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China as one of the Target Investment Countries for Non-Performing Loans

According to the research report from the law firm Ashurst, A Global NPL Perspective, investors are now starting to turn their attention from the established markets in Italy, Spain, Greece and Portugal to expand in emerging markets such as China and India.

In this report that gathers the opinion of several senior executives across the industry, it is highlighted that even though NPL sales have peaked in Western Europe in 2018, other markets are now being considered as target investments. The report also points out their thoughts on where the future pipeline will come from and where the investment priorities of buy-side clients currently lie.

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Global loans partner at Ashurst, Mark Edwards, finds surprising that even though levels of undeployed capital in the market are remaining high and European interest rates remain low, investors keep seeking for new opportunities in non-performing asset classes and geographies.

“In Europe, 43% and 33% of investors have already invested in Italy and Spain and over 50% and 45% respectively are likely to invest in those two jurisdictions going forward, with a correlation for continued investment appetite in Portugal and Cyprus. Given that the Greek market remains at its formative stages, it’s notable that some 39% of investors report that they already invested in Greece. Appetite there remains high with almost half of investors stating that they are likely or more to invest there in the next two years.”

Investors seem to stay positive regarding return rates in respect of such portfolios. Research shows that over three quarters in Italy are expecting a target rate of 16% or higher for secured NPL while over a half would set their target return at the commensurate level for NPLs in Greece (64%), Spain (67%) and the UK (55%).

With China as one of the target investment countries standing out in these new markets, from 56% of investors who believe are likely to invest there, a third are certain to do so. The research also shows that around 57% of investors have invested in Chinese NPLs in the past two years.

And China doesn’t seem to be the only target of investors. It is expected that the volume of NPLs starts to increase over the next two years in emerging markets such as India, Thailand, Indonesia, Brazil, Argentina and the Middle East. Nonetheless, over half (53%) are expecting a higher rate of return coming from Chinese NPLs (16-20%) whereas for India and Latin America the range is lower, and the majority expects around 11-15% for secured deals.

The research demonstrates that globally 44% of financial institutions prefer the strategy of outright loan sales to reduce NPL levels, which shows the importance of the ‘clean break’ principle to sellers which prevailed in early NPL transactions in Western Europe. It is shown that there is a broad correlation between the asset classes investors wish to purchase and sellers wish to sell. With over a third of investors preferring commercial real estate, the survey shows there is greater sell-side need than investor interest for retail assets.

Callum McPherson, global loans partner, observed that “globally, financial institutions are now finding transactions cost as being the most pertinent consideration when bringing an NPL to market. By contrast in Asia, 43% of respondents state that the resource intensive nature of NPL sales has made it difficult for the continent to handle sales internally. Conversely in Latin America, the least relevant concern in Asia comes out top, with over half (55%) of respondents stating that the greatest challenge is the macroeconomic outlook.”

Even though NPL sales may have peaked in 2018, concerns around high ratios still dominate the European agenda on banking stability.