Emerging Europe: NPL sales pick up in CEE

By:
Lucy Fitzgeorge-Parker
Published on:

Global funds pile into Romania; Hungary, Slovenia next hot spots.

Central and eastern Europe is tipped to be the next hot market for distressed asset sales after some of the biggest global asset managers emerged as bidders for a portfolio of Romanian non-performing loans (NPLs).

The portfolio, dubbed Project Neptune, is being sold by Erste subsidiary Banca Comerciala Romana (BCR), Romania’s largest bank. It is composed of non-performing real estate and corporate loans worth around €2 billion.

The candidates selected to go through to the final round of the tender include consortiums led by Blackstone and Deutsche Bank, as well as solo bidder Lone Star, the Texan private equity player

AnaCap and HIG Capital – both private equity firms – are working with Blackstone, while Deutsche Bank has teamed up with Boston-based hedge fund The Baupost Group and Sankaty Advisors, the debt investment arm of Bain Capital.

Apollo Global Management of the US was also involved in the process, but pulled out before the final round.

Steady growth

International interest in CEE NPLs has been steadily growing since last summer, when Volksbank Romania sold the first large portfolio from the region since the financial crisis.

The €495 million package of real-estate loans was bought by Deutsche Bank, AnaCap, HIG and regional distressed-debt specialist APS Holding. Market participants said the deal helped put emerging Europe on the map for international investors. "When we bought

Ahmed Hamdani
 When we bought the first portfolio from Volksbank there were only a couple of people looking at it.  After that, international investors woke up

Ahmed Hamdani,
Bayside Capital


 the first portfolio from Volksbank, there were only a couple of other people looking at it," says Ahmed Hamdani, co-head of European real estate at HIG’s credit arm Bayside Capital. "After that, international investors woke up and started looking at the region, and by the time of the next transaction there were as many as nine investors interested."

Bayside considered CEE as an alternative to increasingly competitive and aggressively priced western European markets such as Spain, Hamdani adds.

Martin Machon, CEO of APS Holding, says this is a common theme. "As margins in western Europe have come down, we have seen more international investors looking at CEE due to the premiums available," he says. "Two years ago, when investors were bidding on [internal rates of return] of around 20% in the UK or Spain, in Romania and Bulgaria the bidding was at 30% or more."

Those levels have been eroded as competition has intensified – but Richard Thompson, chairman of the European portfolio advisory group at PwC, says returns in CEE are still around 15% to 25%. "That is significantly higher than in some western European markets," he says.

Increasing deal size has also helped kick start the CEE market. "For several years after the financial crisis, there was a huge pricing gap and banks couldn’t afford to sell except in a size that was much too small to interest international investors," says Machon. "As provisioning has increased, banks have been able to offer larger volumes of real estate debt, rather than retail loans, and that has attracted the bigger buyers."

So far, only a handful of larger sales have been completed. BCR sold €227 million of loans last July and a further €443 million in December, both to consortiums led by Deutsche Bank. A second Volksbank deal and one from Bank of Cyprus’s Romanian branch fell through in the autumn.

Early stages

The potential for deal flow in the region remains huge. According to a recent report by Raiffeisen, at the end of December NPLs accounted for 13.9% of the total in Romania, 13.3% in Hungary and more than 16% in Slovenia, Croatia and Bulgaria. In Serbia, the figure was as high as 23%. "We’re still at a very early stage of bank deleveraging in these countries," says Hamdani.

Activity has so far been limited to Romania, where a stringent increase in provisioning requirements last year by the central bank encouraged local lenders to step up NPL disposals. Romania is expected to remain the most active market, but the first large transactions from Hungary, Croatia and Slovenia will likely emerge this year, says Machon.

He estimates annual deal flow from emerging Europe over the next three to four years at €10 billion. "There are much higher numbers being talked about, but I would say that’s a realistic figure," he says.

Machon notes, however, that CEE will remain a challenging region for international investors, mainly due to its states’ small populations.

As Thompson at PwC notes: "This limits the potential investor base because bigger buyers need scale to get involved and also want to see opportunities for follow-on transactions."

The lack of reliable partners on the ground in CEE can also be a major hurdle for international investors, according to Hamdani. "It is essential to have a local partner for these transactions," he says, "but many local firms are not up to international standards in terms of capability or corporate governance."

Nevertheless, notes Thompson, the potential investor base is so large that even more challenging jurisdictions will likely see international interest over the coming years. "We are in contact with around 160 investor groups that are interested in acquiring distressed assets from banks in Europe, but only 10 to 15 have so far managed to make investments of any size," he says. "There is still a lot of money chasing deals."