Italian banks are expected to dominate the market for shifting bad loans off the balance sheets of financial institutions in 2017, according to S&P Global.
The rating agency expects worldwide issuance of non-performing debt via asset backed securities to total $50bn, with Italy potentially accounting for 80 per cent, or $40bn of such sales this year.
The figures, from S&P’s 2017 outlook for structured finance, represent a sharp rise from 2016, when the amount of public rated deals was just $3bn.
However, the appeal of asset-backed securities issued by Italian banks is likely to depend on a convincing political solution to the €360bn of problematic loans on its balance sheets, representing about 20 per cent of the country’s total amount of outstanding loans, according to S&P.
Investor scepticism over a government scheme to provide a state guarantee to a portion of packaged loans deepened after Matteo Renzi stepped down as prime minister after losing a referendum on constitutional reform, creating more unease at the political outlook.
“Uncertainty around the government does not help to attract new money,” said Darrell Wheeler, head of research at S&P.
“The referendum shouldn’t make any difference to how these loans are analysed and should not affect the ability of the banks to securitise non-performing loans, but it would have been helpful in making global investors feel more comfortable about buying the debt.”
Some such debt sales have already been announced.
The European Central Bank has ordered Monte dei Paschi to trim its non-performing loan balances, and the Italian lender had announced plans to sell nearly €30bn of gross non-performing loans through securitisation.
Moody’s and DBRS rated a €140.5m deal by Banca Popolare di Bari backed by almost €480m of loans in September of 2016. China saw 12 deals issued in 2016 and S&P rated a €536m deal in Ireland. Moody’s said in its own outlook that it expected to see increased NPL issuance in 2017.
The vast majority of NPL sales so far have been done privately with specialist hedge funds and private equity firms, without the backing of a major rating agency — an important factor in attracting more mainstream investors.
“I am sceptical we will get to that volume of transactions,” said Andrew Dennis, investment manager at Aberdeen Asset Management, adding that too much uncertainty remains about when and how much the loans would pay out.
“We are not convinced that enough has been done to reform the legal process and the recovery process to make it a hugely attractive asset class.”
But S&P’s Mr Wheeler said the prospect of higher return and large supply will attract investors to the market.
“Once investors get used to buying product it will help develop,” he said. “This will be a multi year product.”
