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Fewer bad loans should be a good problem to have. For Europe’s debt collectors, it is beginning to grate. Encouragingly for them, the market showed signs of life on Thursday.
Sareb, Spain’s bad bank, sold a €3bn portfolio of unsecured corporate loans to Norwegian debt chaser Axactor. But a low rumoured price of €150mn highlights the market’s inertia.
Unparalleled support from governments during the pandemic forestalled multiple arrears in Europe. In Italy and Greece, government guarantees encouraged debt workouts in which US private equity groups played a big role.
With opportunities there largely exhausted, the industry is looking to Spain. The market here is fragmented and no guarantee scheme underpins sales. The economy is resilient but a drought has strained rural businesses.
Unsecured non-performing loans are on offer. But better lending standards mean primary NPL creation will be constrained.
Disappointing collection rates are another issue. Collections in 18 out of 35 Italian rated securitisations and two out of the three from Spain have fallen short, says Sebastiano Romano at DBRS Morningstar.
Iberia may do better ultimately. That helps explain why doValue, an NPL specialist owned by US group Fortress, is expanding there. The business reported a collection rate of 8.7 per cent of outstanding balances in the first quarter compared with 2.4 per cent in Italy.
European NPLs are at record lows. But default rates started rising in the second half of last year. New NPL creation will put pressure on banks to shift older distressed assets off their balance sheets. About €100bn lurks within the Spanish banking system compared with a similar amount already bought by servicers.
The market should pick up this year, thinks consulting firm Alvarez and Marshal, with perhaps €12bn of transactions to come. Prices will remain under pressure. About 7 cents on the euro is typical for unsecured portfolios, rising to 20 cents and 30 cents for corporate loans and residential mortgages.
That should shift the balance of power back to debt collectors. Those that have acquired scale from government support schemes in Italy and Greece will have a step ahead as the Spanish NPL market opens up further.
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