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Turnround Management Association Europe – Dedicated to Corporate Renewal

TMA Europe East Europe Conference

Wednesday 16 March 2016, | 16:00-20:00

The Czech National Bank, Prague, Czech Republic

 

Hungary the new sweet spot for CEE NPL transactions, Romania overcrowded, Serbia ready to pick up – conference coverage 

By Antonio Vanuzzo, Reporter, Debtwire

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Keynote Speaker: Ralf Zeitlberger, Erst Bank, Austria

Hungary is considered the next sweet spot for CEE NPL transactions, whereas Romania has become overcrowded like Spain in the past few years, according to several buysiders, advisers and operational turnaround professionals gathered at the TMA Europe – Eastern Europe conference held in Prague on Wednesday (16 March).

In addition to Hungary, investors polled byDebtwire expect the Balkans Region to gain traction in 2016.

“Serbia is looking quite interesting at the moment, Slovenia and Croatia offer plenty of opportunities too,” one buysider pointed out. “Romanian portfolios are mature and the prices are going up as bigger funds are entering the market."

PwC data shows some EUR 11bn of NPLs were brought to market in 2013-2015, mainly driven by commercial real estate sales. In terms of returns, the average Internal rate of return (IRR) hit 24%, a percentage higher than in the vast majority of western European countries, PwC noted.

Not a single marketplace

“The CEE market is fragmented, sometimes foreign investors coming from the US or China tend to forget it. Currently the single ticket approach – usually EUR 5m to 30m – remains the right one to increase the number of transactions. It’s better to cherrypick than expect big portfolio disposals,” a sell-side adviser pointed out.

“Adoption of international standards and the quality of data provided are key drivers to successfully complete a transaction beneficial for all the parties involved,” a second adviser commented.

A third crucial element to boost NPL transactions in the CEE region is enhancing the servicing capacity. “Servicing companies are focused only on single countries, it’s still difficult to find a pan-regional player having international standards, and banks aren’t usually keen to replace them,” the first sell-side adviser said.

The variety of NPL supply also weighs on investors’ expectations. “Everybody in the market is looking at commercial real estate portfolios with little granularity, but we have to keep in mind that for these kind of assets the supply is extremely limited," the adviser continued.

Complexities apart, Austrian, Greek, Italian and French lenders, which dominate the overall market, need to deleverage nonetheless. According to a Deloitte’s CEE NPL report issued in November 2015, in 1H15 75% of the banks surveyed by the consultancy firm indicated they intend to strengthen their capital adequacy via assets sales, up from 60% in 2014.

“The key driver to boost the NPL market in the CEE region is the banks’ level of provisioning. If they aren’t [going to make provisions], any agreement is impossible,” a second buysider pointed out.

To name a few, Unicredit’s Croatian subsidiary Zagrebacka Banka holds EUR 1.9bn of NPLs, 19.6% of its total loans as of FY14, Deloitte’s report showed. In Slovenia and Serbia, the Milanese bank’s NPL ratio is 17.5% and 17.8%,equalling to EUR 340m and EUR 272m, respectively.

Erste’s Romanian subsidiary Banca comercialaromana NPLs hit EUR 2bn, a 23% ratio, according to the same report. Erste Bank Hungary’s NPL ratio amounted to 26% in 2014, equating to a EUR 1.3bn NPL volume. OTP Hungary’s total NPLs reached EUR 1.5bn for a 17.3% ratio. Also in Hungary, Raiffeisen bank’s NPL ratio rose to 25.7%, totalling to EUR 1.3bn.

Romania the star pupil, Slovenia the old friend 

“What I’ve seen in Romania is the change in the banks’ approach. Now they’re among the most proactive ones in the region and this helps create a track record for future transactions”, the secondbuysider said.

According to a report today (18 March) in local newspaper Misranu.ro, Unicredit sold a EUR339m Romanian NPL portfolio to a consortium led by Polish player Agio Kapital.

