Saturday 10 December 2016

Appetite for loan portfolios is still strong as sell-off enters fourth year

Donal Buckley

Published 16/04/2015 | 02:30

Nama's headquarters: The state bad bank is planning more portfolio sales this year
Nama's headquarters: The state bad bank is planning more portfolio sales this year

NAMA and some banks may have achieved 15 to 20pc increases in the prices they are getting from sales of loan portfolios during the last 12 to 18 months.

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This is the estimate of PWC corporate finance partner David Tynan.

He was commenting on trends in European loan portfolio sales as shown by a new survey.

In response Nama concurred about the price increases but did not say how much they were.

"Nama continues to witness strong demand for loan and property assets brought to market by its debtors and receivers, with competition among buyers and price tension continuing to increase. This in turn results in higher prices for these assets and, in the case of loan portfolios, a lower discount relative to the par value of loans," it said.

Meanwhile Ireland's Permanent TSB was the largest seller of property loans in the first quarter of this year according to a separate survey from Cushman & Wakefield (C&W), the international associate of estate agents Lisney.

PTSB sold its Capital Home Loans servicing platform and the €3.5bn of associated residential loans to Cerberus.

It also finalised the disposal of its €1bn and €500m Irish CRE loan portfolios, dubbed Project Leinster and Project Munster to Haybell Limited, a newly formed entity believed to be funded by Deutsche Bank and Apollo.

C&W estimates that European property loans sales in Q1 of this year were about €12bn or about half those of the previous quarter.

Nevertheless it expects volumes "in the second half of 2015 will be boosted by the €49.2bn pipeline of live and planned sales, with Nama and the Italian banks set to be key vendors."

Thus it forecasts that banks and asset managers in Europe are set to sell up to €70bn of property debt and foreclosed assets over the course of the year.

PwC's survey shows that the average price the consultancy firm's clients expect to pay for performing European loans has jumped to 93pc of the face value of loans, compared with 91pc paid last year.

However a Nama spokesperson said the portion of performing loans still on its books have fallen.

"Approximately 29pc of loans acquired by Nama were classed as performing in 2011 (as a percentage of the NAMA value, i.e. par value less impairment provisions)

The percentage of Nama's loan portfolio that is classed as performing has subsequently fallen to approximately 18pc as a result of disposals of performing loans," he said.

The PwC report indicates that the outlook is not as bright for non-performing loans though as the prices paid for non-performing European loans will dip this year, down to 46pc from 47pc.

Reflecting the Nama comment PwC said "The quality of these (non-performing) types of portfolios coming to market is expected to worsen and increase in granularity."

In other words they are much less likely to recover the full value of the loans and may incur higher management costs such as receivers, estate agent and legal fees as the properties may be sold on at prices below the value of the associated mortgage.

Mr Tynan says that it is difficult to say if the price levels shown in PwC's European survey apply to Irish loans because most of the Irish loan portfolios contain a mixture of both types of loans.

On the other hand recent Irish deals show that banks and others are willing to re-finance Irish property loans at close to full value or at par.

For instance In February, Bank of Ireland is believed to have paid close to par value when buying the performing part of a portfolio of Danske Bank loans. The total portfolio had a par value of €540m of which Bank of Ireland took over 1,000 loans to SME, agriculture and CRE sectors that were originally worth €274m.

It is believed that from the bank's point of view this was an efficient way to acquire a major tranche of new business.

Goldman Sachs took the other loans in the portfolio consisting of distressed loans which had a €266m par value.

Recent re-financing deals such as Johnny Ronan's buy-out of his Nama loans is also seen as further evidence that international financiers are willing to match the European price levels suggested by the PwC survey.

Tynan believes another factor driving up Irish loan prices has been the cheaper cost of borrowing and the availability of more leverage as part of the purchase price.

Initially purchasers would have paid 9 to 10pc for leverage but "now they are paying less than 3pc so this allows them to price the leverage into the offers they make for the loans," according to Tynan.

But one area which does not attract top prices are those mixed portfolios of residential mortgages which include a substantial number of tracker loans as these have low profit margins.

"If trackers were not included then the average prices for Irish loan portfolios would be higher," Mr Tynan says.

The European survey also shows that 11pc of respondents made their top five highest level of loan portfolio sales /purchases in Ireland in 2014 and 8pc expect to make their top five highest level of loan portfolio sales /purchases in Ireland in 2015.

Mr Tynan says that the 2015 reduction is partly because investors are planning for the future when most of the Irish loans will have been sold.

"There's a finite market in Ireland and I expect most of the Irish loans will be sold within one or two years," he adds.

PwC's UK team also found that investor interest in portfolio sales in the UK and Ireland is likely to be redistributed to Italy and a number of other markets in 2015.

However Mr Tynan points out that a number of investment funds have established infrastructures in Ireland which will mean that they will remain active in managing Irish assets.

At least one commentator has suggested that Nama might consider selling off all its remaining loans in one big portfolio deal.

However the PwC survey suggests that this might not be the best way to maximise prices, as "the price of performing commercial real estate loan portfolios is expected to increase even further in 2015."

On the other side of the argument if price expectations for non-performing loans continue to fall this may make it more difficult to maximise the return.

Nevertheless PwC says non-performing assets "remain the most popular asset class amongst investors due to the returns they offer.

"Average discounts to face value have decreased due to fierce competition for deals in some of the established and more liquid markets," it said.

Expected returns from the real estate loan market this year have remained steady, despite the increased competition. For performing loans, investors expect an unleveraged return of 5pc, while for non-performing loans 20pc returns are expected which is in line with 2014.

Investors are expected to increase their use of leverage this year as the number of investors expecting to use no leverage to buy loans has dropped by 21pc and those looking to leverage at the most aggressive level, of above 75pc of the price being paid for loans, increased by 5pc.

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