At the end of last year, the European Commission developed a guide with good practice to improve the process of NPL portfolio transactions in the secondary markets. The purpose of this guide is to establish an ideal procedure for buying and selling NPL in Europe, especially protecting those who do not have extensive experience.
In this area, it is important to implement this guide for transaction platforms, which establish contacts and organize the buying and selling process. Similarly, the European Commission ensures that “transaction platforms are intended to help the seller by reducing the complexity of having to interact with multiple potential investors when using a specially designed platform“.
Although participants in this market are not obliged to follow this guide, it is advisable to follow the EC advice to obtain results that improve the efficiency and transparency of companies. Given the length of the guide, we summarized its seven steps bellow.
1. Structuring of transactions: portfolio selection
This initial phase analyzes the need to have an NPL portfolio that is marketable. To do this, it is necessary to ask whether own resources are sufficient or whether, on the contrary, it is necessary to hire an external transaction platform.
According to the EC, the question that the selling party should ask itself is what degree of internal experience in managing a sales process there is. In order for the correct implementation of NPL portfolios transactions to be implemented, the Commission suggests the reception of an independent and specialised team, which also has “knowledge of NPL markets and experience with market dynamics in different countries/jurisdictions“. This team can also advise on the selection of NPL portfolios.
2. Preparation phase
The second phase is to present, in general, the steps for a process of selling the NPL portfolio. Among them we can see:
- The decision to make a targeted auction process or a negotiated sale
- The project timeline
- The collection of documents and the preparation of the data tape
- The Virtual Data Room (VDR)
- The Non-Disclosure Agreement (NDA)
- Loan Purchase Agreement (SPA)
It is extremely important to gather accurate and relevant information and details for investors, which means higher offers and a greater possibility of execution. In fact, the use of EB data models for NPL will be mandatory this year.
3. Pre-commercialization phase: pre-marketing
In this third phase, we study the market, trends, and evolution of recent times, as well as different pre-sales actions. Among the main actions is a preliminary inquiry to determine interested investors, a portfolio teaser, a report with the main information, a letter of process and, finally, a draft with the terms of the purchase agreement where all the conditions under which such agreement is governed are established.
4. Non-binding bidding phase (phase 1)
After the preparation phase of the sale, the EC now details how the course should so that neither party is particularly benefited, thus ensuring equal and transparent treatment. Therefore, it is recommended to be mediated by external transaction providers, which facilitate the management of issues that may arise to potential investors, organizing all the information on an acquisition page, as well as communicating new relevant informations via e-mail.
5. Binding bidding phase (phase 2)
The binding phase covers all measures necessary for the receipt of the binding offers from the chosen investors. It is recommended that the seller makes a short list of these binding investors.
After this, the construction of the NPL portfolio (and possible sub-portfolios) is also completed and requests for new information are terminated. After reviewing all binding offers and signing with the main investor, in case of auction, the sale of the portfolio will go to signature, and the process may be closed.
6. Sign the transaction and close the deal
At this stage the sale of the NPL portfolio is finalized, loan purchase agreements are carried out and, if necessary, all additional documentation for the transaction is handled. Then the portfolio is prepared for the migration of data and documents that ensure a smooth transaction and it is transferred.
7. Post-closure phase
Finally, both the selling party and the buying party should endeavor to be cooperative and coordinated in order to execute the final negotiations of the NPL portfolio transaction. The existence of external transaction platforms that support this collaboration is of great help, greatly reducing potential conflicts after the closure phase.
Different experts advised the European Commission to create this guide to the sale of NPL portfolios. The aim is to strengthen consensus across the EU secondary NPL market as it is not effectively regulated. It is therefore important and useful to follow these guidelines which emphasise the role of external transaction platforms, which in many cases have proved highly effective. In conclusion, greater transparency, predictability, and standardisation are sought to attract a wider group of investors.