Participants at a recent SCI seminar on non-performing loan securitisation were optimistic about the role of ABS in facilitating disposals of troubled loans across Europe, with or without government guarantees. Concerns persist, however, that work still needs to be done in several jurisdictions in terms of professionalising servicing capabilities and standardising securitisation procedures.

Iain Balkwill, partner at Reed Smith, commented: “Generally, I think securitisation is a great way for banks to dispose of NPLs and is certainly an excellent way to expand the number of investors in the NPL asset class. The GACS programme gave the market the shot in the arm it needed and it was a great endorsement for the deployment of securitisation technology as a means of resolving the European NPL problem.”

He emphasised that one of the major benefits of securitising NPLs is that it helps broaden the universe of investors, by creating a range of yields to match investor needs. This broadening effect is maximised by building in credit enhancement and structural features that help protect investors and, with a large investor base, it is possible to offload a large number of NPLs in one go.

Securitisation can also act as a profit-sharing instrument, helping to resolve bid/ask issues, whereby banks sometimes don’t favour the price at which they may otherwise have to sell NPLs. Additionally, securitisation can help with the development of greater transparency in the NPL market, as well as increasing standardisation and the level of disclosure.

Francesco Di Costanzo, a structured finance analyst at Moody’s, commented that there are also several challenges in securitising NPLs, across jurisdictions. The major ones are typically irregular cashflows, alignment of interest between servicer and noteholder and the fact that data sets are often incomplete - which makes it difficult to complete a public securitisation.

It has therefore fallen to governments across Europe to help with NPL disposals, such as through guarantee schemes like GACS. Many panellists at the SCI seminar were supportive of such initiatives, with one saying that in Europe governments have played an important role in NPL disposals, particularly in Italy and Spain.

Another supporter of GACS is Gaetano Anselmo, head of risk control at Banca Carige, who originally favoured a whole loan sale to offload NPLs at his bank, but eventually utilised the GACS guarantee to issue the second NPL ABS with GACS in Italy and the first under the single supervisory mechanism (SSM). It appealed to him because it provides a government guarantee, at market prices, the bank keeps the senior note on the books and it has the equivalence of a government bond with a liquidity spread.

A downside of GACS, however, comments Anselmo, is that the process is an intensive one - requiring a lot of time, as the structure is more complex than a non-GACS ABS. In addition, there are further layers of documentation to prepare.

In terms of a post-GACS landscape, Anselmo suggests the environment will favour some market participants, but not others. “A life without GACS will be less benign for originators because they will not benefit from capital relief, while investors could feel more in charge of the transaction.”

Di Costanzo is also optimistic about a post-GACS world: “I think there will be life after GACS and I think investors will get more familiar with the asset class. I’d point out there have been deals done without government guarantees in place, such as the Evora trade and some Irish transactions too.”

The issue of unlikely-to-pay loans was also raised during the panel, as banks need to resolve large exposures of these assets on their balance sheets. One panellist stressed that specific management from banks and engagement with investors is needed to arrange financing, but was optimistic that a UTP-backed transaction could be on the horizon.

Also looking to the future, Gifford West, md at The Debt Exchange, said that while Spain and Italy have the largest volumes in terms of distressed assets - and therefore opportunity - yields have compressed as the market has matured. He suggested therefore that investors may need to look to other assets - or other jurisdictions – for yield, such as Ukraine (where his firm has been involved).

Similarly, Zach Lewy, founder and group cio, Arrow Global, said that he is optimistic about European NPL opportunities in several markets, including Italy and Ireland. He agreed with West, however, in that the assets still available may require “greater skill sets that generalist investors may lack and may be unable to therefore unlock.”

West adds that while it is often said that “pioneers get shot and settlers get rich”, some early firms “went in and made money”, including in Ireland and Spain. He posits that in Italy there needs to be a shift in terms of smaller banks executing smaller transactions, to “get things moving, as opposed to only structuring huge deals every 18 months.”

Not only would this be a tactical move, as it would help standardise the market, but it would also facilitate deal flow, suggests West. He concludes that securitisation works well when highly homogenous and statistically modelled pools of data exist, but he is sceptical that this will happen in Italy, with issues at the enforcement level remaining and no real certainty for investors on getting their money back.

RB