NatWest’s retail loan sale tests the UK NPL market

Sector specialists expect more retail dominated non-performing loan sales, but say banks are still getting to grips with pandemic-related distress across their wider portfolios.

In February, it was reported that UK bank NatWest, part of Royal Bank of Scotland, had appointed consultancy PwC to sell a £550 million (€637 million) portfolio of distressed loans, secured predominantly against struggling shopping centres in the UK.

The portfolio sale, first reported by React News, is understood to include retail and leisure property loans, secured against 25 assets owned by around 15 borrowers. React reported that some of its positions are in administration while others are in technical default.

NatWest declined to comment for this article. However, at the time of writing, the loan sale process was understood to be ongoing, with several organisations bidding to buy it.

As the first significant sale of distressed UK property loans which were originated this cycle, rather than before the 2007-08 global financial crisis, it has led market participants to consider whether it is the first of a new wave of UK non-performing loan portfolios.

Montero: ‘Hotels and retail are the key sectors that banks will want to deleverage’

Federico Montero, managing director and head of European real estate at investment banking firm Evercore, who specialises in managing loan sales, said the NatWest portfolio sale is likely to have been prompted by the pandemic, but has its roots in the retail crisis of the past few years. “The situation of this retail portfolio has been accelerated by covid-19, but I do not think this is new distress,” he told Real Estate Capital.

Looking further forward, Montero expects the NatWest loan sale to be followed by other loan sale processes linked to the industries most affected by the pandemic, as lenders aim to reduce their exposure to sub-performing property sectors. “Hotels and retail are the key sectors that banks will want to deleverage,” he commented.

However, sources expect the most immediate loan sales to comprise retail debt that has been in a state of distress in recent years, due to the UK’s retail crisis, rather than loans which have become troubled specifically because of the impact of covid-19 and subsequent lockdowns.

Gahrotra: ‘In the next quarter, we will only see a few transactions as I am not sure banks are prepared yet’

According to Alok Gahrotra, partner in consultancy Deloitte’s portfolio lead advisory services team, there is yet to be a sharp rise in insolvencies and loan defaults across various property sectors, which in turn could drive a new wave of NPL sales.

Gahrotra believes portfolio sales prompted specifically by pandemic-linked distress are unlikely to be seen at least until government loans and grant schemes unwind. “Banks have spent the last six to nine months trying to understand what is on their books, and figure out where stress lies,” he said. “In the next quarter, we will only see a few transactions as I am not sure banks are prepared yet. There is still a national lockdown and a moratorium [on commercial tenant evictions in the UK] in place. I do not expect an uptick in transaction flow until the second half of 2021 going into 2022-23.”

And even when government support packages cease, banks will need time to recognise defaulted loans and ready them for sale, said Montero. “Once we are out of the pandemic crisis, we will start to see banks assessing what parts of their loan books they want to deleverage.”

As a result, he added, real estate loan sale activity in 2021, across Europe in general, will continue to be driven by the sale of legacy, pre-2007 loans, which were intended to be sold last year but could not be marketed due to the disruption brought about by the pandemic.

Gahrotra predicted that, 2021 European real estate loan sales volume will surpass last year’s figure but will be below 2019 levels. “In 2020, the European NPL sales volume was below €50 billion. This year will continue to be slow, as banks are still trying to understand what the level of distress is. They will possibly close between €50 billion-€100 billion. From next year onwards, it will return to the €150 billion-€200 billion levels of 2018-19.”

Investor appetite

Sources described a market full of capital waiting to be deployed to buy emerging property NPL portfolios, across continental Europe as well as the UK. Richard Roberts, head of origination at NPL investor and asset manager Arrow Global Group, said most investors recognise the looming opportunity.

Roberts: ‘There is a lot of money waiting to be invested and not as many on-market opportunities out there yet’

“They have raised new funds on the back of it, so there is a lot of money waiting to be invested and, at least at this point, not as many on-market opportunities out there yet,” he said. “Those who can deploy in bilateral and off-market deals will find the most attractive opportunities.”

A wide array of specialist buyers is willing to take on and manage NPL portfolios and steer them back to profitability, sources agreed. They added that the list of likely buyers remains fairly similar to that seen in the wake of the 2007-08 financial crisis – including opportunistic US private equity managers – because such NPL buyers have the expertise, tools and capital to invest in new portfolios.

Sector-specific deals will be of the greatest appeal to investors, according to Gahrotra. “If you can get to a certain size with a specific asset class, that’s more attractive than mixing up loans secured against different property types or backed by operating businesses in various sectors.”

Portfolio size, he added, is also relevant. “Depending on the investor type banks are targeting, they should try to put a deal in the market with a specific size. If they want the larger funds, like Cerberus, PIMCO or Bain, the deal should be at least on the $50 million-$100 million plus equity cheque size to appeal to them.”

Roberts expects lenders to take different approaches to dealing with their non-performing loans. Although some UK banks are currently evaluating sales of under-performing or distressed loan portfolios, he said, they will also be considering the best time to market them.

“If they can afford not to sell and bear the operational costs of continuing to service them, they might want to see how things pan out over the next couple of months, or the rest of the year, and see how the different sectors recover to achieve better pricing.”

However, some lenders, as seems to be the case with NatWest, might prefer to deal with NPLs now and refocus on their core business, he added. “Banks often, for strategic, reputational or operational reasons, do not want to retain non-core businesses or portfolios. They may either want to free up capital, or they do not want to appear in a newspaper for foreclosing on an asset, so they might say: ‘I am happy to let somebody work out this situation and I recognise there is a cost implication on this’.”