npl event presentation - deloitte · · 2018-02-25•ec finance ministers sub-committee on npls...

NPL Event30.5.2017

© 2017 Deloitte Financial Advisory GmbH 2

Deloitte speakers

Tel. +36 (1) 428 6865Email: [email protected]

Contact

Balázs Bíró

Partner, Hungary

Tel. +43 1 537 00 2950Email: [email protected]

Contact

Ben Trask

Partner, Austria

Tel: +43 1 537 00 2900Email: [email protected]

Contact

Albert Hannak

Partner, Austria

Tel: +44 20 7007 9191Email: [email protected]

Contact

Will Newton

Partner, UK

Tel: +44 20 7007 7323Email: [email protected]

Contact

Amo Chahal

Director, UK

Tel. +43 1 537 00 2918 Email: [email protected]

Contact

Stephan Brandweiner

Senior Consultant, Austria

Tel. +40 (21) 2075 205Email: [email protected]

Contact

Andrei Burz-Pinzaru

Partner, Romania


Ben TraskIntroduction and welcome


Austria’s share of total exposure to CESEE is with 22% the highest among all EU-15 countries

KPI’s EU banking market

22%

19%

16%

10%

7%

5%

3%

17%

EU-15 banks' shares in total exposure to CESEE in Q3 16

Source: BIS

Austria

France

Italy

Germany

Belgium

Netherlands

Greece

Other


Overview


0

1

2

3

4

5

6

7

11

12

UK

Germ

any

Fra

nce

Spa

in

Italy

Neth

erla

nds

Sw

ede

n

Austr

ia

Belg

ium

Denm

ark

Luxe

mb

ou

rg

Fin

land

Ire

land

Port

ug

al

Pola

nd

Gre

ece

Czech R

ep

ub

lic

Hung

ary

Rom

ania

Cypru

s

Slo

vakia

Cro

atia

Ma

lta

Bulg

aria

Slo

ven

ia

Latv

ia

Lithu

ania

Esto

nia

EU

Rtln

Total banking assets in EU countries

31.12.2015Source: ECB

Exposure in Austria and CESEE

EURbn

CEE Local: c. 1,053

Austria Local and CEE Exposure: c. 1,057

France CESEE Exposure: c. 159

Italy CESEE Exposure: c. 134

Germany CESEE Exposure: c. 84

Others CESEE Exposure: c. 277

Total: c. 2,764

Source: BIS, OeNB & ECB


Overview


0%

5%

10%

15%

20%

40%

45%

50%

Gre

ece

Cypru

s

Port

ug

al

Italy

Slo

ven

ia

Ire

land

Bulg

aria

Hung

ary

Cro

atia

Rom

ania

Pola

nd

Spa

in

Austr

ia

Ma

lta

Slo

vakia

Lithu

ania

Fra

nce

Belg

ium

Latv

ia

Denm

ark

Germ

any

Neth

erla

nds

Cze

ch R

ep

ub

lic UK

Norw

ay

Fin

land

Esto

nia

Luxe

mb

ou

rg

Sw

ede

n

NPL ratio in EU countries

31.12.2016 EU averageSource: EBA Risk Dashboard


Albert HannakRestructuring procedures in Austria & CEE


Significant changes have been implemented (or are planned) to restructuring legislation across Austria and CE

Introduction

• Efforts to standardize and simplify restructuring procedures across the region influenced by EU attempts to harmonize legislation

• General desire to make restructuring easier and a more effective resolution tool

• Croatia’s new restructuring law (‘Law on the Procedure of extraordinary administration in companies of systemic importance for the Republic of Croatia’ or ‘Lex Agrokor’)

• Proposals to implement an Austrian Reorganization Act, similar to the UK Scheme of Arrangement

• Well-functioning insolvency and restructuring systems are key to supporting economic growth and job creation. EU Insolvency initiative aims to:

1. Increase opportunities for companies to restructure early

2. Help prevent bankruptcy and avoid laying off staff

3. Ensure entrepreneurs get a second chance after bankruptcy

4. Lead to more effective and efficient insolvency procedures throughout the EU


Croatian government passed an emergency law to protect the national economy from a potential collapse of Agrokor

