European Portfolio Advisory GroupEuropean investor insights survey
March 2014
European investor insights survey Introduction
Welcome to our Investor Insights Survey. This is the 3rd year we have undertaken the survey and have once again had a tremendous response from the investor community, with 50 different investor groups taking part. Those surveyed ranged from investment banks and hedge funds to private equity groups. This is a market leading loan portfolio survey and seeks to understand and evaluate the loan portfolio sale market, as well as what and where investors are planning to target next.
We estimate European banks currently hold €2.4trn of non-core loans. The majority of deleveraging is by way of natural run-off. However, there is an overall increase in deal activity in loan portfolios – most notably in commercial real estate. In 2013 we saw loan portfolios with a face value of €64bn trade, mostly coming from banks in the UK, Ireland,
Spain and Germany. The investors we surveyed have already accumulated more than €60 billion of equity to invest in non-core European loan assets and are undergoing further fundraising. We expect volumes of loan portfolio deals to accelerate further in the coming years as European banks continue to deleverage.
We expect that this non-core pool could increase further still as banks continue to re-assess what is central to their strategy in the emerging economic and regulatory landscape (the ‘new normal’) and become more transparent about their non-core portfolios and deleveraging efforts. In addition, the Asset Quality Reviews, currently in progress at the time of this publication, are likely to drive further changes to what European banks consider to be core and non-core.
Price, of course, remains a much talked about issue when looking at the potential for transactions. Our survey shows return requirements remaining largely unchanged over the last year but competition and demand for deals continues to increase.
I hope you find this publication useful. If you would like any further information please contact me or one of my colleagues listed at the end of this document.
Richard ThompsonChairman, European Portfolio Advisory Group, PwC UK
Highlights
Respondents are estimated to have more than €60bn of funds available to invest in European loan portfolios. When combined with leverage, we estimate that these investors could close significantly more deals this year and we expect portfolios with a face value of around €80bn to trade in 2014.
84% of investors stated that data quality is their key investment consideration other than price. There are many other factors that investors consider before investing but the location of the underlying assets and the availability of complete and accurate data are by far the most important considerations other than price and data quality.
The UK, Germany and Spain remain the most established countries for loan portfolio sales. However, competition for deals in these territories is intense, meaning investors are now beginning to search other markets such as CEE, Italy and Portugal.
Non performing assets remain the most popular asset class amongst investors due to the returns they offer. However, average discounts to face value have decreased due to fierce competition for deals in established loan markets.
The ability of leverage to close the bid-ask gap has been widely discussed, and most investors are now optimistic about the availability of leverage in the debt markets. 34% of respondents stated that they plan to leverage more than 50% of the transaction price for deals.
Transaction structuring is becoming more common place in sale processes. The most common type of structuring is a risk and reward sharing structure such as a collection sharing agreement.
Investment considerations
Size of the market Countries Asset type
and return Leverage Structuring
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Market
Investors have more than €60bn of equity available to invest in European loan portfolios and expect loan portfolio transactions to peak in 2014
Funds available in 2012 Funds available in 2013 When will the number of portfolios taken to market peak?
23%
10%
23%
44%
0%
Up to €250 million
€251 million to €500 million
€501 million to €1,000 million
€1,001 million to €5,000 million
More than €5,000 million
23%
7% 23%
35%
12%
Up to €250 million
€251 million to €500 million
€501 million to €1,000 million
€1,001 million to €5,000 million
More than €5,000 million
0%
10%
20%
30%
40%
50%
60%
20
52
28
Already peaked 2014 2015 and beyond
% r
esp
ond
ents
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The key factors other than price for investors when considering investments are data and location of the portfolio
% r
esp
ond
ents
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
76
31
16
84
49
27
Geography/jurisdiction
Access to servicingcompanies
Access to funding Data quality Data availability Other
Other factors include:
• Benchmark data
• Asset quality
• Competition
• Legal/regulatory framework
• Exclusivity
• Collection performance
• Ability to be a market leader in that geography and asset class
• Credit assessment
Note: respondents may select multiple options
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Interest in UK, Germany and Spain remains strong. Interest is increasing in Ireland, Italy and Portugal
% r
esp
ond
ents
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
69
38
26
15 158 10 8
71
34 34
1118
118
16
79
53 56
26 28 26 26
16
UK Germany Spain France Ireland Italy Portugal CEE
2011 2012 2013
Top European countries for investment
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Deals
Investor appetite for non performing loans remains strong, with significant appetite for CRE, unsecured retail and corporate/SME loan portfolios
Investments in performing loans
Investments in non performing loans
0 10 20 30 40 50 60
Commercial real estate backed loans
SME/corporate loans
Unsecured retail loans
Secured retail
Investments – 2011
% respondents
Investments – 2012 Investments – 2013
2222
21
2419
21
1622
26
1931
37
0 10 20 30 40 50 60
Commercial real estate backed loans
SME/corporate loans
Unsecured retail loans
Secured retail
4239
53
2753
55
3856
58
3531
42
Investments – 2011
% respondents
Investments – 2012 Investments – 2013
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Significant competition for deals is driving up pricing in 2013 across most asset classes
Average discount to face value – performing loans
Average discount to face value – non performing loans
0 10 20 30 40 50 60 70 80 90
Commercial real estate backed loans
SME/corporate loans
Unsecured retail loans
Secured retail loans (including mortgages)
5063
5433
6162
856767
5262
59
% discount
2011 2012 2013
0 10 20 30 40 50 60 70 80 90
Commercial real estate backed loans
SME/corporate loans
Unsecured retail loans
Secured retail loans (including mortgages)
2713
1410
3027
5048
4425
3538
% discount
2011 2012 2013
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Return requirements have remained relatively stable, suggesting pricing increases could be driven by availability of leverageAverage expected unlevered IRR – performing
Average expected unlevered IRR – non performing
0 10 20 30
Commercial real estate backed loans
SME/corporate loans
Unsecured retail loans
Secured retail loans (including mortgages)
1919
16
1111
10
161010
141313
Expected IRR %
2011 2012 2013
0 10 20 30
Commercial real estate backed loans
SME/corporate loans
Unsecured retail loans
Secured retail loans (including mortgages)1818
17
2021
19
201717
1420
21
Expected IRR %
2011 2012 2013
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Good quality data and a tightly run sales process are key determinants for a successful sale process
% r
esp
ond
ents
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
63
27
71
48
2715
Poor quality data (e.g. collateral
information is incomplete)
Delays in receiving portfolio
data
Too manybidders at thelater phases of
the process
Poor communicationfrom the vendor
and/or their advisor (e.g. poorly
structuredQ&A process)
Limited provisionof representations
and warranties
Other
Other factors include:
• Seller price expectations being too high
• Poor quality assets
• Aborted processes
• Lack of transparency
What do you consider to be the most frustrating aspects of sale processes you have been involved in?
