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The NPL binge ended up in chaos. Funds started selling credits

10 February, Il Sole 24 Ore

Debtors who can’t find anybody to talk to, not even when they want to pay their debts. Judges who terminate foreclosures because credit managers aren’t paying the required contributions. These examples might be borderline but, speaking with the people working in the sector, they give an idea of where the problem lies: banks had sold NPLs in significant quantities (over 100 billion in the span of few years), but who bought them is not always equipped to manage them properly. Banks may have got rid of the burden, but the problem of bad loans hasn’t been solved yet. It has just been moved somewhere else. Since bad loans are connected to families, enterprises and people, we must ask ourselves: are these bad loans in good hands?

A few data are enough to be doubtful about it: the first seven non-banking servicers operating in Italy (servicer is the name for those companies working on credit collection on behalf of investors that bought the NPLs from banks) from the end of 2016 to the end of 2018 had seen their workload growing by 75%, although their staff had increased only by 21%. That means that they’d doubled the managed NPLs (from 139 billion in 2016 to 241 billion in 2018) but they only slightly increased the number of people working on those NPLs. On the one hand, it resulted in more standardised, quick and less accurate procedures; on the other hand, it had caused funds to re-sell NPLs to other investors only for the sake of the financial performance, which means trading NPLs.

The NPL binge

In July 2017, Pwc in its report defined Italy “the place to be”. After all, banks had sold out a great number of bad loans, and they did it at dirt low prices in a rush to get rid of them. As a result, investors from all over the world dashed to get some those NPLs: Fortress, Pimco, Crc, Bayview, Anacap, Cerberus, Bain Capital Credit, Hoist Finance and Varde Partners; along with the specialised divisions of merchant banks and Italian investors such as Algebris and Banca Ifis. As the expert observed, “the feeling is that investors were mostly moved by a purely financial and speculative logic: getting as many NPLs as possible without really thinking how to manage them”.

Once acquired the band loan portfolios, investors gave them to servicers (in some cases, the same servicers that they bought together with the NPLs, in other cases via a mandate) to take care of the actual credit collection. Servicers ended up managing huge quantities of NPLs. And hiring more people is not easy. Cerved, the second servicer in Italy, used to manage NPLs for 15.5 billion at the end of 2016 employing 813 people. Today, the company manages NPLs for 41 billion (nearly the triple) with only 1,230 people. DoBank, Italy’s market leader and almost entirely merged to Italfondiario, has maintained the quantity of managed credits steady (around 80 billion) but has reduced the staff from 3,800 employees in 2016 to 3,000 at present. Credito Fondiario (which also operates as a master servicer) has increased the NPLs from 6.7 to 50 billion, while the staff has gone from 110 to 250 people. It’s evident that such companies, like all the others of the sector, are focused on efficiency and technology. But the risk of under-capacity is real, especially for the smaller and younger ones.

“Not all the servicers have enough resources to invest in staff and technology in order to manage portfolios that quickly”, confirms Andrea Mignanelli, Cerved Credit Management Ceo. “The necessary staff depends on the type of credit – clarifies Guido Lombardo, Chief Investment Officer for Credito Fondiario – some companies have grown thanks to the right technology, while I believe others bite more than they could chew”. “The main problem is technology – adds Antonella Pagano, Intrum Italy Business Development Director – NPL management requires an adequate hi-tech structure to be able to load the documents”. That’s the point: everybody is after efficiency and synergies, but only a few are successful in the process. In some cases, servicers assign to a single manager even hundreds of defaulting debtors, making it impossible to look after them all properly.

The risk of an NPL bubble

The problem is often upstream, in the due diligence of portfolios. When a bank sells its NPLs, the fund usually appoints a servicer for the assessment of the portfolio (and of the potential future earnings). As Sistemia Ceo Paolo Sgritta observed, “this might represent a potential conflict of interest”. Servicers, in fact, might be induced to promise and estimate excellent performances in the hope the investor would buy the portfolio and appoint them for the management. “This has recently resulted in some risked statements by some servicers”, adds Sgritta. After all, some experts commented that the competition between funds has become so harsh that NPL prices have excessively risen in comparison with the quality of credits.

According to Banca Ifis, the average price of mixed portfolios (secured and unsecured loans) in Italy has grown from 19% of the gross value in 2017 to 28% in 2018. “In 2016 and 2017, we saw some competitions for NPLs being completed at prices totally misaligned with the market – tells Claudio Manetti, Fire Ceo –such attitude has drugged this type of transactions, so to speak”. Many funds had obsessed with buying NPLs to increase their assets, to grow quickly, because Italy was “the place to be”. Sooner or later, it will come the time to deal with the issues related to NPLs. “Funds came to Italy expecting to make big money, but I’m afraid for many it won’t be like that”, continues the manager. After all, it has already happened.

A trading cards market

That’s it. In the middle of the banquet, some might be tempted to “adjust” its financial performance by selling some parts. That means, trading NPLs. “By selling some parts, you improve the financial performance of the entire portfolio”, says the manager. This might be the reasons behind the rise of a secondary market for bad loans. In this case, the sellers are not banks, but the funds that bought from banks. According to Banca Ifis, in 2015 and 2016 the secondary market respectively generated 31% and 51% of the total NPL transactions. In 2017 and 2018, due to the intense sale activity of banks, the secondary market reduced to 4% and 2% of the total. The outlook for 2019 is for a return, according to Banca Ifis, setting at 39%. Therefore, this year nearly one NPL transaction every two won’t be carried out by banks, rather by investors selling NPLs to other investors. Just like trading cards.

Let’s be clear. The existence of a secondary market is totally normal. Those who buy NPL mixed portfolios often prefer to sell some portions to more specialised operators. But the widespread feeling in the industry is that the real intentions might be others. The purpose, in fact, might be “adjusting” the performance and making easy profits trading NPLs.

There’s so little transparency on the secondary market that it’s hard to tell who might have done something like that. What is certain though is that several operations raised some suspicions. For instance, Crc and Bayview. The former bought (with some leverage) some NPL portfolios for then re-selling them. In 2019 the company sold a portfolio for 425 million, and in 2019 it put for sale another portfolio for 2 billion — all in the span of few years. Besides, there is the NPL portfolio worth 6 billion put on the market by Dgad International (Credit Agricole group). The fund Anacap decided to change servicer by appointing Sistemia because the former one (which one is hard to tell) wasn’t providing adequate results. Banca Ifis itself is very active on the secondary market, having carried out considerable NPL sales at the end of the year. “They’re residues of portfolios we no longer work on”, explained Banca Ifis. After all, there’s still the question: what will be the impact on the families and enterprises behind NPLs? Making a prediction is difficult. Certainly, more transparency would be beneficial for the sector.

Source: Il Sole 24 Ore

Translator: Cristina Ambrosi

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