Distressed debt deals set to grow on Europe’s southeast frontier

Distressed debt deals set to grow on Europe’s southeast frontier
More transactions on the scale of BCR’s €1.2bn “Project Tokyo” are not expected.
By Clare Nuttall in Bucharest August 18, 2016

A growing number of non-performing loan (NPL) portfolio transactions are being concluded in Southeast Europe, with Bulgaria, Croatia, Serbia and especially Slovenia all expected to see more sales in the near future. However, there are questions over the degree of investor appetite for some markets in the region.

Within the last few years, Romania has emerged as a very active market for bad loans, but while there are still deals to be done, more transactions on the scale of BCR’s €1.2bn “Project Tokyo” portfolio are not expected, and there is a growing belief that the best days for the Romanian market are now in the past. This has led some investors to look elsewhere in Southeast Europe, where banks have been slower to put their NPL portfolios on the market.

In the last couple of years more banks in SEE have been seeking to free up capital and clean their balance sheets by disposing of NPL portfolios. In many cases the process has been driven by international banks - especially those from Austria and Greece - who are selling off their loans in SEE along with other parts of the continent.

NPL ratios in the banking sectors of SEE are consistently higher than in CEE, where in most countries the ratios are now in single digits. By contrast, data compiled by KPMG shows that as of 2015 estimated ratios in SEE plus Hungary were all in double digits, with the highest, in Serbia, at 22.78% and still rising.

“We consider Croatia, Serbia and Slovenia to be the backbone of the region,” said Darko Jovanovic, partner, banking/finance at Belgrade-based law firm Karanovic & Nikolic.

Slovenia has emerged as probably the most interesting location after Romania, given the aggressive restructuring of the banking sector since the December 2013 bail-in, and it also has more favourable legislation than many other countries in the region. Croatia has seen relatively few deals to date, but it was the location of one of the biggest deals in the area - the sale of Erste’s €217mn Project Janica to Norwegian B2Holding.

“Next to Romania, Slovenia is probably the most active. It’s a very small market but the magnitude of the problem was such that people had to act ruthlessly,” says Marcell Nemeth, counsel at Wolf Theiss in Vienna.

However, Nemeth warns that while “there is certainly activity in all these countries”, he does not expect the trend towards more sales of NPL portfolios to show itself to an equal extent across the region.

Intense speculation

The Slovenian market is currently the site of intense speculation, with the country’s largest bank Nova Ljubljanska Bank (NLB) selling off €800mn worth of NPLs in three tranches, as it cleans its balance sheet ahead of a planned privatisation.

The bank announced on July 19 that it had agreed to sell a package of retail NPLs with a face value of approximately €104mn. It was also reported to have concluded a deal to sell a €396mn package of corporate loans at the end of June. The name of the buyer was not disclosed, but according to local daily Dnevnik the corporate package was sold to US fund Pine River Capital, Swiss buyout fund DDM Group and Czech APS Holding.

Observers forecast this could kick-start the market in Slovenia, which has been quiet so far. “This is a very large and complex deal, both for NLB and for Slovenia. We expect more NPL portfolio transactions to follow the closure of this deal,” Marko Ketler, partner at karanovic/nikolic, told bne IntelliNews. “There is an opportunity for investors to make good deals for good value.”

Slovenia is a somewhat unusual market in that state-owned banks have already transferred a large part of their NPL portfolios to the country’s bad bank, the Bank Assets Management Company (BAMC). “So far the Slovenian bad bank disposed of relatively few bad loans, but it is quite engaged in restructuring of the assets it received as well as in the restructuring of the distressed debtors. At some point I think it will need to sell larger portfolios of loans, but timeframe is difficult to be predicted,” says Mia Kalas, partner at Selih & Partnerji in Ljubljana.

