NPLs and REOs in Spain, Portugal and LatAm: more securitizations and transactions in Southern Europe

The growing pace of transactions in southern Europe has coincided with the lifting and phasing out of debtor support and relief measures adopted in response to the COVID-19 pandemic.

We have witnessed the appearance of NPL portfolios with higher aggregate values and made out a very clear interest in securitizations of both NPLs and the rights associated with REOs. European debt servicers are starting to take positions in the transposition process of the European Directive on credit purchasers and credit servicers, in force since December 28, 2021.

Increase in aggregate values of NPL portfolios

In the first quarter of 2022, we identified In Spain and Portugal a clear trend among financial institutions towards designing NPL portfolios with higher aggregate values. Although they have not yet reached the proportions of the jumbo portfolios we were seeing before the pandemic, it does clearly seem that for NPL portfolios sold in competitive bidding processes, sellers consider that economies of scale justify greater aggregate values.

Phasing out of debtor relief and support measures

Although debtor support measures in response to the pandemic are coming to an end, a few do still apply in debt transactions. In Spain, for example, suspension of the debtor’s duty to petition for an insolvency order has been extended until and including June 30, 2022. Petitions for insolvency orders filed by creditors since March 14, 2020 have also been suspended until the same date.

Greater interest in securitization structures

Sellers of NPLs have confirmed their interest in securitization structures. Alongside traditional securitization transactions (those involving performing loans), sales of distressed loans and assets are starting to gain market share, as are synthetic transactions, in which the bank keeps the loan or asset on its balance sheet, and transfers cash flows and a large part of the risk of the investment to investors. The largest securitization process of this type in Europe was Project Galaxy (€10 billion) featuring the Greek Alpha Bank.

New European directive on credit purchasers and credit servicers

Towards the end of 2021, Directive (EU) 2021/2167 of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48 and 2014/17 was published.

The goal of the new directive is to propel activity on secondary markets for NPLs and it has sufficient potential to change dynamics in the debt servicing industry. The directive also creates a new map of strengths, weaknesses, opportunities and threats for transactions with NPLs which operators will benefit by knowing. In the transition period, now in progress and ending on December 29, 2023, the main players in the NPL market (sellers, purchases and servicers) should analyze their internal processes in depth. There are important changes on the horizon for the main NPL servicers and purchasers, which will affect their domestic and international transactions.

The new directive is designed to reach all participants in the NPL market: servicers, purchasers and sellers of NPLs.

NPL servicers will have to obtain authorization to carry on their activities and will have to come under the supervision of a national authority in each member state. NPL purchasers will have to review their agreements with servicers and take on board the “reasonable forbearance” principle: the forbearance they have to show before initiating foreclosure proceedings against certain borrowers, which includes a list of forbearance measures.

Lastly, when financial institutions sell NPLs they will have to share information on those loans with their purchasers which is to be done using templates (known as EBA data templates). The directive defines strict timeframes for mandatory use of the EBA data templates by seller credit institutions in transactions with NPLs. Use of these templates to supply information to the purchaser will be mandatory for NPLs which were arranged later than July 1, 2018 and became non-performing loans before the directive came into force (December 28, 2022). Until the EBA’s technical standards on these templates come into effect, however (they have to be submitted to the Commission within 9 months from the directive’s entry into force), the EBA templates only have to be completed with the information that the selling credit institution has available.

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 Colombia, Mexico, Peru, Portugal and Spain.