Foreign gladiators prepare for Italian loans campaign

First-movers line up to cash in on Italian banks’ bad loan clear-out, reports Alex Catalano

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Italy is the new Spain for real estate debt investors. International capital is circling around the country, looking to swoop on distressed non-performing loan portfolios and real estate. The early movers are all there: Fortress, Cerebus, Blackstone. “Over the past six months sentiment has been improving,” says Gennaro Giordano, chief investment officer of GWM Capital Advisors. “There have been a number of transactions after years of no activity and the debt market is showing the first signs of recovery.”

However, a straight comparison with Spain or Ireland is facile. To start with, Italy’s real estate market did not go into overdrive, over-build and collapse to the same extent over the past cycle “Italy didn’t have a bubble or big price drops, but the market was pretty illiquid,” says Francesca Galante, founding partner of real estate debt adviser First Growth. “Another key difference is that the Italian consumer is less indebted than the Spanish or Irish one.” With Italy’s economy in recession, investment volumes tumbled to €1.8bn, 80% off their 2007 peak, before picking up to €4.3bn last year, according to JLL.

Owners unwilling to take a loss

Prices, meanwhile, appear to have held up relatively well, dropping by only 16%. But this reflects a market frozen by property owners’ unwillingness to sell at a loss and the lack of bank debt. Italian banks have also been reluctant to crystallise their losses on bad loans; Italy’s
definition of what constitutes a non-performing loan is wider ranging than the European Central Bank’s.

“In many cases borrowers continue to pay interest; loan-to-value levels are the problem,” notes Marco Rampin, head of real estate capital markets at BNP Paribas. However, a big loans clear-out is getting under way. Faced with regulators’ quality control requirements on their problem loans and stress-testing later this year by the European Central Bank, Italian banks have started to clean up their balance sheets.

Plus, Italian prime minister Matteo Renzi’s proposals for economic and political reform have sparked hope that Italy’s economy will get onto a growth path. “Italy is where Spain was two or three years ago,” says Antonella Pagano, European loan portfolio specialist and partner at PwC
in Milan.

Banks are estimated to hold around €156bn-plus of non-performing loans, but much of this consists of consumer and corporate lending.
However, with real estate and construction loans accounting for nearly a third of the banking sector’s commercial loanbooks, it is not unrealistic to think that there could be as much as €50bn-60bn of soured real estate debt.

Unicredit and Intesa Sanpaolo, Italy’s two largest banks, are tackling their non-performing loans by teaming up with US private equity firm KKR and restructuring adviser Alvarez & Marsal to put a pool of bad loans into a work-out vehicle. The details of this deal, announced in May, are
still being worked out. In June, Monte dei Paschi, Italy’s third-largest lender, agreed to sell Fortress a €500m portfolio of 12,000 loans; but
these are unsecured.

Non-performing loan deals rare

There haven’t been many real estate-backed non-performing loan deals yet. In March, Bayside Capital, an affiliate of Miami-based HIG, bought a €43m portfolio of mixed residential and commercial real estate loans from Cassa de Risparmio di Ravenna. Credito Valtellinese also recently sold €36m of non-performing loans, some of which were secured on real estate, to Ares Management.

“We’re seeing some investors focus on real estate and some on unsecured or mixed portfolios,” says Pagano. “Compared to the past, they are much more specialised.” She expects to see more deals in the second half of the year. Buying non-performing real estate loans is not a quick turn, thanks to Italy’s time-consuming foreclosure laws. “It would take five to six years at least on average to work through a portfolio,” says Pagano.

This means that investors appear to be taking a longer-term view. “Relative value is factoring in a long recovery period and that the cost of money is close to zero,” says Giordano. Thus there is strong interest in acquiring Italian debt servicing platforms. Unicredit is selling its servicing business, Credit Management Bank, which manages €40bn of bad loans for Unicredit and others. Banco Popolare is also looking to shed its Release bad bank and Fortress, which already owns 85% of Italfondiario, one of Italy’s largest loan servicing companies, is among the bidders.

Meanwhile, local banks, which traditionally fund the buyers of smaller assets, aren’t yet ready to start lending to them again. “In 2014 there is increased appetite from international banks for big deals,” says Giordano. “However, the Italian players are still missing. This will improve, but there is still an important part that is missing. For big deals there is no problem, but for the average deal and average sponsors, there is still a lack of lenders.”

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Special vehicles drive Italian loan deals

In Italy, a banking licence is required in order to lend. Thus, banks dominate real estate financing; vehicles like a debt fund or mortgage REITs would fall foul of the regulators if they started providing loans. Buying loans in Italy is also considered to be lending, but there is a work-around for investors, by having a special-purpose vehicle buy the debt and securitise it. This is the tool typically used by international investors acquiring non-performing loans.

However, these securitisation vehicles can’t easily be used as a work-around for alternative lenders to make loans. “There’s a lot of interest from alternative lenders such as insurance companies and hedge funds; the problem is they would have to find a bank willing to take the risk of
warehousing the loans, because only banks can originate loans,“ says Gennaro Giordano, chief investment officer of GWM Capital Advisors.

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