Global debt sales have increased over the past 6 months against a background of increasing economic and political uncertainty. The pressure for such sales mounts as many banks — particularly European banks — battle real or perceived liquidity and solvency threats.
Debt sales are both tactical and strategic. Tactical sales involve taking advantage of short-term profit earning (or loss diminishing) by buying and selling opportunities in the marketplace. Strategic sales reflect the need to restructure the balance sheet and reposition the business.
On the strategic side, the looming reality of the new Basel III constraints is also forcing many banks to restructure their balance sheets to increase available capital resources, improve liquidity and enhance asset quality. Basel III also amplifies existing issues in the calculation of banks' Basel II risk-weighted assets.
The restructuring process involves raising additional capital, shrinking loan assets, restricting certain trading exposures, or any combination of these. Other commercial and regulatory pressures are intensifying these trends, including recent ratings downgrades across the financial sector and increasing wholesale funding costs evidenced in recent months.
It is impossible to accurately quantify the amount of existing debt that banks might want to sell. However, it is clearly very large. Of course, this bank debt is in addition to the immense sum of new and rolled over sovereign and corporate debt that needs to be issued over the next few years.
Moreover the regulatory and commercial forces acting on the banking system are all driving it in much the same direction at the same time. So who is going to buy all this bank debt, impaired or otherwise?
Other banks will be limited in what they are able and prepared to buy, and under present conditions few will want to acquire their competitors’ impaired assets, even at deep discounts. In extreme circumstances, central banks might buy certain classes of debt assets, but this is really a last resort for everyone. Much of the debt in question is likely to end up in the non-bank sector as hedge funds and others seek bottom-of-the-cycle investment opportunities.
Domestically, the Australian non-performing loan market saw an uptick in activity in 2011 with distressed and leveraged transactions driving secondary loan market volumes. Despite the upturn, volumes remained thin compared with markets elsewhere. Single name asset sales dominated.
The largest recent portfolio deals were the A$5 billion sale of GE Money’s mortgage book and the A$1.7 billion sale of the BOS International property loan book. We have also witnessed some mooted deals whereby a tranche of bank debt in a corporation is sold to outside investors and subsequently restructured, sometimes being wholly or partly converted into equity. (Precisely such an arrangement has been proposed for the heavily indebted Nine Network media group.)
Despite an increase in non-performing and delinquent loans, Australian banks generally have so far resisted portfolio sales. Of course, they are under far less pressure to do so than many of their counterparts elsewhere.
In this difficult and uncertain climate, KPMG’s Global Portfolio Solutions group has been supporting our financial services’ clients with portfolio valuations, realisation strategies and providing independent support for sell and buy side processes.
With extensive experience in advising both sellers and buyers on hundreds of mandates globally, our senior loan portfolio professionals work alongside governments, financial institutions, corporations, strategic and financial investors, collection agencies, industry financiers and other professionals to understand market dynamics and issues.
Increasingly, clients are looking to KPMG for practical help with strategic analysis, market sounding exercises and transaction support.