Lex Agrokor

• Protect the viability of companies of systemic importance for Croatia

• A rapid and effective procedure for restructuring

• Provide liquidity, stability and sustainability for the company

• reach a settlement with creditors

• 6 April 2017: Croatian Parliament passed the ‘Law on the Procedure of extraordinary administration in companies of systemic importance for the Republic of Croatia’ aka Lex Agrokor

• 7 April 2017: Agrokor applies to Court to enter the new procedure with immediate effect

• 10 April 2017: Court places Agrokor into the new procedure and appoints Ante Ramjlak special trusteeTimeline

Stated Goals

• Largest privately owned Croatian retail group

• €6.5bn in revenue, 60,000 employees in 2015, €6bn debt (six times equity)

• Making headlines since early 2016 – growing speculation regarding restructuring


Lex Agrokor gives extensive powers to the trustee, but also offers creditors a super-seniority olive branch

Lex Agrokor

New roles

Outlook

• Special trustee: Authorized to undertake all actions for regular business operations

• Creditor’s council: Up to nine members representing each class of creditor

• Advisory body: Provides its opinions on the actions and decisions of the Special trustee at the request of either the Croatian Ministry or the Court

• Super seniority for new financial lending (i.e. DIP financing)

• Settlement agreement between debtor and creditors within 12 months

• Extraordinary administration creates a moratorium => protection from creditors

• If special administration fails: insolvency would likely result in a chain reaction supplier of insolvencies

• Potential issues: The new law could contravene Croatian constitutional property ownership rights

Key terms


A more dynamic pre-insolvency/restructuring procedure

Austrian Reorganization Act

Austrian Ministry of Justice

The new Law is currently under consideration by a working group within the Austrian Ministry of Justice

Going concern

Positive going concern forecast as required by the current LawBut no imminent insolvency (contrary to AIA)

Business size

Procedure open to small, cross border and listed stock companies

Purpose

Modernization by furthering efficiencyAvoiding insolvency while going concern is at riskEnhancing depth and liquidity of Austrian capital marketsAttracting creditors to lend, companies to restructure

Legislative agenda for 2017

New court-approved out-of-court restructuring solution

Recognized flexible tool for implementing complex international restructurings

Current status: Law on Reorganizations is inflexible, time consuming and difficult to utilize in practice.

Reference to the UK Scheme of Arrangement

LawReform


Proposed new law envisages the following procedural steps


• Detailed restructuring plan (specific crisis management/ defensemeasures)

• Vote by a majority in number and 75% in value of entitled creditors

• Flexible structure

• Between documents posting to creditors and agreement takingeffect is a maximum of 30 days

• Court acts as senate including presiding judge and two specialistslay judges

• Voting requirements fulfilled, administrator review, enforceable andbinding agreement for all creditors, including non-consentingminority creditors

• No enforcement proceedings / deferral of payments

• Same value as an enforceable court title

• Binding declaration of intents included in the reorganizationagreement

• Once court approves the agreement, no action for annulment / forresumption (except if abuse of rights, disregard of principles of fairhearing / violation of law)

The reorganization

plan

Reorganization

agreement

Duration

Jurisdiction

Effects

Dissenting

creditors


In-line with proposed EU reforms, there is a general trend away from formal insolvency towards pre-insolvency restructuring procedures which seek to maximize value for all stakeholders

Conclusion


• Moving the emphasis away from formal insolvency procedures to a more dynamic pre-insolvency / restructuring procedure

• Create a more attractive environment for creditors to lend and companies to restructure their debts

• Our view: The implementation of this new restructuring tool could constitute a considerable step towards making Austria a more attractive location for lenders and creditors alike

Lex Agrokor

• Though the law was implemented in a expedited manner, it has provided a degree of stability to the beleaguered company, avoided a potentially catastrophic insolvency and created platform on which to negotiate a restructuring

