According to a recent report published by Cushman & Wakefield’s (C&W), 2014 was a massive year for the non-performing loan (NPL) market with the execution of a record €80.6bn of European commercial real estate and real estate owned transactions. Placing this figure into context, the C&W report stated that this “represented growth of 156% on the volume for 2013 with an increase of over €26bn on the totals for 2012 and 2013 combined”. Looking ahead for 2015, C&W predict that closed transaction volume in 2015 will be in the region of €60-70bn with Italy anticipated to be the next NPL “hot spot”.
The rationale for the spotlight being focussed on Italy stems from the ECB’s announcement in October of their Asset Quality Review (AQR). The results revealed that four of the eight banks that were deemed to have capital shortfalls were Italian and €9.7bn of a €24.6bn capital void (as of 31 December 2014), was attributable to participating Italian banks. Given the hugely successful de-leveraging auction process undertaken by many banks in the UK, Ireland and most recently Spain, it is unsurprising that many market observers anticipate that Italy will follow suit with their own form of auction process. Although going down such a tried and tested route is no doubt a compelling option for the Italian banks, given the huge success of their CMBS 2.0 market I wonder whether the Italian banks may in fact have another string to their bow.
Driven by the fact that CMBS overcomes Italian domestic regulations requiring institutions purchasing syndicated loans to have a banking licence, we have seen significant Italian CMBS 2.0 issuance over the past couple of years. During the course of 2013 and 2014 there have been a number of notable Italian deals (Gallerie 2013 srl; Deco 2014–Gondola; Moda 2014 Srl) and the deal flow has not abated in 2015 with the recent closing in January of Tibet CMBS Srl. and the pricing of Taurus 2015–1 IT. In terms of future Italian deal flow, the continued low interest rate environment, the recent announcement of the ECB introducing large scale quantitative easing and investors’ relentless search for yield, the likelihood is that the volume of primary CMBS issuance will increase further during the course of 2015.
For a long time I have held the view that CMBS is the perfect financing instrument to enable yield-driven private equity funds to maximise their returns on the acquisition of NPL’s. Indeed the feasibility of such a funding tool was explored in a recent article that I had published in the fall edition of CRE Finance World (Europe’s Future Power Couple – CMBS; A Financing Tool for NPL Portfolios). By employing similar technology to that discussed in the article i.e. transferring the loans to an issuing vehicle that funds such an acquisition through the issuance of CMBS notes to yield driven investors, the Italian banks will in effect have a mechanism to offload a significant volume of non-performing loans. Although compared to the current crop of CMBS 2.0 deals, the CMBS structures are likely to require some finessing to accommodate the fact that the loans were not originated for securitisation and are likely to be non-performing, such structuring is not insurmountable and is unlikely to stave off investor demand for notes.
Given that at the present time Italy is one of a few countries where there has been significant CMBS issuance since the global financial crisis, but also a country where a number of its banks are under significant pressure to delever, we may therefore be at the perfect juncture in the market for CMBS 2.0 to be deployed as the answer to Italian bank deleveraging woes.