Lone Star is set to acquire 75% of Novo Banco, Portugal's third largest lender, in return for a €1bn capital injection. The acquisition, along with the mooted creation of a bad bank, signals growing investor activity in the Portuguese non-performing loan market.
Under the agreement, the resolution fund (a public body financed by all Portuguese banks) will inject capital into Novo Banco if its capital falls below regulatory requirements. The clause, however, will be triggered only if the capital shortfall results from problem loan impairments held in a so-called side bank, from which Novo Banco has been selling off non-core assets.
The non-core assets in this case include all assets that are not part of the commercial franchise, such as non-strategic loans, real estate, restructuring funds and international holdings not linked to domestic clients. The bank reduced its net book value from approximately €10.8bn in December 2015 to €9.7bn in September 2016. The bulk of the decreases came from strategy loans (at €3.6bn), followed by real estate (at €2.5bn) and international holdings (at €1.6bn).
The Lone Star deal follows over two years of attempts to sell the 'good bank' salvaged from the collapse of Banco Espirito Santo in a €4.9bn bailout in 2014. Since then, activity in the country's NPL market has picked up from €1.6bn in 2015 to approximately €3.3bn in 2016, according to Deloitte.
Joao Ulrich Boullosa Gonzalez, md at Duo Capital, confirms that in recent years there has been some activity in the market - mainly in unsecured non-performing loans - but says that it is "not as much as we would expect".
The bid/ask gap on the assets remains a major stumbling block. "The banks were reluctant to sell the loans, given that it would expose their losses. As the economy improved, however, after 2013, investors started looking at the Portuguese market - especially since the Spanish one was maturing," Gonzalez adds.
While the market's size is not attractive to players such as Apollo and Cerberus, others - including Anacap and Arrow Global - have been very active in Portuguese NPLs. "Anacap has slowed down its activity within the country, but Arrow has been here for a long time," Gonzalez continues.
He refers to Arrow as the dominant player in the market, especially in unsecured loans. The firm is said to have established a first mover advantage by buying servicers and establishing a large network by sealing agreements with leasing firms and building relationships with bank contacts.
The Portuguese NPL market is valued at around €30bn to €40bn, according to Deloitte figures. This is equivalent to a 15% NPL ratio, which is unsustainable.
Nevertheless, investors have stated in public that they have €15bn to invest in the market, including NPLs and sub-performing assets. Gonzalez suggests that what's left depends on government action, with an asset management company potentially on the cards. Additionally, he states that a government guarantee similar to the Italian GACS will be necessary to the bridge the bid/ask gap.
Securitisation of NPL portfolios seems unlikely in the short term. "NPL securitisations were hardly done; only performing loans were securitised in the past, so that banks could borrow cheap money from the ECB, where they placed the senior tranches as collateral," Gonzalez observes.
While the bad bank could embrace securitisation, he says it's too early to judge. "I just don't see it in Portugal, given the lack of financial education required by non-institutional investors. The ECB has also lowered activity with our local banks, which - along with our legislation - forces banks to retain the equity piece, further lowering appetite for these structures."
The deadline for a decision on a Portuguese bad bank was expected by end-Q1. A lower level of portfolio loan transactions had been anticipated in the country until then, compensated for by a significant increase in activity thereafter.
This article was published in Structured Credit Investor on 3 April 2017.