Are Capital Markets Ready for Rise of NPLs?


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As governments begin to unwind the financial help they have provided for their people and businesses, are asset managers ready to cope with the flood of non-performing loans set to hit the debt markets over the coming months and years?

he Covid-19 pandemic has laid waste to global economic plans as governments rushed out support packages to limit unemployment and prop up damaged businesses. As governments now begin to unwind those packages, a tsunami of Non-Performing Loans (NPLs) is set to besiege the banking sector and flood the capital markets, as noted by an expert panel at Apex Group’s recent webinar “Distressed Debt Transactions”.

Markets drawing breath

Debt markets appear to be taking a breather, with new NPLs that are coming to market near impossible to value on historical performance. “We can almost say that these new portfolios coming out have often little relevance for the past benchmarks,” said Johannes Raschke, Chief Investment Officer, B2 Holdings, “and that is a challenge we will have to overcome going forwards.” The unpredictability of the pace at which governments will unwind their support and when the pandemic may be over are proving difficult for analysts to model. But markets are not totally halted, with some banks and other NPL investors now looking to unload NPL portfolios they have held since the financial crash of 2008/2009.

In Europe in particular “we are going to need many more investors to come in and participate in sales in several countries in Europe, in order to help clean up the overhang of the legacy assets, but also to assist and be interested in the NPLs that we think will be coming out of this,” said Bliss Morris, Founder and CEO, First Financial Network.

What should market participants expect?

The opportunities will come from many asset classes as property, retail, travel, hospitality and other corporations are all under stress. “There is room for all types of (structured) transactions,” said Alejandro Lucero de Pablo, Senior Global Adviser, Equifax TDX. There will also be significant differences between those asset classes. De Pablo maintains that “real estate coming from hotels, companies and business in general is a very good opportunity with good prices”, whereas he thought that, particularly in the south of Europe, left-leaning governments would want to offer more protection for the individual mortgage market. “There won’t be one solution that fits all,” said Ioannis Orfanos, Partner, Arbitrage Real Estate, “there will be cross-bank solutions, like the Bad Bank.”

Raschke added that “if you have invested into markets like the UK, France and Germany, and you would like to put some spice into your portfolio, then you look to South and Eastern Europe where yields are, by definition, higher.” Covid-19 is a global issue and opportunities will come available almost everywhere.

Technology and resources essential to handle the expected volumes

“You need a multi-dimensional platform that can handle a lot of volume, it’s a volume proposition,” said Morris, adding “although the technology is a critical tool, you have to have the expertise to manage the information going into the platform.” Niall Vaughan, Global Head of Operations –  Corporate Solutions, Apex Group, also considered technology to be critical in handling the new wave of NPLs. “If I were an investor I would be looking for a player that can develop a technology platform that … can cater for real-time valuations, can cater for forward looking modelling tools incorporating qualitative and quantitative data allowing us to predict, where possible, the rate of return as well as transparency of data for the respective regulators and directors.” Volumes and the high level of uncertainty will demand the evolution of existing technologies to manage the complex demands before NPL investors.

Will regulations need to change?

The panel believed that the sheer scale of the upcoming problem will inevitably lead to more regulation. Speaking about IFRS9, Vaughan said that “it attempted to get people to project lifetime ahead and to rebalance their forecasting on an annual basis to accurately depict the real time value of the portfolio ” but this is now challenging as currently there are too many unknowns at a macro level. The immediate actions taken by governments and central banks have bought time for regulators to start to consider just how this new situation “Covid-19” will need to be managed and new regulations seem inevitable. “A lot more regulation will start to come into effect on this new wave of NPLs, and governments will have to react quickly and strongly as you will get players coming into the market to take fire sales at a discount when for you it is challenging to value,” said Vaughan. Firms clearly need to be prepared for changed regulations and more regulatory pressure.

Getting reliable data is difficult but essential

A lot of data and information needs to be collated in order to perform valuation of the NPL portfolios as they come to market. Morris remarked that “we don’t know what pricing is going to be and that is going to be critical. We don’t have any market data in this environment.”

“Most of the information is held in the paper files at the banks,” said Paolo Pellegrini, Director General, Cerved Credit Management, “and it is quite complex for an analyst to go through all this paper to try to find information and put that in a structured way.” Both more resources and technology need to be available to handle the workload and come up with consistent and reliable valuations.

Partnering for success

Given the speed with which this new wave of NPLs is going to hit the market and the scale of the opportunity, investors need to be able to just focus on those opportunities and not have to worry about the processes, procedures and “the regulatory burden and pain”, said Vaughan, leaving that for experienced service providers. Investors need “to go and look for partners with good technology … to take the stress away from them…bringing three or four stakeholders together so that the investors get a much better rounded solution,” and with the partner also able to defray costs across the whole group of stakeholders. Asset managers should look to outsource as much of this effort as possible, seeking a global single-source service provider that best fits their portfolios whilst they focus on their investments.

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