• Risks remain that the law could be challenged

• Our view: The real question is not the letter of the law, but how it is implemented and whether it treats all creditors fairly – we will start to see the answer later this year and into 2018


Will NewtonECB regulations


The past 18 months have finally seen European authorities wake up to the durability of the NPL problem in Europe

Political agenda

Working groups

• EC Finance Ministers sub-committee on NPLs

• ECB/EBA joint working group

• ECB task force

Initiatives

• Data

• Securitisation

• Bad banks

Guidelines

• ECB SREP priorities for 2017

• ECB NPL guidelines

• ECB leveraged lending guidelines

Thought papers & speeches

• ECB Board member speeches

• ECB Financial Stability Review


Thoughts & initiatives to help fix a “failing” market

ECB Financial Stability Review – May 2017

• “Large stocks of NPLs … continue to present risks to financial stability”

• “Significant legal and administrative reforms have been undertaken in

recent years … yet the market continues to provide low level NPL

valuations that result in wide bid-ask spreads thus impeding large-scale

NPL sales”

• “Recent publication of the ECBs guidance … should provide an important

supply-side impetus”

• “Demand-side impediments … remain a factor in many markets”

• “… the market has not yet priced-in the effect of reforms due to concerns

regarding the efficiency of their actual implementation and/or because of a

highly conservative approach to valuation”

• “… some degree of market failure may be playing a role in the persistence

of large bid-ask spreads …”

• “… information asymmetries may be a key factor in explaining these wide

bid-ask spreads”

• “A comprehensive range of policy options may have to be pursued to tackle

large stocks of NPLs and to address the attendant market failures”


Increased intervention in the market in the future

Proposed & potential initiatives

Securitisation

• GACS

• FSR proposals: State guarantee of junior

tranches

Forward purchase scheme

• FSR proposals on partial financing by State

of direct NPL sales

• Low cost financing of forward price element

in excess of normal bid price

Bad banks

• Constancio speech on central Europe-wide

AMC

• ECB initiative to explore possibilities within

State Aid framework

Data harmonisation

• EBA initiative

• Potential for future NPL clearing


A summary

ECB NPL guidelines

• Definition of ambitious but realistic NPL strategies

• Quantitative NPL reduction targets

• Credible operational plans

• Banks will not get it right first, or second, or third time

• Banks do not yet seem to realise just how much detail we will

require

• This is going to be a multi-year, iterative process Supervisory approach

Requirements

Intention

• Increased provisioning

• Narrowing bid-ask spread

• Increased loan sales

• Enhanced supervision


Amo ChahalEurope market overview

20© 2017 Deloitte Financial Advisory GmbH

Key activity drivers

2016 – another record year

Size of market

Outstanding non-core and NPL universe c. €2trn

Market pressure

Pressure to clean house and focus on return on capital

Regulations

Ever increasing regulatory pressure and oversight – Basel III, SII, IFRS, SSM

Investor demand

Ever growing buyer demand for European assets – €100bn in capital raised and rising


European market overview – Size and nature of market

€410bn

1.4%

€79bn

10.9%

€355bn

9.1%

€71bn

7.3%

€220bn

4.6%

€175bn

5.5%

€354bn

12%

€50bn

2.3%

Total Non-core and NPL

€2trn

€203bn

2.7%€61bn

10.3%*

CEE

€133bn

34.4%

Non-core and NPL volume

NPL ratio

*average


European market overview

€103.3

€104.3

€82.9

€69.5 €172.82016

2015

2014

Completed Ongoing

43

31 22

11

11

875

Italy Spain Austria & CEE

Portugal Netherlands Ireland

UK Germany

Strong activity levels seen in Southern Europe, led notably by Italy and Spain

Improving economies are bringing better values for loan securities

Regulatory pressures continue to push banks to resolve NPL and non-core issues

Deal rate is expected to rise in 2017 as paused deals are completed

Shift in the asset mix expected

The record rate of loan disposals achieved in 2015 has been repeated again in 2016, with just over €103bn of completed deals

