European NPLs in 2019: Remain in Spain? Or go to Ukraine?

A surprising number of people have reached out and asked where my annual forecast for European NPL activity is (and here I thought no one read it.) 

Here are my thoughts:

The big trends for 2019 will be:

• The big get bigger - primarily in Spain
• The medium to small finally get their chance in the big markets - especially in Spain
• The nimble will also see opportunities outside of the core markets - maybe Ukraine & Greece?

Ma?ana vs. Domani: Spain Is Where The Scale Will Be in 2019…

There is no prize for predicting that the majority of the big European NPL deals in 2019 (in terms of investment) will be in Spain. Similarly, there is little prize for guessing who the winners will be. With the exception of the entry of CPPIB into the market, big trades will continue to happen, and they will continue to be purchased by the same small group of investors. The boards of the Spanish banks are responding to the pressure to reduce their NPL/REO balances seriously; expect more jumbo trades in Spain to the big funds.

Spain’s Ma?ana becomes Italy’s Domani: Italy remains ‘next year’s’ market for most players. While a number of large trades have taken place, buyers’ opinions on the prospects of Italy remain highly polarized. Many large players continue to shy away having felt that the risks outweigh the opportunity. Other large players have jumped in with both feet.  There is no question that the inventory is there, but it remains a question mark as to whether there is an opportunity for anyone but the largest (and the bravest.).

Mid Size Players Finally Get Their Turn...

In Spain, behind these jumbo sales is a growing volume of smaller sales both by the banks and the PE firms that have acquired staggering volumes of NPLs and REOs. This is the opportunity that mid-sized players have been waiting for and DebtX has seen a continued growth in interest (demonstrated through spending money on SPVs, lawyers, due diligence.).  The President of SAREB on 28-01-2019 stated that they had moved away from bulk sales because they saw greater opportunities in smaller sales. As the largest holder of assets in the Spanish market, this represents a sea change. We expect to see a large number of mid-sized sales in Spain in 2019 which in turn will drive liquidity. The buyers are there, the goal for 2019 is to streamline the process to ease their entry. Opportunities will be there both for NPL and REO investors.

Greece?

The origin of the word ‘dilemma’ is Greek meaning a problem offering two possibilities, neither of which is unambiguously acceptable or preferable. Greece appears to be gaining momentum for both the large and small players on the buy and sell side. While there has to be a shakeout in the servicing market, there are third party servicers and this is drawing investors in. We remain bullish on Greece; there are real opportunities but they will come with uniquely Greek challenges.

Opportunities for the Nimble are Increasing.

DebtX has been promoting Ukraine now for two years, working with both the government and local banks to bring international investors into the NPL market. The last two months have been a watershed moment. The DGF (Ukrainian equivalent of the FDIC) has held three successful auctions in the past weeks bringing international investors into competition with local buyers. DebtX will be conducting a major sale in the next month that should appeal to many investors. Obviously, Ukraine has even more ‘unique’ risks than Greece, but we continue to be very excited by its prospects. Ukraine remains the largest unsolved European NPL portfolio. Ukraine’s highly educated workforce enables servicing and will make recoveries palatable in the country’s economic upswing. If you’re not among the 6 members of the Nine Zeros club (…a billion, …get it?) then you still may be one of the nimble agiles to see Ukraine not as too-big-to-fail, but too-big-to-ignore. Consider a trip to Kiev in Spring...

Other markets where mid-sized players might be able to get interesting deals? Portugal, Ireland, UK, and Netherlands should offer small, but interesting opportunities. Germany, for the time being, is off the table.

A Nod to the Known Unknowns

Two catalysts that could have a dramatic impact on European banks’ balance sheets are the obvious known unknowns, Brexit, and the forgotten one, Chinese capital controls. 

If the worst case BREXIT scenario happens, we would expect some dramatic opportunities to emerge in the United Kingdom, especially London and Northern Ireland. Suspense over Brexit has already plunged some residential sectors in London to 2008 levels…

Chinese capital controls have been an on again/off again story for the past five years. Again, if these began to bite, the impact on London, New York, Paris, Toronto, and Vancouver could be substantial. To illustrate the point, in one category of investments, China has cut their investments by 50% in Canada...

Finally, A Note to Compliance Departments @ Selling Banks and Government Agencies

DebtX prides itself on running fair, transparent sales, and our firm’s ability to demonstrate the fact.  Back in May of 2015, I wrote an article about NAMA’s Project Eagle. Against an otherwise brilliant track record of sales, four years later the investigation of this sale trundles on with no end in sight. 

As I wrote at that time:

“The lesson of the story is that in the darkest hours, it is easy to forget that a day will come when the current expedient transactions will be reexamined. Open sales through an established platform not only offer the best proceeds at the time of the sale, they also are an added line of defense against later public scrutiny.”

I stand by those words.

London NPL Summit in March

Once again, DebtX is sponsoring Smith Novak’s NPL summit in London on March 7th and 8th. This year looks like it will be bigger than ever. For anyone with an interest in this market, I look forward to seeing you there.

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Gifford West is a veteran international financial service executive with extensive knowledge of the secondary REO and distressed & performing loan market. He has led DebtX's efforts in Europe since 2002.

The views expressed on this website are Gifford's alone and do not necessarily reflect the views of DebtX.