global-dept-sales-september-2011v2

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Second edition of Global Debt Sales of KPMG gives an actual overview about the NPL-market, securitization - RMBS & key banking markets across Europe, the Americas and Asia-Pacific

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global-dept-sales-september-2011v2

  1. 1. LOAN PORTFOLIO ADVISORY Global Debt Sales Portfolio Solutions Group kpmg.com KPMG INTERNATIONAL© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  2. 2. © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  3. 3. ForewordThe debt sales market has become positively exhilarating since our first edition ofGlobal Debt Sales just six months ago. The world is slowly but surely pulling itselfout of the deep recession that followed the global financial crisis. But while somecountries are faring reasonably well, others have seen their debt – both public andprivate – skyrocket to unmanageable levels.The result has been a series of government regulations and business strategiesthat have reshaped the debt sales markets in many jurisdictions. And as the specterof sovereign debt defaults continue to circle EU countries in particular (includingPortugal’s mid-summer debt downgrading to junk status by Moody’s), many punditsand industry observers are forecasting even greater levels of debt sales (particularlynon-performing portfolios) in the near future.In the midst of all of this, KPMG debt sales and portfolio services experts fromaround the world have come together to create the second edition of Global DebtSales. As part of this ongoing publication series, KPMG’s global Portfolio SolutionsGroup (PSG) will continue to examine recent debt portfolio activity in a number ofkey banking markets across Europe, the Americas and Asia-Pacific. We’ll look at alltypes of ‘non-core’ debt sales, including performing and non-performing loans fromaround the globe, and will strive to provide high-level insights into trends and newopportunities on the horizon.With extensive experience advising both sellers and buyers on hundreds ofmandates globally, our senior team of loan portfolio professionals work alongsidegovernment and financial institutions, private companies, strategic and financialinvestors, debt collection agencies, industry financiers and other professionalsto understand the specific issues facing each market. More and more, our clientslook to us to provide a combination of strategic options analyses of portfolios andplatforms, along with robust market sounding exercises with our extensive investornetwork to deliver quality solutions from both a country and global perspective.We hope to once again share some insight with our readers in order to help marketparticipants cut through the complexity of global debt sales and maximize the valueof their loan portfolio positions.We encourage you to contact the authors of this publication, or your local KPMGmember firm to discuss any of these issues or insights in more detail.Graham Martin Stuart KingPartner, London Partner, MadridM: +44 78 2519 6802 M: +34 914 56 82 69E: grahammartin@kpmg.com E: stuartking@kpmg.com© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  4. 4. troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate, Conact,conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portal solution, ICD,Kowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care, Institutsverwaltung, distressed,Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi, welltbuero, Immobilienkongress, Audis,compliance, Ardea, NPL-Forum2012, risorse per ROMA SPA, RpR , protocollo di qualitá, capitale Roma, Aareal, Immoconsulting,Teramo, workplace management, closing, interim,turnarond, tags kowo troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate, Conact, conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portal solution, ICD, Kowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care, Institutsverwaltung, distressed, Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi, welltbuero, Immobilienkongress, Audis, compliance, Ardea, NPL-Forum2012, risorse per ROMA SPA, RpR , protocollo di qualitá, capitale Roma, Aareal, Immoconsulting, Teramo, workplace management, closing, interim, turnarond, Treuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortress condominio amministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimo conto economico Fondo immobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGR Banca d`Italia Legge 106 cartoliarizzazione Reo Immobilie imueble Casa Recupero Credito Bad Bank SIP Sistema integrada protection Caja workout Credito fallido credits en détresse Troubelshooting incentive care ICD Pfandbriefbank Eurohypo Portfolio ; Exit - Strategia Immobilienfond Software Orgaplan CONact Unicredit CashflowSync RE-lifecycle Kowollik deuda morosa UEN Union Estates Network lucidi vendittelli UCCMB italfondiario Due Diligence Portal-Software Web-Solutions Property Property Management Amministrazione immobiliare Condominio ciclo di vita del Immobile fundos immobiliarios troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate, Conact, conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portal