Note: data correct as of 31 December 2016 and based on GBV

Activity by year

# completed deals 2016


The loan sale market in Italy continues to grow


8.1

30.6

23.5

21.9

2.2

2.1

17.3

22.9

40.2

14.0

5.3

2.1

2.2

1.6

36.0

13.0

13.0

13.3

7.5

6.4

11.8

2.3

39.7

19.1

2.3

4.2

0.3

3.1

1.3

0 20 40 60 80 100 120

Italy

Ireland

UK

Spain

Germany

Austria &CEE

Netherlands

Portugal

Greece

Completed 2014 Completed 2015 Completed 2016 Ongoing 2016


Activity by country


Sale of residential and mixed loan portfolios picking up


9.9

33.3

34.9

5.8

7.8

4.0

0.4

8.6

24.6

9.5

23.7

22.4

6.5

5.6

6.4

4.2

40.6

20.4

1.7

2.0

4.2

0.4

1.8

0 10 20 30 40 50 60 70 80

Mixed

Residential

CRE

Consumer

Corporate

RED

AssetFinance

REO

Other

2015 2016 Ongoing


Activity by asset class


Top sellers and buyers


16.0

12.0

4.0

10.6

6.8 5.6

32.4

5.4

5.8

3

9.1

6

13.5 2.5

6.2 8.65.2

0

10

20

30

40

50

60

70

€bn

2016

2015

2014

7.3

2.6

21.3

3.4

7.3

4.25.1

11.3

4.6

17.9

5 12.9

5.5

4.1 3.2

10.220.7

3.2 2.6

8.6 3.1

0

5

10

15

20

25

30

35

€bn

2016

2015

2014


Top sellers Top buyers


Stephan BrandweinerAustrian banking update


Austrian banks continue to be faced with weak economic growth

Austrian banking market

600

620

640

660

680

700

720

740

760

780

800

-

200

400

600

800

1,000

1,200

2013 2014 2015 2016

#E

UR

bn


Total assets (consolidated) Exposure to CESEE (consolidated)

Number of credit instiutionsSource: OeNB


In this challenging environment, Austrian banks progressed with the necessary structural adjustment process in 2016 to increase efficiency and hence step up profitability in the longer term.


-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

(2)

(1)

-

1

2

3

4

5

6

7

2013 2014 2015 2016

EU

Rb

n

Austrian banks - Profitability

Net result after tax Return on assets (annualized)Source: OeNB


NPL ratios have steadily decreased over the past years


0%

2%

4%

6%

8%

10%

12%

14%

BAWAG Erste Group RBI Group Raiffeisen OÖ Raiffeisen NÖWien

Bank Austria

NPL ratios

2014 2015 2016 EU averageSource: Annual Reports


CESEE has been profitable in all years from 2008 to 2016


(3)

(2)

(1)

-

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015 2016

EU

Rb

n

Net results of Austrian banks' subsidiaries in CESEE

Czech Republic Slovakia Russia Romania Croatia

Hungary Ukraine Other CESEE totalSource: OeNB


Balazs BiroCEE market update


The improving macroeconomic environment remained the main catalyst for NPL markets

-2%

-1%

0%

1%

2%

3%

4%

5%

AT HR CZ HU PL RO SK SI BG SRB

2014 2015 2016 FSource: Local national banks, EIU

70

80

90

100

110

120

130

Hungary Romania Slovenia CroatiaSource: Eurostat

GDP growth in the CEE region (2014 - 2016 F)

House price index - Residential properties (2010 = 100)


Both NPL volumes and ratios fell in 2016 compared to 2014

0%

5%

10%

15%

20%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

2013

2014

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q2 2

016

Poland Czech Republic Slovakia Hungary Romania Slovenia Croatia Bulgaria Serbia

NP

L r

ati

o (

%)

NP

L v

olu

me (

EU

R m

n)

Retail NPL (EUR mn) Corporate NPL (EUR mn) NPL ratio (%), right axis

Source: National Banks, Deloitte analysis


Banking trends – deleveraging at full steam, consolidation starting

Deleveraging2014 -

20

08

20

14

20

16

20

10

20

12

Freeze2008 - 2014

Consolidation

2016 -

Banking Market

Activity by year - CEE (€ bn)

