31 March, Il Sole 24 Ore
How do you manage “good debts” for 99 billion?
A debt is acceptable when is repayable, otherwise it’s a problem. In Italy, debts of companies are scary. They scare the Government and the people. A company with debts, if it can’t pay them off, goes bankrupt. Suppliers lose everything, employers are made redundant (a death sentence in these days), and the Government has one more issue to solve.
Concerning debts, apart from NPLs (non-performing loans, the worst), there are also UTPs (Unlikely To Pay). What’s the amount of UTPs in Italy? According to the below chart, they are 99 billion euro. That means 3 austere national budgets.
What are they?
UTPs are the result of a funding issued by a bank to a company that might be struggling in the future to repay the debt for a reason or another. This debt can be managed and fixed. 99 billion euro returning to the economy is a remarkable impulse to the growth of the private sector and of the State itself, as companies pay taxes while defaulting companies don’t. However, this type of debts is challenging, because there is a very little number of people in Italy capable of managing, processing and valorising UTPs, basically transforming these debts into performing loans. The expertise to do so, in fact, is very technical.
The two subjects needed to solve UTPs.
From one side, banks can assess correctly the situation of their clients (namely the companies with debts), also availing themselves of internal resources or external agencies. From the other side, the finance directors and the specialised teams inside the companies might be able to find solutions to their debts.
To have a complete view of the scenario, it’s better to have an opinion from the players operating in the sector.
Giovanni Bossi, Banca Ifis Ceo, operating in credit to companies, has a deep knowledge of the financing process.
Andrea Pietrini is the Yourcfo Ceo, a management consulting company working with medium- and large-sized companies to assist them with their financial issues
Michele Bovenzi e Luigi Sottile, from the Deutsche Bank Discretionary Portfolio management team, assess on a daily basis the debt situation of the clients of the group.
Let’s start with mapping the phenomenon: where are the companies located? Which are the sector and the company size mostly impacted? Are small- and medium-sized companies suffering more than large-sized companies?
“Let’s consider numbers – says Giovanni Bossi – in September 2017, the total exposures in the banks’ statements was 278 billion including adjustments. Of these, 62% were “gross bad loans” (173 billion) and 36% were “gross UTPs” (99 billion). You need to know the coverage rate to get the net UTPs. This is 61.9% for bad loans, hence the net value is 66 billion. For UTPs, this is 33.7%, therefore the net value is 66 billion. These figures help to have an idea of the phenomenon. Even if UPTs decreased from 2016 to 2017, they have decreased less than NPLs. We must keep in mind that a part of UTPs will inevitably deteriorate and become bad loans, while another part if properly managed, may return to be performing. According to our analysis and the data from Banca d’Italia – notes Bossi – we can say that there is no significant distinction in company size regarding UTPs: they impact SMEs as well as bigger companies. Concerning sectors, we note that UTPs are mostly concentrated in the construction and real estate development, as well as in the shipping and furniture/textile industries. UTPs are concentrated in the North-West of Italy (33%), followed by the Centre (25%), the North-east (24%), the South (13%) and the Islands (5%). Finally, the percentage reduction of the volumes from 2016 to 2017 has evenly impacted all the sectors (-15%/-16%), except for consumer credit to families, and it was more prominent in the North-East”.
Pietrini comments: “UTSPs are originated from past funding politics that didn’t take into account the company performances in a context of great economic discontinuity. A superficial knowledge and assessment of clients had led to these situations. From one side, companies had used these loans not to fund investments, but rather current expenses, with a poor financial and strategic planning and a great disbalance between debt and equity. All this favoured the rise of UPTs, in a context in which companies used to prefer hiding their issues with aggressive financial strategies rather than addressing them at the first signs.” Deutsche Bank agrees with this view.
“As recently communicated by Flavio Valeri (Chief Country Officer DB), – explains Bovenzi, DB – we have a bad loan rate around 5% of the assets, the best in Italy together with Credem. That said, the UTPs related to SMEs are set between 1.7% and 2%, depending on the circumstances and on the economic cycle. At a more microeconomic level, UTPs are not significantly concentrated in a specific industry or geographic area, in conformity with our governance model of risk diversification of credits, and thanks to our proprietary assessment process that tends to privilege clients with a good economic, financial and assets balance”.
If the risk represented by UTPs is obvious and critical, the question is: who should deal with them? The opinions vary.
“The UTP management – says Bossi – is the essence of bankers’ work since they’re the ones issuing credit. You can’t get rid of these credits, because of the high value of the relation between the bank and the client. Let’s not forget that behind UTPs there are companies and entrepreneurs that need help. For some, there is nothing to do. But we have to work on those credits that deserved to be brought back to a positive situation. Banca Ifis has a division dedicated to impaired debts including the holdings from the old Interbanca. Due to the extremely technical knowledge required to manage these credits, we don’t believe in the rise of a UTP market to solve the problem. Instead, we all should learn to manage credits better. The Italian companies will be thankful and the national GDP will benefit”.
“The solution of such a complex matter needs the collaboration of various roles”, explains Pietrini. “Companies should promptly acknowledge the problem and be able to identify the root cause of the UTP. Banks must not adopt a punishing approach towards companies, rather they must lead companies through the recovery process in order to avoid the credit to become non-performing”.
If Pietrini and Bossi seem to be of similar opinions, DB is more moderate and flexible. “It’s very difficult to give a single answer, as we think that the choice of the best person/role to deal with the credit depends on the dimensions and the characteristics on the company”, Sottile explains.
Perhaps, UTPs can be managed in the same way as similar investment strategies, like PIRs. But the experts interviewed seem to disagree with this view.
“I hope it won’t happen. Otherwise, it will mean that banks and financial operators have given up relating with their clients. A real pity”, concludes Bossi.
Pietrini agrees: “I don’t think UTPs are a good investment instrument because their management requires very accurate and tailor-made interventions depending on the company. When we have to deal with such situations, a prompt intervention can be successful. Our strategy is to gather all the people involved in the credit to preserve the good relations: between the banks and the companies, but also with new creditors, the suppliers and the stakeholders. If the business is healthy, there are all the conditions for the recovery of the profitability and/or of the liquidity. Sometimes it only takes skills, patience and common sense”.
DB shares the same onion. “The UTP management is different for the Individual Saving Plans (PIR), in terms of expected returns, concentration, and liquidity, even more so if considering the recent Mifid 2 regulation. We believe that this kind of investment should address professional and institutional investors”, Bovenzi and Sottile conclude.
Hence, UTPs are a critical element of the system but, if managed with great skill and intelligence, they might be very beneficial for the economy. There is still to understand whether there are enough professionals (among banks and consultants) to manage 99 billion of UTPs.
Source: Il Sole 24 Ore
Translator: Cristina Ambrosi