solution, ICD, Kowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care, Institutsverwaltung, distressed, Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi, welltbuero Treuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortress condominio amministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimo conto economico Fondo immobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGR Banca d`Italia Legge 106 cartoliarizzazione Reo Immobilie imueble Casa Recupero Credito Bad Bank SIP Sistema integrada protection Caja workout Credito fallido credits en détresse Troubelshooting incentive care ICD Pfandbriefbank Eurohypo Portfolio ; Exit - Strategia Immobilienfond Software Orgaplan CONact Unicredit CashflowSync RE-lifecycle Kowollik deuda morosa UEN Union Estates Network lucidi vendittelli UCCMB italfondiario Due Diligence Portal-Software Web-Solutions Property Pr
  5. 5. Contents Trend Watch 02 Basel III 02 The rebirth of the EU Securitizations Market 03 Introduction to Europe 06 United Kingdom 08 Ireland 12 Germany 16 Spain 20 Italy 25 Portugal 27 Poland 32 Russia 35 Spotlight on Africa 38 Introduction to Americas 42 The United States 44 Brazil 51 Mexico 53 Argentina 55 Introduction to Asia 57 China 58 Korea 61 Japan 64 Australia 67 Thailand 69 Taiwan 72 Indonesia 75 India 78 Malaysia 81 KPMG’s Portfolio Solutions Group’s Service Offering 84 Glossary of Acronyms 86 Global Debt Sales  |  1© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  6. 6. Trend WatchBasel III – the straw that breaks resources become trapped in national markets. Many institutions are nowthe camel’s back actively re-evaluating their balance “While Basel III hasn’tFor the better part of three years, sheets and deciding which portfolios yet sparked a flurry ofindustry commentators and marketpundits had been predicting a flood make sense to keep, and which they activity in the debt sales should sell.of debt sales from banks. Indeed, the market, there’s goodsigns all pointed to an imminent sell While most of Europe is keenly awaiting reason to believe that itoff as banks struggled to overcome the the transposition process of Basel IIIeffects of the economic downturn and into European Directive and Regulation is just a matter of time.”meet the increased regulatory capital (after which it will move on to nationaldemands now being put on them by legislation), the key elements of Basel IIIregulators. The deterioration in quality are already fairly clear. They include: timeframes will apply to many of theof some banks’ portfolios added more key elements. • increased capital ratios (with afuel to the fire as the combined impact particular focus on the need for good But the Basel III capital ratio alsoof increased capital requirements and quality, loss-absorbing equity capital); effectively amplifies the existing issuesimpairment charges seemed to pointto the need for capital constrained • increasing quality of capital in the current calculation of Basel IIorganizations to find some exit route. requirements with a focus on risk weighted assets. As a result, firms harmonization across borders; are increasingly looking to optimize their Basel II credit risk models andSo what has happened recently? • new leverage requirements calculations, and are analyzing theirProposed in December 2009 and agreed (effectively capping the absolute portfolios in light of the level of pricingby the G20 and the Basel Committee size of balance sheets in relation to and performance that can now bein December 2010, Basel III outlines capital, irrespective of risk); achieved in the market.the significantly increased capital andliquidity requirements for banks. Basel • new measures to improve Systemically important financialIII also differs from its predecessor counterparty risk management institutions (SIFIs) are under even more(Basel II) by taking a different regulatory (largely focused on collateral pressure, with further enhanced capitalapproach: where Basel II strove to management and stress testing); and ratios expected (some anticipate anincrease risk management standards • new liquidity requirements to both add-on of up to 3 percent, takingby offering the ‘carrot’ of reduced ensure firms hold sufficient high minimum common equity Tier 1 ratiosregulatory capital requirements, the quality liquid assets to meet short- up to 10 percent). This will result in evenapproach taken by policy makers in term shocks, and to encourage a greater pressure on balance sheets fromBasel III has been to focus much more restructuring of the balance sheet both a funding and capital perspective.on across-the-board increases in capital with a focus on matching off It should also be remembered thatand liquidity requirements. long-term funding sources against Basel III is only one element of theWhat’s more, regulators are increasingly longer-term assets. rapidly evolving regulatory framework,taking a more national approach, Much of the media focus has been and many firms are now dealing witheffectively pushing institutions centered upon the increased capital a raft of new or proposed regulationtowards creating subsidiaries rather ratios within Basel III and the extent on a wide variety of issues includingthan encouraging branches and home to which organizations will (or will not) the impacts of new proposals on crisisstate supervisors to act appropriately. meet these ratios. The market should management, regulatory reporting,The result is further pressure on keep in mind, however, that transitional and trade reporting (not to mention thealready-strained capital and liquidity, as implications of the UK’s Independent2  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  7. 