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Investors are optimistic about the availability of debt to fund deals and prefer to raise their own finance
Leverage in transactions
Sources of funding
0 10 20 30 40 50 60 70
More than 50%
Less than 50%
No debt funding
% respondents
2011 2012 2013
2526
34
1814
24
5760
42
Raised own finance e.g. bank loan
Vendor financing
Staple financing
Other, please specify
64%
18%
18%
0%
Including high yield bond, public bond and retail deposits
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Structuring is becoming more common to complete deals but is mainly used to provide the vendor with some upside rather than managing the P&L and capital impact of a sale
% respondents
Risk and reward sharing (e.g. collection sharing arrangement)
Joint venture or partnership structure
Deferred payment options
Loss deferal mechanism
Other (please provide details)
Regulatory capital led structure(i.e. to provide relief for the vendor)
82
45
45
27
9
9
0 10 20 30 40 50 60 70 80 90
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Servicing
58% of investors are considering servicing/asset managing their loan portfolio investments internally
How do you plan to service your current/future investments?
42%
19%
39%
In house
Captive servicer/asset manager
Third party
With an estimated €2.4 trn of non-core assets to be run-down or sold, there is a significant opportunity for servicing companies to assist banks and investors to manage their assets.
In addition to opportunities for new entrants and expansion by existing players, banks may look to carve out their administrative operations and offer their services market-wide. Investors may also look to either acquire or build their own service platforms to ensure independence, increase the range of targets, and allow them to offer higher prices while still delivering target returns.
The challenge for potential new entrants is how the servicing strategy of banks is going to develop, especially in less developed markets, and whether the potential rewards are worth the risk of setting up a servicing operation without the certainty of a contract in place.
As banks look to increase lending once again, servicers could take on more of the administration of new loans but this operating model is not yet developed.
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European and global contacts
Across Europe, PwC firms have experienced partners and directors to assist you with your non-core asset and NPL related needs. Through this group both buyers and sellers of non-core assets and NPLs can receive consistent and seamless service integrated with country specific knowledge and expertise.
Richard Thompson+44 20 7213 [email protected] Jaime Bergaz+34 915 684 [email protected]
AustriaJens Roennberg+49 69 9585 [email protected]
Bernhard Engel+43 150 188 [email protected]
Czech Republic and SlovakiaPetr Smutny+420 251 151 [email protected]
DenmarkBent Jørgensen+45 3945 [email protected]
FranceHervé Demoy+33 156 577 [email protected]
FinlandHarri Valkonen+35 840 539 [email protected]
Germany Christopher Sur+49 699 585 [email protected]
Thomas Veith+49 699 585 [email protected]
GreeceEmil Yiannopoulos+30 210 687 [email protected]
HungaryMiklos Fekete+36 1461 [email protected]
IrelandAidan Walsh+353 1792 [email protected] ItalyAntonella Pagano+39 8064 [email protected]
NorwayLars Johansson+47 (0) 4816 1792 [email protected]
PolandLukasz Bystrzynski+48 22 523 [email protected]
PortugalAntonio Rodrigues+35 12 1359 [email protected]
RomaniaCornelia Bumbacea+40 212 253 [email protected]
RussiaNick Page+74 9596 [email protected]
Slovenia and CroatiaLuka Vesnaver+38 6158 [email protected] SpainJaime Bergaz+34 9156 [email protected] SwedenPer Storbacka +46 8555 [email protected]
TurkeyAykut Tasel+90 212 355 [email protected]
UkraineVladimir Demushkin+380 444 906 [email protected]
United KingdomRichard Thompson+44 20 7213 [email protected]
Deniz Erkoc+44 20 7804 [email protected]
Chris Hart+44 20 7804 [email protected]
Robert Boulding+44 20 7804 [email protected]
Chris Mutch+44 20 7804 [email protected]
Jonathan Wheatley+44 (0) 20 7213 [email protected]
North AmericaMitchell Roschelle+1 646 471 [email protected]
Jeff Nasser +1 267 330 1382 [email protected]
Asia PacificTed Osborn+852 2289 [email protected]
Latin AmericaNico Malagamba [email protected]
Middle EastDuncan Sawyer+971 430 [email protected]
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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice . No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
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