The recent news that Blackstone and Lone Star have just securitized a portfolio of re-performing loans secured by Spanish and Irish real estate respectively, could potentially mark the arrival of a new era for the European securitization market. Indeed, if these transactions prove themselves to be the green shoots for the emergence of a new fixed income product, then this has the potential to have widespread positive ramifications for not only yield hungry fixed income investors but also for those banks that have balance sheets saddled with large volumes of non-performing loans (NPL).
Indeed, we have long advocated the view that securitization has the potential to play an integral role in the removal of swathes of NPL's that are currently stifling banks. In fact, the feasibility of such a product was the subject of an article that I had published in 2014 in the fall edition of CRE Finance World (Europe's Future Power Couple – CMBS; A Financing Tool for NPL Portfolios). Simply put, these structures involve the transfer of non-performing (or rehabilitated) loans to a special purpose vehicle that funds such an acquisition through the issuance of notes into the capital markets thus providing lenders (be it debt funds or banks) with a tool for transferring the risk and reward of large volumes of loans.
The news of the successful execution of these transactions by two high profile NPL investors featuring loans secured by assets in different jurisdictions is significant for three main reasons. Firstly, these deals provide a clear rebuttal to the chief concern raised by the 2014 article that the myriad of structural complexities that needed to be overcome for the execution of a deal was too high a bar for the beleaguered securitisation market. Secondly, when these transactions are considered alongside the Italian GACs structure and the commendable efforts of other European jurisdictions to put in place the necessary infrastructure to support these types of transactions (such as servicing laws), then we could be witnessing the early stages of a paradigm shift towards securitisation as a solution for NPL's (as it has been for so many other asset classes). Finally, the fact that these two transactions have been put together by two major distressed debt investors could be construed as the clearest sign yet that it may in fact be the debt funds (rather than the banks) that will be the key architects of this new fixed income product.
Ultimately though, only time will tell whether we are at the humble beginnings of the establishment of a new fixed income product or whether this is just another securitisation curve-ball. Certainly from a positive perspective, given the incessant pressure on banks to off-load significant volumes of NPLs and the demonstration by these debt funds that securitisation has a role to play in distributing NPL risk, then the news of these deals is a major positive development for the European market. Despite the question marks about the future, those banks that have sizeable volumes of NPLs to shift should follow the lead of these trail blazing debt funds and embrace (or at the very least consider) this technology which has the potential to solve some of their biggest headaches.
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