7. Commission on Banking (ICB) final either directly or indirectly through some European RMBS issuance is recoveringreport that has now been issued). form of securitization-like structuring. Despite the financial crisis, Europe has seen an overall continuation of theSo where will it all end? The rebirth of the EU issuance of Asset Backed SecuritiesUndoubtedly, there is now significant securitizations market (ABS), albeit at lower levels than before,pressure on banks’ balance sheets. and often supported to a significant There is no doubt that investorsAcross the globe, bank executives are degree by public institutions (such as around the world have grown warynow striving to understand the impact of the European Central Bank (ECB) and of securitized products, particularlyregulatory change: what will their firm’s the Bank of England). following the suboptimal performancefuture business model look like? What of U.S. Residential Mortgage-Backed Interestingly, while total ABS issuanceareas of the business will continue to Securities (RMBS) that had been was increasing in 2007 and reached abe profitable? And what strategy should backed mostly by subprime mortgages. record level in 2008, the volume thatthey follow for both the investment and With investor appetite for performing was actually placed with investorsdivestment of divisions, assets and EU RMBS also declining, this article was already in decline by 2007 andsubsidiaries? examines the resilient performance was nearly non-existent in 2008 andSo while Basel III has yet to spark of EU RMBS both during – and after – 2009 (see Figure 1). As a result, thethe flurry of activity that was widely the financial crisis. Indeed, EU RMBS demand for the remaining issuanceanticipated, a number of barriers remains a suitable funding instrument was primarily substituted by Europeanhave started to fall away. For one, the for financial institutions, as well as an credit operations, for which retainedoverall impact of Basel III is becoming appealing opportunity for investors. securitizations can be used as collateral.clearer. There are also signs that amore normalized loan portfolio marketis returning and that the economicsituation is working its way through Figure 1: Retained versus public issuanceto impairments. And once thesechallenges are sorted out, there is 100% 900 827good reason to believe that Basel III Public issuance as percentage of total 90% 800will eventually trigger further portfolio 287 80% 700rationalization and debt sales. Issuance EUR Billions 70% 308Of course, all of this leads to the obvious 612 77 600 510question of whether there are – or will 60% 450 500be – any buyers in the market for these 50% 815portfolios. One peculiarity of regulatory 400 40% 389driven change is that it applies the same 300pressures (in the same direction) to 30% 510 325 441the entire banking industry at once. 20% 200So while there may be pressure to sell 28 10% 81 100off those capital and liquidity hungry 12 9portfolios, there may be few banks lining 0% 0up to buy them. In this environment, it 2006 2007 2008 2009 2010 2011should not be a surprise if many of those Public (%) Retained (%) Issuanceless desirable portfolios are eventually Source: European ABS & CB Research, J.P. Morgantransferred out of the banking industry, Global Debt Sales  |  3© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  8. 8. In Focus: Comparing European RMBS performance to the U.S.The knock-on effect from the weak rates did not rise above 3 percent their U.S. counterparts: the first is thatperformance of U.S. RMBS is not through the global financial crisis. European households tend to have aonly unfortunate, but undeserved. In contrast, U.S. delinquency rates lower average level of indebtednessPerformance of RMBS in Europe was started to rise at the end of 2008, hitting (as measured by lower debt-to-incomesolid during and after the crisis with recorded delinquency rates of above and higher wealth-to-income levels),EU RMBS outperforming their U.S. 10 percent in 2010. which made euro area householdscounterparts in both delinquency levels less sensitive to income or interest The downgrade rate shows similarand downgrade rates (see Figure 2). rate volatility. The second is related to trends, with European prime RMBSLooking at delinquency levels in averaging just 4.3 percent over the stronger personal bankruptcy and dutyparticular, evidence shows that the 2007–2010 period, where U.S. RMBS of care laws in the euro area, whichunderlying assets of EU RMBS have averaged an astounding 40.1 percent. provide less incentive for borrowers toperformed better than those of U.S. default on mortgages.RMBS, and – with the exception of Irish There are two main reasons why EUprime RMBS – European delinquency RMBS perform better compared toFigure 2: RMBS Prime 60+ Delinquency is worth noting that these issues have occurred in countries with limited 12 sovereign risk and relatively robust economic conditions. What’s more,Delinquency 60+ [% of CB] 10 these collateral types are generally 8 perceived as bearing low risk when compared to other products such 6 as Commercial Mortgage-Backed Securities (CMBS). And according to 4 the ECB, investors seem to look for transparent and simple structures, low 2 collateral risk and a good reputation of the originators. 