Italian bank debt/Elliott: ‘sofferenze’ frenzy
Banco BPM’s deal with hedge fund has its benefits but the break is not a clean one
It is a good rule of thumb in corporate finance: the less attractive the asset, the more exciting the code name dreamt up by bankers.
In June, Banco BPM, the third-biggest bank in Italy, sold a €5.1bn portfolio of bad loans in a deal it called “Exodus”. Late on Monday came another high-octane announcement: “Project Ace”. In a securitisation led by Elliott Management, the giant hedge fund group will relieve BPM of up to €7.8bn of sofferenze. That is the local term for the worst of the worst-quality loans, where the borrower is most likely bankrupt.
What Elliott gets out of this is obvious. The New York-based firm is already one of Italy’s biggest holders of non-performing loans through Credito Fondiario, the Rome-based loan servicer it owns. If it can improve collection rates on the secured portion of BPM’s portfolio, it stands to make a lot of money. Any recoveries at all on the unsecured part, probably written down to zero by BPM, will be a bonus.
The benefits for BPM are also clear. The bank’s gross NPL ratio was 15.9 per cent of total loans at the end of the third quarter, among the highest in Italy. A deal with Elliott, due to complete by March, could cut that ratio to about 11 per cent. It would also mark a significant step in the two-year effort to rid the biggest banks in the country of their bad assets, following similar deals this year from UniCredit with Fortress, and Intesa Sanpaolo with Intrum.
Still, the break is not a clean one. BPM will pluck the loans from its balance sheet but will still own the top-rated parts of the securitisation (which are backed by a government guarantee). The bank is also having to sell 70 per cent of one of its best businesses, its loan-servicing unit, to Credito Fondiario, while committing to sending the buyer about 80 per cent of its future NPLs to service.
Meanwhile, what remains on BPM’s books is a portfolio of about €3.5bn of sofferenze. That could be tougher to shift, whatever the bankers call it.