The map is re-drawn for NPL investments
- Market movements during 2020- decreased demand for NPL portfolios
The Council has been active in the Nordic and Swedish NPL markets during the spring and summer of 2020, and we have noticed movements in the markets from different players, most of which might be caused by the effects from COVID19 on the credit market:
- Lower demand for NPL portfolios for sellers, banks and other credit institutions.
- Traditional buyers in the region, which are the DCA companies, have reduced risk appetite, and several forward flow contracts have been terminated or not prolonged.
In the quarterly reports we have noted increases in credit losses and reservations ranging from some 30% up to several hundred %, several planned NPL sales processes have consequently been cancelled. The combination of the effects of COVID-19 and the new regulatory framework, including the Prudential Backstop, has resulted in banks looking into new ways of managing and selling NPL portfolios going forward.
On the international and European market, The Council has received intelligence suggesting that the NPL markets have been standing almost still during 2020, however recently some first transactions are being prepared and are expected to close during this fall, most likely in Southern Europe.
According to our investment partner, the way to success going forward for sellers is to widen the investor base, which in the Nordic markets would imply non-DCA investors, such as large banks, institutional investors, pension funds and other, which unlike the DCA:s will have to outsource the management of the distressed debt or co-invest with a DCA.
After the financial crisis in 2009 Nordic NPL portfolios have been trading at an IRR of around 10-15%. During this period, the forward-flow solution has become the most demanded solution by NPL sellers in the Nordic region. Now, most buyers have increased IRR requirements, and there will be new investors entering the market.
The strong growth within unsecured consumer credits in the Nordics has led to increased volumes of NPL portfolios, and in combination with a strong legal framework, the Nordic NPL market will become more attractive to international institutional investors with long-standing experience from NPL investments across Europe. Several new investors have started to allocate capital for investments into the Nordic market starting fall of 2020.
- Market outlook autumn 2020- structuring of portfolios a new alternative
We have been in contact with DCA companies in The Nordics to understand how collection curves might have been affected by the impact of COVID19. They have told us that curves are affected to a certain degree in Southern Europe, but that in the Nordics, on the other hand, collection curves are not significantly affected at all up to this point. However, at the same time, there is a slight increase in debt restructuring which might indicate an upcoming increase in risk among certain banks and creditors.
The Council has noted a certain gap in price expectations between the sellers and potential buyers of NPL portfolios. One of the solutions now discussed in the market is that portfolios are structured so that investors can accept higher price levels since the structure will allow low-risk investment tranches. Structuring the NPL portfolios, one off portfolios as well as forward flows, will create benefits for both buyer and seller compared to a traditional NPL sale. Portfolio prices can find long term sustainable levels based on the quality of underlying debt as well as on good collection performance of the portfolio. Also, when structuring, the portfolio the seller might be able to co-invest in their NPL portfolio and have access to the data of the sold NPL portfolio, which has not been possible with traditional NPL sales, which has meant a certain lack of transparency.
Normally, big ticket credit is higher risk and lower price than small ticket. To mitigate risk and improve price levels, solid origination combined with extensive data history over debtors will be beneficial.
As a summary, there will be several success factors going into the fall of 2020 when it comes to selling NPL portfolios:
- A widening of the investor base and broadened marketing of the portfolios
- A set up of structures and competing bids
- High quality in underlying credit risk
The wins of the future and re-drawn map for NPL investments will be mutual for investors and seller:
- New and broader investor base with a new alternative investment class
- New structures and setups for sales, more dynamic marketplace
- More transparency for both sellers and buyers of NPL portfolios, which means that the asset class can more easily attract even more sellers and investors
About us
The Council was established 2010 and offer advisory services within risk, compliance and governance to financial companies in Europe. Within our new business line, The Council offer investments advisory and broking services to NPL sellers and potential investors. We have access to a network of up to 400 international investors and we manage both traditional NPL sales as well as sales through structuring NPL portfolio investments.
We have gained vast experience from the NPL investments evaluating over a hundred NPL portfolio investment case over the years. We offer a smooth, efficient and anonymous sales process securing best possible commercial terms for your NPL sale.
Jörgen Krigsman Mireille Andersson
Transaction Manager, Partner Partner
Mobile: +46 734 00 34 11 Mobile: +46 706 08 02 14
E-mail: jorgen.krigsman@thecouncil.se E-mail: mireille.andersson@thecouncil.se