Non-core property debt is being offloaded in innovative ways amid pressure to reduce toxic portfolios.
The wave of real estate loan sales ongoing in Europe demonstrates how the market is evolving.
During the first five years of the deleveraging of Europe’s non-performing debt pile, banks and asset management agencies, such as Ireland’s NAMA, packaged loans into portfolios based on factors such as common borrower connections or property sector. They hired advisors to put the portfolios out to auction and watched as the same few US private equity firms came back with the prices they were prepared to pay.
Such sales contributed to gross European non-core real estate exposure decreasing by €275 billion since the end of 2013, to €537 billion, according to investment banking firm Evercore.
Things have changed. The market has shifted from northern to southern Europe and buyers’ and sellers’ price expectations remain far apart in cases. As a result, methods of offloading real estate NPLs are changing.
Evercore’s latest snapshot of the European non-core real estate market detailed some of those alternative deleveraging strategies. For example, securitisation of NPLs has been trialled in Italy; Monte dei Paschi di Siena is transferring around €26 billion of NPLs into a securitisation vehicle. Although loans are written down in value on transfer to an SPV, the bank can retain an interest and benefit from any future upside. In issuing tranches of notes, the potential pool of investors is widened.
Joint-venture structures have also been used – in which sellers transfer NPLs into a vehicle which then receives an injection of equity from an investor. The investor adds value to the portfolio, from which the seller also benefits. Italy’s Intesa Sanpaolo is currently putting together a JV deal on its €1.3 billion Project REP, for example.
So-called ‘bail-ins’ have also happened – such as Spain’s Banco Santander buying the troubled Banco Popular for €1 – which allows one business to take on another in its entirety and then address its problems. Lone Star’s ongoing purchase of the majority of Portugal’s former Banco Espirito Santo – known as Project Novo – is another example.
These changing strategies show that sellers are facing increasing pressure from regulators to tackle their toxic loan piles. Sellers need to address their NPL situations without making significant losses due to insufficient loan provisioning in cases. Investors’ lack of familiarity with emerging markets, concerns about the liquidity of underlying property markets and – especially in Italy’s case – continued worries about enforcement legislation, have meant that bids have often fallen far short of banks’ expectations.
However, if loan portfolios are not sold wholesale, banks can avoid fully crystallising losses. They can also keep an interest in any upside, demonstrating an element of savviness.
The profile of buyers has also changed. Cerberus, Lone Star and Oaktree were absent in the list of the top 10 buyers in H1 2017, according to Evercore. New entrants such as Bain Capital Credit and Italian rescue fund Atlante II were among the more active investors. This perhaps suggests that the traditional buyers of European NPLs have less appetite for the opportunities produced by the emerging locations in the past year.
Another shift in the composition of the European loan sale market was reflected in the changing composition of the buy side. While southern European lenders tackle their NPLs, northern European portfolios increasingly contain performing loans, as lenders that have offloaded NPLs make strategic sales of unwanted assets. Blackstone and Prudential were prominent buyers in H1 2017 after acquiring UK Asset Resolution’s £11.8 billion performing buy-to-let loan portfolios.
There is still a lot of non-core real estate debt to be worked out in Europe – a net volume of around €269 billion estimates Evercore – and the relatively straightforward loan sales of the type seen in the first wave will become less common. As such, the next wave of sales could prove to be more innovative.