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Banking Measure Could Solve NPL Problems Within Five Years
8 September 2017
Should the economy continue to perform regularly, the special-purpose vehicle that will manage the banks’ overdue loans should be capable of winding down the toxic assets within five years
The special-purpose vehicle that three of Portugal’s largest banks will create to handle the problem of non-performing loans (NPLs) will need about five years to deal with BCP, Novo Banco and CGD’s exposure to corporate loans that are already overdue by more than 90 days. It will be enough if the economy were to grow by around 2%, with inflation at 1.5%, for the forecast to hit its target, Ricardo Mourinho Félix explained to DN/Dinheiro Vivo.
“It’s important that we act in an intelligent and well-thought out manner,” the Assistant Secretary of State and Finance declared. “In this scenario, if the economy grows 2% per year in the long term with inflation of 1.5%, an average nominal growth of 3.5%, our problems with NPLs could be resolved within five years. Should the economy grow at a faster pace, it could be even less,” he added.
According to the official, the three banks involved are already “largely in agreement” with regards to the final design of the common platform that is being created to manage the distressed debt. There exist some final matters to wrap up with the law firm that will represent the new company, and the parties must finalise the credit management contracts. The idea behind the platform is not to share the toxic assets, but rather to share and debate possible solutions for each banking institution. Each of the banks involved will take part in the platform’s governance.
As Público reported yesterday, CGD, BCP and Novo Banco reached an agreement with the government for the measure aimed at finding a solution for the banks’ distressed debts, which will have the support of the Portuguese Instituição Financeira de Desenvolvimento (IFD – Financial Development Institution). The banks are also studying the possible creation of a Group of Complementary Companies (ACE), which would be responsible for recovering and eventually selling off the NPLs, the newspaper added.
The IFD, commonly called the Banco de Fomento (development bank), will shoulder part of the responsibility for financing the new measure and has already formally requested authorisation to broaden its scope of activities, which was limited to supporting the small and medium-sized enterprise (SME) segment, according to Público.
A common solution to avoid market distortions
Mourinho Felix explained that the government’s reason for sponsoring and supporting a joint solution for those banks with the most difficulties with distressed debt is to ensure that the bad debts do not become a destabilising force in the market. “The three banks and others that may want to take part in the measure voluntarily will coordinate efforts so that no one bank acts to the detriment of the others. That is, if there were to be no cooperation, it’s highly likely that those banks which manage to unload their problematic assets first will cause other banks to suffer greater losses. We are looking to avoid such a destruction of value, “he said.
Another factor contributing to the banks’ decision to resolve the problem of distressed debt in a concerted way is that some of the overdue loans (>90 days in arrears) are common to several banks, and others are politically sensitive cases, such as loans linked to Angola or Venezuela. Finally, the initial idea of creating a “bad bank” to take over the totality of the toxic assets was quickly found to be impractical, given the unwillingness of the European authorities to accept the idea, which would necessarily entail direct state aid, and neither the Commission nor Directorate-General for Competition would authorise it.
Supervision and insolvency
The government’s strategy to deal with the high level of NPLs in the Portuguese banking system is based on three pillars, one of which was the creation of this structure, in which the banks may participate voluntarily, to manage them. But in addition to this, changes have been made to banking regulations and supervision.
Mourinho Félix also chose to encourage the use of insolvency and corporate reorganisation mechanisms, such as the PER (Special Revitalization Process) or SIREVE (System for the Recovery of Companies by Extrajudicial Means). Additionally, the Assistant Secretary insisted that creditors should appoint administrators when they agree to convert loans into equity of debtor companies.
On the supervisory side, the government has held meetings with the Bank of Portugal to change some of the impacts that companies face after going into default. Even if the companies finalise a successful restructuring of their debts, they end up with the associated history of bankruptcy. And history has a price.
“Today, companies that previously had problems paying back their debts and were then restructured are still treated as defaulters. Any new loans they receive are treated as if it were at the same level as distressed debt,” the Assistant Secretary of State explained. In these cases, the government believes that positive incentives should be created and that only part of any new loans these companies contract should be classified as of lower quality. “Such a change would have positive consequences for everyone, including less stigma for those companies.”
Original Story: Diário de Notícias – Luís Reis Ribeiro / Filipe Paiva Cardoso
Translation: Richard Turner