05.04.2019 Structured credit management and value creation of underlying real estate collateral

Héra Holding’s General Manager speaks at the Quotidiano Immobiliare Conference “NPL, investments and real estate: solving problems”

Reducing the NPE stock held by banks in recent years has without doubt been both a necessary and decisive move. Today the real challenge for banks and servicers is the structured credit management of complex deals that require financial know-how and the core skills of highly specialist sectors.

This was the topic dealt with on 4 April 2019 by Héra Holding S.p.A.’s General Manager, Paolo Zago, at the Conference organized by Quotidiano Immobiliare entitled “NPL, investments and real estate: solving problems” held at Milan’s Innovation Campus.

The impaired loans market has undergone far-reaching transformation in recent years. “The fact that banks have cleaned up their Balance Sheets”, Zago explained, “or concluded large disposals over the last few years does not mean that the credit issues have been solved or that the much bigger problem of recovering value has been dealt with”.

“According to Banca Ifis data of January 2019”, Zago continued, “there are still 120 billion NPLs held by banks. 155 have been sold to the primary market but only 7 billion have been recovered. This means that credit disposal has not meant credit management and value generation”.

In fact, banks have tended not to manage their outstanding loans but rather dispose of them to generalist servicers with know-how mainly limited to less complex situations, in order to have the quickest cash-in possible. They have therefore focused especially on retail credit (both unsecured and secured loans) and/or on big tickets.

“This type of credit recovery service has now come to maturity”, Zago continued. “We now need to gear up credit management and draw on core competences to claw back as much credit as possible”. Funds/servicers that bought the impaired loans from banks now need to start managing the more complex positions more effectively, using specialist skills because disposal prices have risen and there is greater pressure to guarantee investors adequate IRR levels.

In particular, the real estate and industrial sectors require strong specialist skills, not just with regard to credit recovery but also in terms of generating value with the workout process.