Romania emerged in 2015 as the largest and most active market for sales of non-performing loan (NPL) portfolios in the CEE region. Most dealmakers agree this trend will continue in 2016, given the large volume of NPLs still held by banks and the eagerness of bank owners - in particular Austrian and Greek banking groups - to sell, but more big failed deals could still deter investors.

In 2015 around €2bn worth of NPLs were sold by Romanian banks, with the giant €1.2bn portfolio dubbed “Project Tokyo” that was sold by Erste Group’s Banca Commerciala Romana (BCR) to Deutsche Bank, the International Finance Corporation (IFC) and debt recovery specialist APS accounting for more than half of the total.

Earlier in the year, BCR, which is Romania’s largest bank, offloaded a €433mn portfolio, again to Deutsche Bank, while UniCredit Bank Romania sold €340bn worth of bad loans to Polish debt recovery firm Kredyt Inkaso for €28mn. Another transaction, the sale of Intesa Sanpaolo’s €287mn “Project Rosemary”, reportedly at a 90% discount, is expected to close soon, after what one adviser said was a “very competitive process”. The sale of Greek-owned Bancpost’s €500mn portfolio is also reportedly underway.

Radu Dumitrescu, director of financial advisory services at Deloitte Romania, forecasts a deal volume of around €2bn in 2016, though for this to happen, “we need one portfolio of around €1bn to sell”, he says, adding that “I am optimistic we will get to €2bn in 2016. Appetite exists on both sides.”

A report from KPMG estimates the size of the Romanian NPL market at €12bn, of which just €3.5bn had been sold to investors as of Q4 2015. “Banks that have not yet brought NPL portfolios to market may now consider the chance to do so, due to recovering investor sentiment from the successful transactions in Q4 2015,” the report says.

According to Mihai Dudoiu, partner and head of the banking and finance practice group at Bucharest-based law firm Tuca Zbârcea & Asociatii, a number of transactions are ongoing and he agrees that, “we are confident that new NPL transactions will occur in 2016 and we expect that banks which have not been active in selling NPLs will take the necessary measures to clean up their balance sheets”.

The NPL ratio in Romania remains “rather high” compared to other countries in the region, Dudoiu adds. A study carried out by the Romanian central bank found that Romanian banks have an NPL ratio of more than twice the EU average. The share of non-performing loans in Romania was 13.61% at end 2015, according to the central bank.

According to the KPMG report, BCR still had the largest volume of NPLs in late 2015 - around €2bn. Other banks with a substantial NPL burden include BRD-Societe Generale with €1.1bn and Greek-owned Alpha Bank Romania and domestic-owned Banca Transilvania with more than €400mn each.

Transaction volumes in Romania still do not compare with those in highly-leveraged West European markets. KPMG reported a record €104bn worth of portfolio sales in 2015. The UK accounted for one third of the total, with other hotspots including Ireland, Italy and Spain. However, to date Romania has surpassed most CEE markets with the exception of Poland, and outperformed the region last year.

“Within the CEE region, Romania has one of the highest levels of bad debts, many more than in Hungary or Poland. We are also seeing a large number of transactions now because unlike in Western Europe, the first deals only really started at the end of 2014,” says Horea Popescu, partner and head of corporate and M&A in Romania at law firm CMS.

Debt cycle

With the exception of Banca Transilvania, which is majority locally owned, the banks selling NPL bundles in Romania are mainly the local operations of international banking groups.

The sale of portfolios of NPLs is natural in this section of the economic cycle,” says Simon Dayes, partner and head of Southeast European banking and international finance at CMS. “What we see in Romania, we can see all across Europe and CEE, including UK, Spain, Italy, Poland and beyond. Because a number of the major Romanian banks are foreign-owned, our NPL transactions can be head-office driven rather than the product of a pure local strategy and this can affect the seller’s priorities.”

“Austrian and Italian financial institutions have been the most active sellers in the region and this will continue moving forward ... Greek banks are also expected to have a greater focus on the NPL problems of their foreign subsidiaries throughout the region in 2016,” says a Deloitte report.