0 Jan-07 Apr-07 Oct-07 Jan-08 Apr-08 Oct-08 Jan-09 Apr-09 Oct-09 Jan-10 Apr-10 Oct-10 Jul-07 Jul-08 Jul-09 Jul-10 RMBS will inevitably remain one of the most important funding sources Dutch Prime Greek Prime Irish Prime Italian Prime Over the past decade, the market has Portuguese Prime Spanish Prime UK Prime U.S. Prime seen European financial institutions slowly shift from traditional depositSource: Moody’s Investors Service funding of mortgage lending towards more capital market-based funding.But in 2010, securitizations came back Investor appetite primarily focused Indeed, by the end of 2007 around 21in favor, when about 21 percent was on high quality collateral percent of housing loans were financedpublicly placed. Year-to-date figures Investor interest in these assets has through RMBS and covered bonds2.(27 percent publicly placed)1 seem not been universal, however, with the With RMBS playing such a significantto indicate that investor demand will largest share of the placed issuance role in the current funding structurescontinue to recover. coming from prime RMBS from the of financial institutions, we believe Netherlands, the United Kingdom and that their use is critical in restoring Italy, along with German auto ABS. It the funding to markets. In fact,1. European ABS & CB Research, J.P Morgan .2. “Housing finance in the euro area” European Central Bank, March 2009 ,4  |  Global Debt Sales © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  9. 9. Figure 3: Downgrade rates this, the upcoming Solvency II regulations will also restrict EU insurance companies 80% 74.7% from investing in securitizations unless 70% the originator complies with the new 5 percent retention requirement. In effect,12 month downgrade rate 60% this is expected to lead to renewed focus 54.3% from originators on the longer-term 50% 47.4% 43.9% performance of the created securities. If 40% 37.3% successful, these new requirements will ultimately contribute to mitigating the 30.3% 30% incentive of risk-taking and the easing of 24.2% lending standards. 20% 15.6% 14.2% Other regulatory factors are also 9.4% 9.7% 10% influencing ABS in the EU. For example, 4.5% 3.1% 4.2% 1.1% the ECB intends to introduce loan-level 0% 2007 2008 2009 2010 data requirements as a condition of eligibility in its central bank funding EU Prime EU Non-Conforming U.S. HEL U.S. RMBS operations, and the Bank of EnglandSource: Moody’s Investors Service has published new transparency requirements which issuers must comply with if their asset-backed securities areaccording to the IMF the restarting , What is currently preventing to remain eligible as collateral in fundingof securitization markets is critical to investors from putting more focus operations in that jurisdiction.limiting the fallout from the economic on RMBS?crisis and to eventually enabling While the performance of European Furthermore, credit rating agencies arethe withdrawal of central bank and RMBS is recovering, investor appetite in changing their rating methodologies. Ingovernment support3. 2010 was still only around 15 percent of January 2011, for example, Standard & 2006 levels, largely due to a lack of trust Poors updated its counterparty ratingThe ECB4 goes further still, suggesting in the market and overall volatility. At criteria to establish a more precise linkthat securitizations will become the same time, having been confronted between the rating of an issue and bothincreasingly necessary due to a with losses on investments that were the counterparty’s rating and type oflack of alternative funding available initially rated with an AAA rating, support provided.to repurchase the repo-ed retainedissuances, the continued phasing out of investors have also lost some of theirgovernment guarantees and the need to confidence in credit ratings assigned by Conclusionrefinance a large part of long-term debt rating agencies. Even though the performance of EUover the next few years. This seems RMBS has remained resilient, theborne out by the fact that by late August Changes in regulations and policy market is actively working on restoring2010, European banks had EUR1.6 initiatives add to a better functioning trust in EU securitizations, not leasttrillion of longer-term debt outstanding of the RMBS market as a vital funding source for thethat was due to mature between August A number of initiatives have been future. And while investor appetite for2010 and December 2012, of which the undertaken by regulators and market European RMBS is certainly pickingEuro area accounted for EUR1.2 trillion. participants in an attempt to align up, it is still far from pre-crisis levels,As a result, most banks will likely need the interests of all stakeholders due to a number of factors suchto issue new securities to redeem in securitizations. For one, the as the changing use of Structuredtheir maturing debt, particularly in incorporation of Article 122a in the Investment Vehicles (SIVs) by banks,the Netherlands. Capital Requirements Directive aims to evolving regulations, ongoing distrust address potential conflicts in the existing with respect to structures, and last ‘originate to distribute’ model by requiring but certainly not least, upcoming originators and sponsors to retain at least Basel III requirements that will result 5 percent of the exposure. In line with in banks facing higher costs when investing in future securitizations.3. Global Financial Stability Report of September 20094. “EU banking sector stability” European Central Bank, September 2010 , Global Debt Sales  |  5 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  10. 