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The term “NPL Securitisation” has been bandied around a lot recently, and for good reason given the hugely important role it can play in the non-performing loan (NPL) arena.
As banks begin to contemplate life after COVID, they will be acutely aware of the need to neutralise NPLs sooner rather than later. These stockpiles will not only constitute NPLs emanating from the global financial crisis but will also comprise a new crop of NPLs in the form of both COVID loans and those loans that have become impaired as a direct impact of COVID measures on individuals and businesses.
One of the many lessons learnt from the aftermath of the Global Financial Crisis was that the sooner banks off-load NPLs, then the better for not only the bank in question but also the economies in which they serve. It is therefore critical that as world economies begin to unlock there is a concerted effort by banks to address their NPLs on a timely basis rather than kick the can down the road.
All the current hallmarks infer that NPL Securitisation has a critical role in this deleveraging process. On one level this technology can be deployed as a balance sheet management tool, enabling banks to substitute NPLs with securitised notes. However a much more exciting proposition is that instead of a bank retaining NPL Securitisation notes, these are instead sold to third party investors and thus properly distilling the underlying credit risk from bank balance sheets.
At this point in time, NPL Securitisation is certainly being viewed favourably. In Italy the GACs (Garanzia Cartolarizzazione Sofferenze) framework has successfully run for the past five years, and has enabled Italian banks to shed huge volumes of non-performing loans from their balance sheets. More recently over the past year the Greek equivalent (Hellenic Asset Protection Scheme (HAPS)) has demonstrated that it can play a very important role in enabling the Greek banks to divest large amounts of NPLs in one fell swoop. Both these instances of the deployment of NPL securitisation technology have proven to be highly successful and in many respects have created the perfect blue-print for other countries to follow.
The importance of NPL Securitisation in addressing the NPL problem is also acknowledged by the European legislature. Indeed, so-called “quick fixes” to the Securitisation Regulation and the Capital Requirements Regulation are in the process of making their way through the European legislative mill, which will make the deployment of NPL securitisation technology significantly more appealing.
It would be fair to say that the NPL Securitisation market is certainly in its infancy, but drawing on the success of the utilisation of this technology in Greece and Italy and capitalising on the quick fixes to European legislation, this market is set to grow. Indeed, when you consider the potential volume of NPLs and investors current thirst for yield then this could be a hugely significant market.
The potential of NPL securitisation technology though isn’t simply confined to banks off-loading NPLs. This technology can be more widely used, and in some quarters it has been surmised that it can be used as a funding tool for so-called Asset Management Companies (bad banks). NPL Securitisation can also play an important role for investors through being used as:
- source of leverage to improve their internal rates of return;
- a neat tool to either monetise unwanted NPLs or the tail of a portfolio of NPLs that they have largely worked through; and
- an investment vehicle for one or more funds to acquire interests in NPLs.
Whichever way you look at it, NPL securitisation is a highly versatile piece of technology that has massive latent potential. When you consider all this against the backdrop of huge volumes of NPLs, the need to address these promptly alongside some much encouraging legislative treatment (not to mention it’s much improved reputation….), then NPL Securitisation is certainly primed to shift up the gears!