Oliver Platt
Oliver Platt, managing partner at ARCIDA Advisors and real estate finance partner at KUCERA
It is inevitable that we’re headed to much higher volumes of distressed debt and growing NPL transaction numbers in Germany. This has many causes - COVID, the war in Ukraine, the growth of working from home, the fall in commercial real estate values with associated covenant breaches, imminent loan expiries, and a host of new regulatory requirements.
But just how bad will the situation get? Germany is already seeing an increase in NPL volumes, from €29.7bn at end-2021 to €31.6bn at end-2022. Then there’s debt and mezzanine funds, many of which will also be taking a bath on lending against insufficient collateral.
Adding it all together, Germany alone could be facing a realistic NPL volume of north of €80 billion, according to Oliver Platt, managing partner at distressed debt specialist Arcida Advisors and a real estate financing partner at lawyers KUCERA. This is likely to provide a host of new opportunities, either in buying loans at a competitive price, or indirectly through taking over the asset management of the properties themselves, however distressed.
Platt has written a considered assessment of the emerging NPL landscape in a special guest column for REFIRE. We have posted the article on our website and highly recommend that you read it.
Platt points to several regulatory catalysts that are likely to trigger this new wave of NPLs being released from banks’ balance sheets in a more timely and regulated manner than in the past. For one, EU regulations, such as the so-called NPL backstop, are designed to cushion the impact of a high level of risk positions on a bank’s capital, or even to protect them completely for a certain period. Banks’ higher capital buffers, in the form of Common Equity Tier 1 capital, can be drawn on while the bank continues to grant loans. But it WILL hamper the furtherance of the banks’ old “extend and pretend” strategies.
There are other catalysts. The 6th amendment to the so-called MaRisk requirements force institutions to comply with stricter NPL limits as soon as they reach a 5% threshold within their portfolios. BaFin and the Deutsche Bundesbank are about to impose even tighter risk analysis measures on lender with their forthcoming 7th amendment. This will have a heavier emphasis on ESG compliance. It too will surely lead to even more conservative lending.
Then there’s the coming EU Directive on Credit Servicers and Credit Purchaser, due to come into effect by December 2023 at the latest. This aims to facilitate the sale of NPLs between banks and debt buyers, while at the same time protecting borrowers as fully as possible. Notably, the Directive aims to promote the development of an “awakened” professional secondary market for NPLs, with few restrictions on purchasing cross-border within the EU.
The whole tenor of these new regulations – married to a rapidly changing financial and real estate environment in Germany – is designed to address a new reality, recognizing a new form partnership that now has to exist between the stakeholders at the level of the loan as well as at that of the real estate. A more holistic approach to resolving all parties’ problems is inevitable, particularly in the light of ESG principles which have fundamentally changed the way business must now be done.
Platt stresses how establishing these partnerships between finance providers and private, specialized loan servicers and loan buyers, is a process that is well under way, and is recognized now as both a necessity and economically viable.
His key point is that changes in the recent past have led to a whole new awareness of the partnership aspect in supporting sustainable NPL strategies, beyond the sole criterion of pure economic success, as was the predominant factor in the past. Protecting borrowers’ rights is now seen as an important outcome, avoiding reputational damage for the loan buyer, its loan servicer, and the investors behind it.
With banks being more heavily forced to face up to problem loans on their books, the market will throw up new investment advisers and servicers to absorb and process these loans. Platt is convinced that investors aiming for diversification and value from either direct or indirect exposure to the growing German NPL market will find potential in the sector. Again, here is the link to the article.