10. Introduction to EuropeSince the end of 2010, activity has To a large extent, this focus on CREstarted to gather pace in the Europeandebt sale market. An increasing has been driven by the considerable defaults already acknowledged (if “Spain has beennumber of banks have been sounding not reported) by many banks, and one of the hottestout market interest for their portfoliosand – most pleasingly from buyers’ the knowledge that many of these portfolios will require significant markets in Europeperspectives – several headline- hands-on, expert asset management so far this year, butgrabbing portfolio sale processes havebegun, continued and closed. Thanks to avoid further deterioration. clearly questions oflargely to the diversity of European This notwithstanding, one of the key issues facing many of the European sovereign debt anddebt sale markets, activity still remainsmost prevalent in the non- and sub- banks is their exposure to very thinly national defaults areperforming markets. priced, late pre-crisis originated lending. And while the vast majority of these popping up acrossOver the past few months, we have loans are classified as performing, they the EU and have thenoticed a growing interest in Europeanbanks seeking to exit non-core markets will present considerable challenges for capital allocations going forward and potential to drive aand products with a particular focus on may see a lack of wholesale funding as significant level ofCommercial Real Estate (CRE) lending. LIBOR and EUROBOR rates increase. portfolio sales.”6  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  11. 11. Given the relative absence of foreign and local strategic buyers, the emergence of these ‘new’ buyers will be critical if European banks are to successfully deleverage over the next five years.In this regard, many of the larger focus on searching for the ‘pools of to shed non-core and non-performingportfolios of residential mortgage, liquidity’ that have, to this point, focused loans, and the impact of the Caja sectorproject finance and infrastructure loans elsewhere. And while many of these restructuring is now starting to yield(where pricing was particularly tight) investors have historically been active portfolio disposals and equity raisings. Asmay be challenged. With many strategic in the RMBS/CMBS markets, or as LP such, opportunities for investors preparedbuyers now absent (or constrained) investors into specialized private equity to engage with financial institutions arefrom the market, more creative funds, they are slowly changing their considerable. In the last few monthsalternative solutions are often being investment mandates for such funds. alone, the market has seen an increaseconsidered. At the same time, strategic But increasingly, their attention is turning in the number of successful sales of realbuyers are becoming increasingly towards direct and indirect investments estate assets to buyers such as Cerberusfocused and can increasingly afford to in loan portfolios at palatable returns for and Fortress, and the progression of thebe more selective as higher volumes of both themselves and the vendors. Given current CAM loan process which involvesnon-core assets hit the market. the relative absence of foreign and local the disposal of over EUR13 billion in non- strategic buyers, the emergence of these core lending and real estate to a coterieNo ‘silver bullet’ ‘new’ buyers will be critical if European of financial investors. We expect that,In all but a few markets and banks are to successfully deleverage over the coming months, this activity willtransactions, banks seeking to exit over the next five years. likely continue as sales in both big-ticketnon-core loan portfolios have yet ‘non-core’ portfolios and non-performingto see the emergence of any real Eurozone debt crisis loans continue.