Meanwhile, other Slovenian banks are also considering portfolio sales of the bad loans they still hold. “The banks that were bailed in have some commitments to the European Central Bank, and those that are in the process of privatisation have to clean their balance sheets first. It’s fair to say they are under some pressure to sell,” says Ketler.

“The pressure to sell NPLs is lesser compared to when the financial crisis was really soaring but the banks are looking because they want to further clean their balance sheets,” according to Kalas. “On the other hand, there is also quite a lot of interest,” she adds.

International investors reportedly looking at Slovenia include APS, B2 Capital, Sweden’s BDM and York Capital.

From the banks’ side, Abanka’s high ratio of NPLs has raised expectations that it could initiate a sale process within the coming months. Gorenjska Banka is also rumoured to be considering putting some of its bad loans up for sale. Nova KBM was also reportedly considering selling its NPLs, but its plans are unclear following its takeover by Apollo Global Management and the European Bank for Reconstruction and Development.

Next big thing

Slovenia is seen as having some of the most conducive legislation to NPL sales in the region, in contrast to Serbia. Nemeth warns that while “Serbia may be the next big thing ... there are so many regulatory constraints, I am a bit cautious.”

A central bank official said in July it would take over six years to resolve Serbia’s NPL problems. However, the central bank and finance ministry are currently working to remove obstacles to future sales. Several laws and regulations are expected to be amended by September.

“In terms of specific legal issues in Serbia that may be relevant for the NPL portfolio transfers, the banking secrecy requirement may somewhat complicate the process, though the central bank and finance ministry are looking at relaxing this,” says Jovanovic. “Also, retail NPLs can be bought only by a locally licenced bank, which is why there are investors who are very interested in buying a local banking licence to get into this lucrative NPL business at the very beginning. There are a number of local banks on sale, and funds are looking at M&A opportunities.”

Despite these obstacles, a couple of transactions were completed in 2015, with both Erste and Banca Intesa selling Serbian NPL portfolios, though both deals were relatively small at €21mn and €35mn respectively.

Greek banks Marfin and Piraeus are also reportedly looking to sell NPL portfolios in Serbia. Meanwhile, as preparations to privatise Serbia’s second largest lender Komercijalna Banka get underway, some of its loans could also be sold off.

Bulgaria too is believed to have potential. Since 2014, NPL portfolios have been sold by BNP Paribas, local United Bulgarian Bank and payday loan company TBI Credit, though the largest package sold had a face value of just €50mn.

“The Bulgarian debt sales market has lagged behind its Central and Eastern European counterparts. However, the relatively high NPL ratio and the upcoming Asset Quality Review due to be completed in August 2016 are expected to turn the trend,” Gergana Mantarkova, managing partner, deal advisory, KPMG in Bulgaria and in the Balkans, said in KPMG’s “European Debt Sales” report published earlier this year. The AQR did, however, paint a more positive picture of the sector than previously expected, which could take the pressure off banks to sell NPLs.

Part of the difficulty in selling NPLs, especially in the small and fragmented markets of the former Yugoslavia, is that many banks and their clients have operations in several countries across the region. As a result, they are exposed to various small markets with different regulations. There is a tendency to bundle certain deals regionally because the banks are present across the region and a number of businesses are interconnected throughout those countries. However, while regional bundling can make portfolios large enough to be interesting to more investors, they are usually structured as separate transactions for each country.

This encourages Nemeth to sound a note of caution on the region. He also points out that the long delays in bringing NPLs to the market could mean some banks in SEE have missed the bus in terms of striking favourable deals.

“On the investor side, people are assuming there is a huge amount of interest. There is, but the capital available [for NPL transactions] is decreasing, and people who want to invest in NPLs can use this money elsewhere in Europe - in Spain or Italy for example,” he says. “There is appetite but whether you can really hammer out the deal and find the funds is increasingly doubtful because some of the people who wanted to spend money on NPLs and had equity spent it back in 2010-2012. We cannot take it as a given that there is still a huge amount of capital available.”