Search
Changes for loan portfolios
By Tauhid Ijaz
Although European lenders have been deleveraging both their non-performing loan (NPLs) and non-core loan portfolios since the financial crisis, regulators remain concerned about the overhang of NPLs in Europe. Last year the ECB issued guidance to banks on NPLs and launched a consultation in respect of additional provisioning requirements for new NPLs.
In addition, IFRS 9 (which provides for forward looking loss provisioning) came into force at the start of the year and raises questions about whether banks will be forced to raise additional capital to offset its impact, and is likely to result in more loans being designated as non-core.
Given these changes, there are likely to be more portfolio sales in the coming years in respect of an increasing range of asset classes, such as secured consumer and SME loans.
Some banks will be sellers but others may be buyers, either independently or in joint ventures with debt funds (which have raised significant amounts of capital which is yet to be deployed).
Most buyers will seek to leverage their investments, which they will generally buy at a discount.
Leverage often takes the form of warehousing loan facilities (so-called loan-on-loans) and, more recently, securitisation transactions involving both performing loan and NPL portfolios.
When lending against such portfolios, legal teams need to consider (amongst other things) due diligence on the relevant portfolio, balancing discretions retained by the buyers with protecting the senior debt and, on NPL portfolios in particular, the availability of servicing and the timing and cost of enforcement in any given jurisdiction.