‘strategic’ buyers. But strategic and Recent discussions around Europeanwell capitalized banks do exist and – bailouts have become ever more Poland is ‘very hot’for the right opportunities – seem sensitive and market destabilizing, While many consumer non-performingwilling to expand (as was the case with the resulting lack of liquidity loan (NPL) markets have struggledwith Santander, which purchased combined with ongoing regulatory to (re)gain momentum following theBank BZK’s business in Poland and the reforms ensuring that the sovereign financial crisis, the Polish market hasWilliams Glynn business from RBS debt issues currently being experienced gone from strength to strength. Ain the UK). will continue to provide negative number of existing and new foreign repercussions for global growth and buyers remain in the market, but itBut the market must remember that – the entire banking system for quite is the strength of local buyers (andin many cases – CRE loans, thinly priced some time to come. As deadlines their desire to grow volumes underresidential mortgages and PFI debt is approach for the repayment of support management) that is providing localoften no more ‘core’ to potential buyers loans, accelerated disposals of non- banks with an extremely attractiveas it is to potential vendors. That said, performing and non-core assets will alternative to in-house collectionthere have been a few instances of local become ever more necessary and teams. This has led to pricing for non-or foreign banks precipitating strategic prevalent in the market. performing consumer loans in the mid-portfolio acquisitions in order to expand to-high twenties, driven by both cheapin certain markets (such as Citibank Spain is ‘hot’ local funding, and the comparativeto Barclays in the UK), but these have Certainly the ‘hottest’ topic over the past advantage of investing in local currencygenerally been the exception rather six months has been Spain. Opportunity (the Polish zloty). That said, new foreignthan the norm. funds are currently negotiating potential entrants remain interested in both debtAs frequent advisors to financial transactions across the Spanish debt and portfolio and collection opportunities ininstitutions, we have seen an increasing equity space, local banks are seeking the Polish market. Global Debt Sales  |  7© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  12. 12. United KingdomIn comparison to the sluggish activity below), it is easy to see the potentialof the past three years, the UK debtsale market has recently become opportunity in this space. “The UK consumera hive of activity. We have seen Macroeconomic environment NPL market can goa number of banks and financialinstitutions begin formal sale Interest rate rises will have a significant one of two ways;processes for their loan portfolios, impact on UK debt sales. Whilst short term expectations are that interest rates either a return towhile others have undertaken informalmarket soundings in order to inform will not increase, they likely to have the old marketstheir boards in advance of potential upward movement in the medium term. But how will this economic environment characterized byfuture sales. To date, a considerablechunk of this activity has related to impact the valuation of a portfolio of small sales to local(ostensibly) performing UK CRE loan loans? buyers, or into a newportfolios, including a number of highprofile sales such as the formal CRE Current low interest rates tend to incentivize the voluntary prepayment market dominatedprocesses by Bradford and Bingley of floating interest rate loans, with by large global(discontinued), and RBS in Spain contractual clauses on prepayment penalties and lock-out periods partially investors.”(now closed) and the UK (pre-closing).But behind these headliners, there offsetting losses incurred by the lender.are several other institutions already As a result, any rise in interest rates will prevalent in the riskier parts of a bank’sengaged with external investors reduce this incentive, and likely trigger loan portfolio. As a knock-on effect, anto gauge pricing and potential deal an increased number of defaults. This increased number of defaults couldstructuring. Looking at the amount will be especially true if the increase further suppress market prices, thusof NPLs, loans 90 days past due and in interest rates is coupled with a slow lowering the cash flows to the lender atallowance for credit losses/NPLs recovery in the real estate market or liquidation, and increasing the pressurefor four of the UK banks (see chart the wider economy; and it will be more on a bank’s loan recovery rates.8  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  13. 13. To account for these higher than expected Figure 4: NPLs, loans 90 days past due and allowance for credit losses/NPLslosses, lenders will need to set aside a for some UK bankslarger proportion of capital to meet therisk provisioning requirements of their Allowance for credit losses/non-performing loansexpected defaults. When coupled with 51.1% 71.0% 26.7% 46.0%higher portfolio management costs, 6,000 70,000 Loans 90 days past due and accruingthis can further adversely impact the 5,317 (a) 62,875profitability to the lender. And while 60,000 Non performing loans (£m) 5,000this will largely be factored into the 50,000eventual transaction price, disposing 4,000 interest (£m) (b)of loan portfolios may still be the 3,446 39,231 40,000most profitable approach to releasing 3,000 2,897resources within a constrained capital 30,000 24,322environment. 