Erste, owner of BCR, together its fellow Austrian competitor Raiffeisen, has a significant presence across Central and Southeast Europe. The two banks expanded rapidly before the crisis and now, according to the KPMG report, “the senior management of Austrian banks have become more active in divesting problematic loan portfolios ... Deleveraging by Austrian banks of their CEE exposures is expected to continue in 2016.”

Banks from crisis-hit Greece are under even more pressure to exit NPLs in Romania and other countries in the region. Vasilis Kosmas, director of KPMG’s portfolio solutions group, estimates that €12bn-€16bn of banking assets will be put on the market by 2018 as Greek banks aggressively deleverage their CESEE exposure.

Several Greek banking groups such as Piraeus and Bancpost are not just looking for buyers for their non-performing portfolios, but putting their entire Romanian operations up for sale. As Dayes says, “The sale of a whole bank may, at heart, be an NPL transaction.”

Substantial portfolios are being put on the market now, which has attracted major international players to the market. “In the last three transactions there was quite a lot of interest, at least by Romanian standards. You can’t compare the market to Spain, for example, but there were three or four big institutional investors from London and the US interested,” says Victor Angelescu, APS’s CEE regional director.

According to Dumitrescu, the portfolios put up for sale have gradually risen in size as banks realise it is taking longer than initially expected to offload problem assets and are trying to speed up the process by packing more types of loans into their transactions - with mixed results. “This is positive because larger portfolios can attract major players like Blackstone and Loan Star. However, increasing the complexity of transactions could affect the price buyers are willing to pay and stop deals from happening.”

Vicious cycle

This was noticeable in 2015, when as well as CEE’s largest deal, Romania was also the location for the region’s largest failed deal when BCR was unable to find a buyer for the giant €2.3bn “Project Neptune”. One of the advisers on the failed transaction said that an attempt to sell the portfolio failed because of “a combination of the price gap and the complexity of the deal [that] did not allow the bidder to fully understand what they were buying ... the level of information was not of the quality wanted, so the price offered was lower than expected.”

Earlier in the year, Bank of Cyprus cancelled the sale of its NPL portfolio to Sankaty Advisers on the grounds the price offered was too low.

Failed deals can have a damaging effect on future transactions, says Andrei Burz-Pinzaru, partner and head of the banking and securities practice at law firm Reff & Associates, which represents Deloitte Legal in Romania. He warns of a vicious circle, where investors may be reluctant to invest in due diligence if they are not confident they will be able to close a deal, which in turn could make it harder to strike deals.

“The closure of several deals in 2015 and early 2016 shows the price gap is not a showstopper,” Burz-Pinzaru says. He believes the price gap is gradually decreasing, with more transactions now happening after a “dry market”. The sale of Piraeus’s PLN50mn (€11.6mn) portfolio to Polish debt management firm KRUK in May 2015 “closed quite fast”, while as of April 2016 Intesa Sanpaolo’s Project Rosemary was close to finalisation after a “very competitive” process.

Even BCR bounced back after the failure of Project Neptune, selling the smaller Project Tokyo that according to one adviser was “the part of Project Neptune that the bidder was happy with and able to price”.

However, the failure of Project Neptune was disappointing not just because of the size of the deal but because it would have seen the loans and the service department sold together - a move that often helps markets to grow and diversify.

“There are many different ways to structure an NPL transaction,” explains Dayes. “The simplest is an outright sale of a portfolio of individual loans, but there are many others.  For example, collections, maintenance or work-out of loans can be outsourced, with remuneration calculated based on a time/success formula. A buyer may provide its own IT platform and its staff, or it may acquire these from the seller or third parties.”

“I am a fan of the model where NPLs are sold together with the people working in that area, then the buyer takes on a new role where this becomes their key business and they can participate in other tenders,” says Dumitrescu.

Should banks active in Romania decide to take a similar approach in future, this could help further develop the local market.

Meanwhile, although other markets in the Southeast Europe region have so far lagged behind Romania, banks in countries such as Bulgaria, Croatia and Slovenia are also expected to make a push to sell some of their NPLs this year.