DBRS Hosted “DBRS on Non-Performing Loans: Emergence of a New Asset Class” Event in London

DBRS Ratings Limited (DBRS) hosted its "DBRS on Non-Performing Loans: Emergence of a New Asset Class" event on Wednesday 30 January 2019, at DBRS’s London office at 20 Fenchurch Street.

Today’s event featured presentations from DBRS analysts and included distinguished guests: Daniele Carella (Vice President, Bain Capital Credit), Marco Grimaldi (Executive Director, Zenith Service and Parr Credit - Arrow Global Group), Kostas Halatsis (Managing Director, Redwood Asset Management), and Pablo Perez (Executive Director, JP Morgan). The panel was moderated by Gordon Kerr (Head of Structured Finance Research at DBRS) with the guests sharing their insights in a discussion on the Pan-European Landscape: From UTP to NPL to RPL at the event.

Topics discussed concentrated on DBRS’s Sovereign, Financial Institutions and Structured Finance teams’ evaluation of performance and outlook for the European non-performing loans (NPL) market in 2019 and beyond.

Europe’s banks have made significant progress in reducing the large stock of NPLs accumulated since the financial crisis, but a number of countries whose banks have high levels of NPLs still have a long way to go. Banks have been assisted by a variety of government measures (state guarantee schemes, asset management companies, ongoing legal reforms), and there has also been a steady increase in large NPL transactions over the past 18 months. However, regulatory and supervisory measures have taken time to develop and implement. DBRS believes banks still face several key challenges: limitations in the legal framework for debt collection and foreclosure in some countries; ongoing weak profitability in the banking sector; and pressure on capital levels.

DBRS has assigned ratings to 20 European NPL securitisation transactions to date (14 in Italy, four in the Republic of Ireland and two in Portugal) and rated these transactions with its methodology focused on servicer or sponsor expectations of recoveries. DBRS ratings on European NPL securitisations are influenced by the transaction structure, including priority of payments, triggers and hedging arrangements. When comparing European NPL transactions issued since 2016, there is only partial standardisation and differences exist not only between different jurisdictions, but also within single jurisdictions such as Italy. In DBRS’s view, to compare different European NPL securitisation tranches, looking at classical subordination or credit enhancement levels is of very limited value. The metric note-to-gross book value can also be misleading. Instead, DBRS prefers to compare different transactions looking at note-to-gross disposition proceeds which measure the shortfall (if any) from initial servicer or sponsor expectations that the note can theoretically sustain.

With only just over two years since the first publicly rated Italian NPL securitisation transaction was issued, it is still too early to know how these deals are truly performing. However, the data that DBRS has analysed has provided some interesting insights. DBRS has received performance data for eight Italian transactions so far, of which five have more than a single data point. Of these five, three are currently underperforming the servicers’ initial business plans. However, all transactions except one are exceeding DBRS’s expected collections for the senior notes.

Irish transactions are a positive outlier as all transactions are significantly exceeding DBRS’s expected recovery assumptions. DBRS received a single investor report from a Portuguese transaction and performance looks promising so far.

For more information on the topics discussed at the event, please contact Dennis Ferreira. A copy of the
presentation slides can also be found at DBRS.com.

In case you missed this event or if you’d like to participate again, a compact version featuring DBRS analysts will be delivered in a webinar form, available to watch both live on Tuesday 12 February 2019 at 3pm GMT, and on demand on the following link: https://www.brighttalk.com/webcast/15677/347489.

Notes:
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on
www.dbrs.com.

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