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Those readers that have followed the meteoric rise of the European non-performing loan (NPL) market from the ashes of the global financial crisis (GFC) will be very aware of the profound impact that COVID-19 has had. In the space of a few weeks a large, burgeoning market that exhibited a waterfall of transactions has been confined to a trickle as deals were pulled or left to stagnate as the market was shrouded with the malaise emanating from the pandemic.
Fortunately though, the tide has now changed with the lifting of lock-down measures, which has also bought with it the green shoots of an NPL market, with Greece being at the very forefront. Recent news of Alpha Bank (€10.6 billion – Galaxy), Piraeus Bank (€2 billion – Phoenix; €5 billion – Vega) and Pancretan Cooperative Bank (€297 million – Castor) readying multiple NPL securitisations is testament to this fact. Although these are very much welcome steps, the erstwhile market observer will be aware that there are a number of significant hurdles that the NPL market will need to overcome (especially with regard to auction processes) in order to properly kick start:
- A recalibration of expectations around the bid-ask price
- The ability to quantify the impact of COVID-19 when it comes to the valuation of NPLs
- The availability of debt finance to maximise returns
As was true with the genesis of the European NPL market, these hurdles need to be overcome and the sooner this is achieved the better for not only the banks but also the respective economies in which they operate.
Despite these uncertain times, one thing that is abundantly clear is that there is everything to play for in the European NPL arena. For starters we know that there is still significant NPL stock stemming from the GFC and that these levels will only surge once the new crop of NPLs created by the current crisis are factored in. In addition, a significant secondary NPL market, driven by the need to monetise existing NPL portfolios, is likely to emerge within a relatively short period of time.
If the reports of significant amounts of dry powder that is ready to be deployed are anything to go by, then there is certainly going to be plenty of appetite for this increased stock. Indeed, taking into account all of this against a backdrop of the fact that the European NPL market has built and developed the infrastructure required to effectively trade NPLs at scale means that the European NPL market can be said to be a very exciting proposition.
Although there are number of uncertainties at this point in time, one thing that is crystal clear is that the European NPL market has the latent potential to be much bigger and better than we have witnessed previously and therefore it is simply a matter of time until the shroud of COVID-19 is properly lifted, the floodgates are opened and a deluge of NPLs pour into the market.