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Opportunities for debt funds

19 February, Il Sole 24 Ore

The Italian NPL transfer machine is on. The market has started with some delay compared to other countries, but we have already started seeing several operations. Most of which with international investors.

“So far, the market has disposed of a significant quantity of bad loans, most of which have been heavily devaluated by banks”, explains Federico Sutti, managing partner for the legal firm Dentons. Nowadays we’re seeing an evolution of NPLs with the arrival of the debt funds.

In fact, there is a category of impaired loans that cannot be partially transferred like bad loans because they’re referred to holdings of companies that are still operational. “In these cases, a business plan is necessary – continues Sutti – It implies a more complex and longer analysis. The bank will proceed differently from NPLs. It will create a joint venture with the investor that will receive the senior notes (the collection is certain) or the junior ones (credit at risk). The debt fund acts like an investor, restructuring the company and often selling it once the operation is concluded”.

There have been many examples in the past few months, and some operations have already been carried out. One concerned the famous Bauer Hotel in Venice. In the first phase, the debt of 110 million euro was restructured, then the hotel was taken over by the American fund Elliott and the London-based financial group Blue Skye. The last step of the operation regarded big investments to bring the hotel to the highest international standards.

The same procedure was followed by the American fund Varde in order to become the new owner of the hospitality group Boscolo. Firstly, Varde bought the debts, then it started restructuring the company. The Tci fund allowed Danieli Hotel in Venice, owned by the group Statuto, to repay the debts towards Apollo. Besides Elliott, among the most active players, there are Hps, Cale Street, Apollo, The Children Fund, while among the insurance companies we can find Generali, Allianz and Axa.

“The first one making this type of deals has been Pillarstone, the turnaround fund created by the joint venture between the American private equity company Kkr and the partnership Unicredit-Intesa Sanpaolo”, says Sutti. If the operation is carried out with the bank that is selling the holding, there is no issue for the bank. While it’s a different story in the case of a joint venture since funds have a high cost of money and they want higher returns for the liquidity they introduce. In this case, the returns for the bank is reduced since it’s reimbursed based on the value of the restructuring, and its payment features among the costs. On the bank side, Banco Bpm has announced a securitisation of a real estate portfolio of a nominal value of 3 billion euro (the group has already transferred to Algebris an NPL secured portfolio with the Rainbow Project for a value of 693 million euro).

“The investors of debt instruments currently present in the Italian market are mostly international”, says Paolo Bellacosa, partner of Vitale&Co. Real Estate. -In some cases, they’re alternative debt providers to traditional banks. Obviously, they require higher returns, depending on the risk level, and, more importantly, they require guarantees granting a quicker and safer access to the asset in case of default of the borrower. They usually finance difficult creditors, or they participate in situations the traditional banks want to exit from or that banks are not interested in funding”.

Insurance companies are also active in this sector. In fact, they have financed in the last few years portfolios with stable incomes or with assets that can guarantee a good value preservation. “In this case, it’s a way for the insurance company to access good quality assets when the equity is not on the market, or it’s in new sectors (hence riskier), still with more guarantees compared to the equity- explains Bellacosa -. In other cases, there are some investors interested in development franchising. Funding real estate development projects is still very difficult in Italy, despite the overall improvements. For this reason, it’s possible to enter into such development operations with almost no competition at all”.

Source: Il Sole 24 Ore

Translator: Cristina Ambrosi

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