2,000 17,656 20,000Vendors 1,000 10,000From a vendor perspective, many of 401the transaction drivers that existed six 0 0 Barclays HSBC Lloyds Royal Bank ofmonths ago remain valid (covered in (as of Sep 2010) (as of Dec 2010) Banking Group Scotland Groupmore depth in the previous edition of (as of Jun 2010) (as of Dec 2010)Global Debt Sales, January 2011). These Loans 90 days past due and accruing interest £m (a) As of Jun 2009, Sep 2010 n/ainclude the onset of Basel III capital Non-performing loans £m (b) As of Sep 2009, June 2010 n/arequirements (see page 2), the need to Source: Capital IQcomply with European Commission StateAid requirements, and the ongoing focusof UK banks on deleveraging, exiting non- Figure 5: Composition of total loan books for some UK bankscore markets/products and aligning loan 1,000maturities with available funding. 900In general, nearly all UK banks and 800 741.6building societies are still focused onconsolidation rather than expansion. But 700 660.3with muted market pricing feedback, 584.7 600 £bn 525.9relative transaction inexperience and 500a notable dearth of strategic buyers in 619.3the market, there have been very few 400 535.4 483.7successful ‘quick exits’. Indeed, banks 300 458.6that have recently conducted transactions 200 17.7 152.9(particularly those with larger performing 100 140.5 2.5portfolios) have often felt significant 104.6 62.9 9.9 35.7 67.3 62.0 65.3PL pain as a result of a transaction or 0in advance of a sale. An examination of Barclays HSBC Lloyds Nationwide Royal Bank of (as of Sep 2010) (as of Dec 2010) Banking Group Building Society Scotland Groupthe composition of loan portfolios for five (as of Jun 2010) (as of Sep 2010) (as of Dec 2010)large UK financial institutions reveals that Book value of total loans less capital and impairment £bnthe book value represents approximately Impaired loans £bn84 percent of the total loan portfolio on a Total capital £bnweighted average basis. Source: Capital IQ Global Debt Sales  |  9© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  14. 14. Selected dealsThe table below details several selected recent transactions in the UK debt portfolio market.Table 6 Face value Seller Buyer Asset type Completion date (in local currency) Barclays CreXus Investment Corp U.S. Commercial real estate £586m March 2011 RBS Blackstone UK Commercial real estate c.£1.6bn July 2011 Citi Barclays Egg’s Consumer PLs c.£2.3bn March 2011 Bradford and Bingley Discontinued Commercial PLs c.£435m Pending MBNA Barclays Consumer PLs £130m April 2011 RBS Pending Commercial Infrastructure PLs c.£3bn In progress LBG Arrow Global, Cabot Consumer NPLs £276m June 2011 Financial and Lowell Irish Life and Permanent Pending Capital Home Loans c.£6.4bn In progress (Residential BTL PLs) LBG Pending Shipping PLs c.£6bn In progress Confidential TPG Credit Residential Mortgage NPLs £50m March 2010 Bank of Ireland Pending UK RE loans £1.5bn In progress Citi Yorkshire Building Society Savings and mortgage c.£3bn July 2011 businessSource: Press articles and market feedbackBuyers wealth funds. The appeal of these new increasingly moving up the learningThe buyer space has been much more buyers to vendor banks is obvious: deep curve and expanding their capabilitiesinteresting recently. Barclays acquisition pockets, lower return requirements in this space. But questions still remainof Citi’s Egg portfolio in March 2011 and higher levels of experience in the as to whether many of these largermarked the first strategic purchase of a credit investment space. And while pension and sovereign wealth fundsmajor portfolio transaction in many years this burgeoning group of buyers will will continue to function as passiveand was widely cheered by vendors and not be a replacement for strategic investors through private equitypundits alike. bank purchasers, they do represent a and investment banking vehicles, or credible and viable option for many of whether they will step forwardOutside of this notable transaction, the non-core performing assets that are to become outright purchasers ofhowever, the market has seen very little currently tapped for future sales. non-core banking assets (at suitablestrategic interest from UK banks and prices for vendors).building societies in buying their peer’s While traditionally focused on RMBSassets. Where strategic interest does and CMBS notes, the combination of depressed activity in the securitization The UK consumer NPL sale market:exist, it is largely confined to those very market and the nature of many Standing at the crossroadshigh quality consumer loans that arecomplementary to the buyer’s existing longer dated and better quality loans The UK consumer NPL market is at acustomer profiles and are capable of have meant that these investors are crossroads. Down one path is a returnexternal financing. increasingly looking at the outright to the ‘old market’ of 2007/08 where acquisition of certain loan portfolios. regular, small portfolio sales were theWith few strategic banking purchasers norm. But the other path may veryfor non-core loan portfolios, the sector Although many of these investors have well lead to the birth of a ‘new market’has seen the rise of longer term been very selective and somewhat dynamic in which large overseasfinancial buyers such as pension funds, less proactive than traditional debt investors look to secure large portfolios.insurance companies and sovereign purchasers in the past, they are10  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

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