For those who haven’t seen it, have a look at the following table which catalogues NPL ABS issuance in China during 2016:
(Table: Deutsche Bank with my highlights)
For those unfamiliar, NPL ABS are asset-backed securities where the “assets” are non-performing loans. So in other words, we’re talking about securities secured by very unsecure loans.
Why would you want to buy a security “backed” by Chinese banks’ sour loans? Well, you probably wouldn’t, but a 4% yield doesn’t look too bad in today’s world and after all, that’s the coupon on the senior tranches and they carry a AAA rating.
I am, of course, being a bit sarcastic there. As you can see from the table above, two of the 2016 deals that priced in China were backed by pools of loans with no collateral and no guarantees. Considering we’re talking about non-performing assets here, it’s not clear to me how one could possibly confer a AAA rating on any of the tranches – senior or otherwise.
Whatever the case, Beijing is desperate to tackle banks’ bad loan problem any way it can without having to resort to a PBoC-funded recap or any further liquidation of the country’s FX war chest. Securitizing NPLs is one way to get the “assets” off the books.
Well it’s not just China bundling sour loans. Italy – which of course has its own NPL problem – is getting in on the act too. Here’s FT:
Italian banks are expected to dominate the market for shifting bad loans off the balance sheets of financial institutions in 2017, according to S&P Global.
The rating agency expects worldwide issuance of non-performing debt via asset backed securities to total $50bn, with Italy potentially accounting for 80 per cent, or $40bn of such sales this year.
The figures, from S&P’s 2017 outlook for structured finance, represent a sharp rise from 2016, when the amount of public rated deals was just $3bn.
The European Central Bank has ordered Monte dei Paschi to trim its non-performing loan balances, and the Italian lender had announced plans to sell nearly €30bn of gross non-performing loans through securitisation.
Moody’s and DBRS rated a €140.5m deal by Banca Popolare di Bari backed by almost €480m of loans in September of 2016. China saw 12 deals issued in 2016 and S&P rated a €536m deal in Ireland. Moody’s said in its own outlook that it expected to see increased NPL issuance in 2017.
In what is perhaps a candidate for understatement of the year, Moody’s VP and Senior Analyst David Bergman said the following last October following the Banca Popolare deal:
Beyond Italy, there is potential for future securitisation of non-core assets backed by residential and commercial real estate in Spain and Ireland. That said, NPL securitisation still faces a number of risks in terms of efficient recovery processes, asset valuation and data quality.
Again, these are non-performing assets we’re talking about.
Saying that there are “risks” in rating these deals is about like saying there are “risks” to insuring a cancer patient.
What could go wrong?