An interesting case this week was a bank selling a pre-default set of “incagliati” loans -the term “incagliati”is also used for boats that have run onto rocks- they are priced higher than NPLs, yet one wonders if they aren’t just NPLs that they simply haven’t been able to provision yet. In another case, a major bank’s secured portfolio of first degree liens on residential real estate turned out to contain a number of cases already settled, some second and third degree liens, and some outright unsecured loans).It appears many banks lack the internal resources to extract and prepare homogeneous pools of credits that, upon outside scrutiny, will match the description they give.
Beyond sourcing superior portfolios and performing quality due diligence, the challenge continues to be that of collection performance, with increasing signs that the larger servicers are going to be “overbooked” leading them to subcontract to second-tier servicers that investors know little about. We believe that securing dedicated in-house servicing capability for secured debt is the way to go for the smart investor.
Meanwhile the latest Government initiatives to speed up foreclosures and bankruptcy procedures are more encouraging than we first thought. Skepticism is rooted in Italy’s propensity to legislate solutions that never get executed in practice, so “seeing is believing”. However latest news is tax-exemption for buyers of NPL assets at auction, which represents price relief of 9%! Other new measures allow banks faster expropriation of assets guaranteeing loans after seven non-payments are up. Better asset realization values and faster collections are the right way to grease the wheels, bringing more NPLs to market and improving returns.
