NPLs and REOs: LatAm, Spain and Portugal wake up to debt market new normal

Resumption of competitive processes with NPL portfolios

According to data published by the European Banking Authority, the aggregate stock of NPLs is in excess of €510.5 billion. Of this amount, 125.4 billion are held in France, making it the country with the highest NPL figure in the EU. Italy comes second, with NPLs totaling €98 billion and accounting for 5.4% of the aggregate stock of loans. Spain takes third place with NPLs amounting to €76.9 billion and a 3% share of the total. Followed by Greece (€62.2 billion), the Netherlands (€37.3 billion), Germany (€33.3 billion), Belgium (€16.9 billion) and Portugal (€13.4 billion).

In the second quarter of 2021, NPL transactions took off worldwide, following very modest levels in 2020. Although an immediate return to previous activity levels is not expected, the outlook for the third and fourth quarters of 2021 is reasonably better than the way things looked at the beginning of 2021.

Alerts from regulators concerning the quality of assets

Globally, regulators have warned of latent and very considerable risks in the non-performing assets of financial institutions. Although the NPL ratio has not increased in aggregate terms, it has risen in specific sectors such as retail, consumer spending and for the companies or industries that have been hardest hit by the restrictions (mainly hotels, airlines, manufacturing, tourism ancillary businesses, leisure and entertainment).

Impact of COVID-19 on corporate debt and new challenges for corporate debt workouts

More than a year after COVID-19 burst onto the scene, it is clearly apparent that the pandemic’s effects on the NPL market will be very different from those caused by the worldwide economic crisis related to property development, construction and associated financial products (subprime mortgages, credit default swaps, and derivatives, among others). The economic crisis caused by the pandemic has already brought important new changes to the NPL market, such as: (i) the change to the classes of debtors for non-performing loans and credit facilities; (ii) the modification of underlying assets and of personal guarantees for non-performing positions and (iii) the design, creation and implementation of different workout processes for the transferred loans.

Elsewhere, guarantee facility mechanisms provided by the governments of various countries have brought new question marks which will have an impact on transfers of NPLs, related obviously to the ability to transfer –without restrictions, subject to conditions or even without the option of transferring – the security associated with secured loans.

In the previous crisis, delinquent debtors –especially corporate debtors connected with the real estate industry– could “hibernate” and even halt their operations, which, at a specific time, made it easier to repossess the assets underlying the transferred debt in NPL portfolios. However, this time there will be a much higher number of non-performing loan and credit facility debtors than in the previous crisis, companies that have places of business operating as going concerns, workers, clients, and additional funding needs. In anticipation of the additional liquidity that the transferred debtors are going to need to return to the performing route, there are already several players in the market who are creating, or developing their direct lending platforms even further, to support an operational or financial restructuring that will enable recovery of the non-performing loan or credit facility plus an extra sum in respect of credit facilities to be used to support a turnaround.

New legislation

So, what main trends are already visible in the main LatAm, Spanish and Portuguese markets? What transactions are being performed in these jurisdictions and which have yet to come?

Garrigues is pleased to share our view of the main trends in these debt markets, drawing from our on-the-ground network of offices in Brazil, Chile, Colombia, Spain, Mexico, Peru and Portugal.