“The Romanian government recently lowered VAT from 24% to 20%, while the levy on dividends equals 5%. Individual bankruptcy law has also been amended, and investors expect some EUR 3bn of portfolios for 2016," a third adviser said.

However, a EUR 2.7bn mixed portfolio dubbed “Project Neptune” disposed by Banca comercialaromana was pulled due to the complexities of the NPL pools, which widened the bid-ask spread. The same lender managed to sell in December 2015 a EUR 1.2bn mixed commercial real estate, consumer and SME loans portfolio dubbed “Project Tokyo” to a consortium led by Deutsche Bank and local firm APS Holding.

Several investors told Debtwire that the Slovenian market is the most creditor friendly in the area. “In Slovenia the first wave of NPL portfolios was pretty mixed, the current second wave is more secure and real-estate backed. The country is one of the most creditor friendly countries of the region. For example, funds don’t need a banking license to operate,” a fourth adviser noted.

BAMC (DUTB), the bad bank set up in 2013 to recover the major Slovenian banks’ bad loans after the bailout, still holds EUR 5bn NPLs and is set to sell 10% of its assets annually, according to the “Act regulating measures of the Republic of Slovenia for strengthening banks’ stability”.

Although securitisation law is quite supportive forSPVs, which can choose foreign laws for assignment agreement and don’t have to pay any stamp duty or double taxation, few transactions have been brought to the market so far. RecentlyBAMC sold a EUR 123m corporate loans portfolio to BofA Merrill Lynch.

Hungary went down the bad bank route as well. MARK was set up by the Hungarian central bank in 2014 with a mandate of buying project loans and real estate to help clean up local banks’ books.

“There are EUR 6bn of assets ready for sale in the country, and lenders are incentivised by the National Bank. However, the banking license requirement might be an issue for prospective buyers,” a third buysider said.

“Creating a bad bank is good for RWA (Risk Weighted Assets), however providing data is key in order to allow buyers to make due diligence,” a fourth buysider pointed out.

Legal hurdles holding back investors 

Serbia is undoubtedly the rising star in the CEE NPL space, the TMA conference participants agreed. However, its convoluted legal framework is pushing back prospective buyers.

“The country is putting lots of effort in doing the homework to get the EU membership. Investors have to consider though that 60% of outstanding loans are being provided to SMEs with a turnover of less than EUR 20m,” a fourth adviser noted.

Cross-border sales of receivables to foreign investors is not allowed, and there are limits to the amount of loans to private individuals from banks only to other lenders operating in the country, a KPMG report on “European debt sales 2016” stated.

The top two NPL holders are Vojvodanska Bankaand the local subsidiary of Intesa Sanpaolo, with a EUR 571m and EUR 485m volume in 2014, the same report showed.

In September 2015, Croatia overhauled its Bankruptcy Act to speed up the pre-bankruptcy proceedings, which now fall under the jurisdiction of commercial court. However, to operate in the country a foreign entity needs a Croatian branch and needs approval from the Croatian Financial Services Supervisory Agency (HANFA).

“According to the old Croatian law, buyers couldn’t complete foreclosure processes if needed,” a banker noted.

The local market is heating up as the first two lenders, Intesa Sanpaolo’s Zagrebacka Bankaand Hypo Alpe Adria’s wind down entity HETA held EUR 1.8bn and EUR 1.3bn of NPLs, respectively in 2014, KPMG estimated.

To safeguard the financial stability of CEE, in 2009 the European investment bank (EIB), International monetary fund (IMF), European bank for economic development (EBRD) along with the European central bank (ECB), the European commission and the World Bank established the “Vienna Initiative”, which also involves the major banks of the region.

One of the main goals of the Vienna Initiative is to set up pan-regional guidelines for emerging eastern European countries such as Albania, Serbia and Montenegro. Speeding up recovery processes as well as making the legal frameworks transparent are the striking points for investors looking for double-digit returns, the second buysider said. "In this respect, pre-packaged bankruptcies initiatives are a very good idea," he concluded.

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