4.3

6.2 5.2 11.5

2015

2016

Completed Ongoing

Source: Deloitte Intelligence as of 31 Dec 2016

3.4

0.5

0.2

0.3

2.2

1.0

1.7

1.4

2.7

1.4

1.1

8.2

2.9

2.8

1.6

Corporate

Mixed/other

Residential

Consumer

Not disclosed

Completed 2015 Completed 2016 Ongoing

Source: Deloitte Intelligence as of 31 Dec 2016

Activity by asset class - CEE, 2015 - 2016 (€ bn)


Consolidation of the banking industry is expected to promote transaction activity in the CEE region

Gradually exiting the region Active buyers in the regionNumerous banks are present in each country

~30+

~30+

~20-30

~30+

~20-30

~30+

~30+

~20-30

~20-30

Bank consolidation


Recent trends and CEE outlook

Investors turned their interest towards retail mortgages in 2016

Transaction activity will level off or possibly further increase in 2017

Corporate NPL volumes are shrinking considerably in Romania and Hungary, although NPL

supply showed only a moderate decrease in the Adriatic region

The declining supply of unsecured NPLs resulted in increasing prices

Secondary NPL transaction markets are reviving and activity is expected to further increase in

the forthcoming years

Consolidation of the CEE banking sector is expected

NPL investors are expected to show higher interest in acquiring banks


Andrei Burz-PinzaruKey legal issues in distressed debt acquisitions


Loan Transfer Deals Experience in Romania

• Legal advisor in more than 10 loan transfer transactions (aggregate par value close to €3 bn).

• Type of projects assisted:1. deal structuring2. sell side/buy side assistance3. portfolio/single ticket deals4. local/cross-border transfers5. true sale/synthetic transfers6. performing / non-performing portfolios

• Sample NPL portfolio engagements include1. Buy side legal advisor in over EUR 300 m corporate and retail portfolio2. Buy side legal advisor in EUR 400 m corporate and retail portfolio3. Buy side legal advisor in multiple large corporate real estate single tickets4. Sell side legal advisor in EUR 261 m secured SME and corporate portfolio5. Sell side legal advisor in over EUR 500 m secured corporate portfolio6. Sell side legal advisor in EUR 200 m unsecured portfolio 7. Sell side legal advisor in EUR 165 m secured corporate and retail portfolio8. Sell side legal advisor in EUR 16.8 m unsecured corporate and retail leasing portfolio


A long, hot summer for Romanian NPL market

EUR 1.5 bln

portfolio deals expected for second half of 2017


Portfolio deals versus single ticket transactions

Investor challenges

Readiness of banks

Porfolios: A committed seller (coverage ratio) is key as there have been too many failed deals. Lack of data from the seller is also an issue and results in the perception that the seller is not committed Single tickets: Seller commitment – same as above. Lack of data normally not an issue by reference to loan/security docs. Usually an issue by reference to updated info on collateral (particularly for income producing assets)

Portfolio composition

Portfolios: International Investors do not like multi-country portfolios as they result in high due diligence costs (unless they already have portfolios in such countries)Single ticket: buyers are usually specialized investors (local or international with strong local presence)

Collection process

Portfolios: Investors require a suitable collection servicer (loan servicer) to manage the portfolio post acquisition. Understanding the legal framework is also a key consideration Single ticket: understanding the legal framework is even more important. Distressed corporate debt servicing: in-house vs outsourced

1

2

3


Portfolio deals versus single ticket transactions

Investor challenges

Collaterals

Portfolios: Investors prefer liquid collaterals (e.g. office and retail) rather than development land and rural industrial. Investors require a local real estate valuers and comparables in order to accurately underwrite the portfoliosSingle ticket: development/turnaround

Portfolio composition

Portfolios: well-prepared and transparent processes together with well prepared documentation and data. Limited competition and timing is also key (due to competing deals)Single ticket: less organized process. Many times is ad-hoc. Usually no outside advisors sell-side (except for lawyers).

