Debt markets continue to feel the calming, if not sedative, effects of the battery of support measures deployed to counter the decline in business activity due to the effects of COVID-19. Jumbo transactions involving non-performing loans (NPL) are expected to resume in the last quarter of 2021. By then, we will see two very interesting developments by then: single-name sales and the emergence of new players on the market. debt market.

Jumbo NPL wallet offers

There is some consensus among sellers and buyers of NPL portfolios that jumbo trades will not come back to the fore until late 2021. There are three reasons behind the current status quo:

1. The sedative effects induced by state support measures, such as payment holidays, extraordinary capital injections, guaranteed loans, equity loans, the subscription of bonds and the occasional acquisition of shares, prevent companies to default on a large scale. Defaults are expected to have an impact on financial institutions’ balance sheets mainly in 2022, when all these mechanisms expire or when it becomes more difficult to claim.
2. During 2021, a large number of hard-hit companies will resort to more or less intense restructuring measures depending on the objectives they wish to achieve (new debt structure, new capital structure, sale of non-strategic lines of business). business or concentration through classic merger and acquisition transactions, such as mergers or acquisitions). Portfolio sellers are carefully analyzing the impact of these restructuring efforts on the bad debt collection rate of their portfolios and assessing the ideal time to consolidate them into portfolios and sell them to investors. The objective would be to avoid the transaction and reputation costs associated with the restructuring and to obtain a price for the NPLs enabling the accounting provisions to be recovered.
3. Finally, regulators received a clear message from financial institutions: “We need to relax the capital requirements for NPLs”. It is highly likely that regulators will allow financial institutions to record lower accounting provisions for loans affected by restructuring measures adopted in response to COVID-19[female[feminine. This flexibility in capital requirements will allow financial institutions to drain their NPLs in a more structured way, gradually and over a longer period, with the benefit of lower internal capital consumption. This will make it possible to have more homogeneous, even sectoral portfolios (hotels and tourism, travel agencies, passenger transport, leisure and catering, etc.), because the intensity of the crisis caused by COVID-19[female[feminine varies by sector.

Single name sales

Until jumbo deals reappear, the trend seems to be one-off NPL transactions with very specific and fairly well-known counterparties (borrower and guarantors), called single name deals. Financial institutions can initiate these types of transactions without having to expose the preparation costs required for sales of giant portfolios. In addition, and due to the characteristics of the borrower or their guarantors, there are fewer unique name buyers, which avoids lengthy bidding processes which usually have heavy contract requirements. purchase and loan documentation.

In the current scenario, the aim is for a single-name arrangement between the original financial institution and an investor to take place without the transferred loans losing institutional guarantees or state support measures.

Appearance of new players in the debt market

The players we advise in the debt market also seem to agree that 2021 is a year of transition, calm before the storm. The storm might not be swift and devastating (i.e., large portfolios of NPLs concentrated in a few transactions in a short period of time), but rather be a steady drizzle over several years.

While we wait to know what the weather for the NPL deal will look like, we are witnessing the emergence of new players in the debt market. New platforms are emerging for the management of non-performing assets (NPL and seized assets or REO), driven by financial institutions themselves in their efforts to reduce the cost of managing their assets and provide services to third parties located in the region. beyond their usual jurisdictions (Brazil, Mexico). The debt service industry is starting to carefully analyze the changes that the future EU Directive on buyers and credit managers, which is at an advanced legislative stage, could trigger.