After almost three years of economic recession and stagnation, many markets are starting to feel the pressure of mounting debt, according to a recent market review conducted by KPMG’s Portfolio Solutions Group.
As a result, investors can expect to see greatly increased levels of activity in the debt sales markets over the next two to three years as banks seek to jettison non-performing or non-core debt portfolios to reduce their exposure to risk and raise much needed capital.
In the second edition of Global Debt Sales, KPMG professionals examine the state of the debt sales markets in 22 countries and offer insightful predictions for the future of the markets on a local, regional and global level.
However, many countries continue to experience mooted activity in local debt sale markets. Pricing gaps between the expectations of buyers and sellers continue to thwart large deals; increased regulation on capital and risk – often considered a potential catalyst to sales – have in reality caused banks to take a ‘wait and see’ approach; in many markets buyers are simply unable to secure capital for larger portfolio purchases.
Particularly in Europe, but also increasingly in other markets around the world, the ongoing specter of sovereign debt defaults and the implementation of national austerity programs have raised the potential for even greater levels of debt sales in the near future. “As the deadlines approach for the repayment of support loans, most markets can expect to see an accelerated rate of disposals by banks, particularly of non-performing and non-core assets. In addition, the diminishing capacity for refinancing on Western markets given the current European problems is also affecting the liquidity situation, for example, of Russian banks. The delayed solution to the loan portfolio quality problem will prevent many Russian banks from attracting a strategic capital investor holding a successful IPO, which also stimulates the need to sell non-performing loan portfolios,” said Eugene Makhotin, Director, Transactions and Restructuring, KPMG in Russia and CIS.
That said, the report points to continued activity in the European non-performing and sub-performing debt markets – albeit at a much slower pace – thanks largely to the diversity of the European debt sales markets.
The report also suggests that Basel III regulations will soon begin to spark a flurry of activity in global debt sales markets as the impact of the regulation becomes clearer. For example, the need for increased capital ratios and tighter requirements on the quality of capital will almost certainly force a large number of banks to reconsider their debt portfolio mix which should lead to a higher level of debt sales. “One peculiarity of regulatory-driven change is that it applies the same pressures – in the same direction – to the entire banking industry at once,” noted Eugene Makhotin. “So while there may be pressure to sell off those large capital and liquidity hungry portfolios, there may be few investors lining up to buy them. This process is happening even now: banks with a sufficient liquidity level are increasingly acting as buyers of quality portfolios, thus aiming to extensively increase loan portfolios and at the same time to get rid of the low-quality elements of their portfolios through selling.”
Indeed, in many markets, banks seeking to exit non-core performing portfolios have yet to see the emergence of any real strategic buyers in the market. And while a number of new buyers such as pension funds and sovereign wealth funds are increasingly seeking to invest directly into loan portfolios, the anticipated rebalancing of banks’ loan portfolios will require strategic buyers to return to the market en masse.
“Based on our research, we see the potential for a massive upswing in debt market activity as economic and sovereign debt concerns start to get sorted out,” added Eugene. “Within the next 12-18 months, we should see a perfect combination of increased investor liquidity, greater confidence in financial markets and a new wave of loan portfolios brought to the market. At that point, global debt sales activity should be positively frothy.”
MN – KPMG Mongolia – © 2018 KPMG Audit LLC, the Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.