4

5


Seller’s proposal is for the Buyer to incur…

Structuring the NPL deal… on who’s risks and costs?

Transaction costs

Authentication of SPA

Publicity of change of creditor

Notification of assigned debtors

Taking over the underlying documentation

Custodian

MATRIX: Risks & Costs

Historical expenses Obligation to take over

ongoing agreements

Current or future litigations

Criminal seizures/ attachments

Fraud cases Fulfilment of notification

formalities

Structure Form (i.e. notarized or

not) Acquisition vehicle Change of law etc.

Other related costs Other risks

Risk of the contract


A glimpse into the insolvency maze

Request for

opening of

insolvency

procedure

T0

T0

Submitted

by a

creditor

Notificatio

n of the

debtor/fisc

al

authority

Possible

challenge

of

insolvency

by debtor

T1= 48h since T0 10 days since T1

Decision on opening

of the insolvency

procedure

Decision of dismissal

of the claim

Submitted

by debtor

Decision on opening

of the insolvency

procedure

Decision of dismissal

of the claim

T1 =10 days since

T0

Possible

challenge by

creditors

T2 =10 days since

notification

Decision of

dismissal of

the challenge

Decision of

revoking the

opening

T3 - 5 days since

T2

Opening of

insolvency

procedure

Simplified

procedure

General

procedure

Bankruptcy

Reorgani

zation

plan

Bankruptcy

Closing

Bankruptcy

Max 4 years


Key legal aspects concerning to receivables to be acquired


• Proper registration of the receivables (secured/not secured, the entire amount requested, if the entire amount is due or not);

• Consider if the receivable could potentially be subjected to a haircut through the reorganization plan and to what extent (depending on the category of the receivable and the status of the insolvency process);

• Consider if the receivable to be acquired would allow you to:

1. change the judicial administrator (to extent there are grounds for such change assuming you would have such intentions);

2. run the procedure to a more rapid closing/swifter acquisition of secured assets (position to impact on the decisions of the creditors’ meetings or, on the contrary, no power to actually influence the outcome of the creditors committees’/creditors meetings’ decisions);

3. oppose to the approval of a reorganization plan (e.g. by identifying the number of categories of creditors, identifying various scenarios under which a reorganization plan might be approved by the creditors).


Key legal aspects concerning to receivables to be acquired


• Understand the overall status of the insolvency procedure, in order to identify:

1. potential risks for the procedure to be blocked/delayed by other creditors (e.g. creditors in the same group with the debtor);

2. fees / costs incurred by the company which may have higher priority than your secured claims (in addition to liquidator’s fees);

3. challenges against the receivable to be acquired that would endanger your position in the insolvency procedure (e.g. challenges against the amount of the receivable/security counterclaims);

4. various transactions/contracts executed by the debtor prior to the opening of the insolvency procedure aiming at diminishing the assets owned by the debtor (e.g. promissory sale-purchase agreement/other agreements concluded with other affiliated creditors).

5. existence of litigations outside the insolvency process which could impact the creditors’ table (and consequently your position as creditor entitled to insolvency proceedings).


Time(ing) is of the essence


• Certain strict deadlines must be observed within the insolvency proceedings to insure protection of creditors’ interests (e.g. registration as creditor, submitting a reorganization plan).

• Various challenges within the procedure (even vexatious challenges) may “steal” time and block the course of the procedure (e.g. challenges against preliminary table of receivables which must be finally resolved as a condition, together with the evaluation of securities, to proceed to the preparation of the final table of receivables).

• The insolvency proceedings are long term procedures – be prepared


R&A – Deloitte Legal is member of the global Deloitte Legal network, with more than 1,750 legal professionals in over 75 countries around the globe.

Reff & Associates – Deloitte Legal in a nutshell


Panel discussion


Panel participants

Balázs Bíró – Deloitte

Klaus Gugglberger – HETA

Viktor Levkanič - APS

Pavel Haskovec - UniCredit

npl event presentation - deloitte · · 2018-02-25•ec finance ministers sub-committee on npls...

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