Expected benefits of Implementing Technical Standards by the EBA on NPL Deals
Expected benefits of Implementing Technical Standards by the EBA on NPL Deals
On 16th December 2022, the European Banking Authority (EBA) published and submitted to the European Commission the final draft of Implementing Technical Standards (ITS) specifying NPL Transaction Data Templates to be used by credit institutions for sale transactions going forward. The purpose of these standards is to establish a common data framework for the sales or transfers of NPLs across sellers and buyers, impacting the way the credit institutions (i.e. banks and equivalent prudentially regulated entities) handle their non-performing loans. The changes in regulations are currently due to come into effect 30th December 2023 subject to the official administrative steps under the delegated authority of the European Commission having been completed by then. With the drafted ITS the EBA aims to “provide a common data standard for the NPL sale transactions across the EU enabling cross-country comparison and thus reducing information asymmetries between the seller and prospective buyers of NPL, which was previously identified as one of the impediments for the development of efficient functioning NPL secondary markets in the EU. Having necessary information standardised by means of common templates, data fields with their definitions and characteristics as set out in these draft ITS will facilitate the sales of NPL on secondary markets and aim at reducing entry barriers for small credit institutions and smaller investors wishing to conclude transactions”.
But what does this mean for the NPL landscape?
With market-leading experience – having advised on non-performing exposure (NPE) transactions in excess of €300BN across Europe – Alantra’s FIG team explore the future of NPL transactions with the introduction of the new legislation.
What are the EU NPL Transaction Data Templates?
The NPL data templates cover a wide range of information, including counterparties to the loan, contractual characteristics of the loan itself, collateral, and guarantee details, any legal or enforcement procedures commenced, and historical loan repayments. The draft ITS specify granular loan-by-loan information to be provided by the credit institutions when selling or transferring NPLs, with the aim to enable prospective buyers to conduct their analysis, financial due diligence, and valuation of NPL in the context of a transaction.
The introduction of common data templates for NPL transactions is expected to focus on facilitating the secondary market by lowering entry barriers for small credit institutions, primarily by creating uniform data aggregation across different banks and financial institutions. This uniformity aims to streamline due diligence procedures and accelerate transaction processes. The standardized templates could enable faster data exchange, analysis, and decision-making, reducing delays and inefficiencies, and ultimately, resulting in cost savings for institutions and investors alike.
Although overall this is likely a positive move for the market, the ITS for NPL transactions contains more than 150 data fields and requires the disclosure of extensive previously undisclosed information to potential buyers, in some cases even needing banks to update IT systems and commence collection of additional data points – which may only be available at the time of loan origination.
On review of the ITS templates, Alantra’s Credit experts’ identified that though it captures a wide range of information and creates a good basis for lowering barriers for loan trading, advisors will play a key role in guiding on the value enhancing materials above and beyond the new legislation. As such, Alantra FIG is working on an integrated loan sale platform that combines Alantra’s advisory offering with a technology-led sales process for transactions comprising non-performing and performing loans sales, merging ITS for NPL transaction disclosure templates with market specific value drivers. This complements the existing market leading NPL valuation and business planning platform – Alantra’s Credit Analytics Platform (ACAP) that we brought to market for NPL whole loan sales and securitisations.
Faster execution, increased traction, wider investor base – a new era for NPL sales?
With the benefits outlined above, financial institutions will be able to expedite NPL sales and transfers, improving the speed of transactions, overall operational efficiency and reduce transaction costs.
The use of common definitions and standardised characteristics for NPL transactions is likely going to boost market efficiency and will increase traction in secondary markets. Reliable, consistent data will grow confidence in the quality of the data and underlying assets. Alantra’s Credit experts therefore expect more active participation in secondary markets, fostering liquidity and likely, driving competition.
The adoption of NPL transaction data templates is expected to broaden the investor base for NPL transactions. As more financial institutions and investors adopt the standardised templates, barriers to entry for potential investors are reduced, ultimately increasing competition. Moreover, the implementation of common data standards is likely to catalyse the emergence of loan sales electronic auction and valuation platforms like Alantra’s own loan sales platform and ACAP which are embracing the new standards, removing friction from the processes of valuing and accelerating trading NPLs.
Does ITS apply in all cases?
The answer is ‘no’.
Only banks (and other credit institutions) subject to prudential regulation within the European Union will be required to use the templates, with U.K. firms not falling in scope. In terms of transactions, while the new ITS for NPL transactions comes into force from 30th December 2023, for loans originated post 1st July 2018 that were classified as NPE/L after December 2021, various types of loans and transactions are excluded from the ITS applicability, with complexity and level of underwriting requirement being the main decision drivers. In addition, a principle of proportionality applies to the templates, with fewer mandatory data fields for loans with a carrying amount below €25,000. Equally, different data fields will be applicable depending on borrower type (individual vs company), and security status (secured vs unsecured).
Examples of exclusions include syndicated loans and intragroup loans. NPL sales as part of a special situation for the credit institution (restructuring, insolvency, etc.) are also excluded from the application of ITS. It is also important to note that the ITS disclosure templates only apply where NPL transactions envisage a change in the lender of record under the relevant contracts, beneficial sales are exempt for the applicability.
Disposals through NPL securitisations will also not be required to comply with the disclosure requirements set out in the NPL Directive’s ITS, given that they have their own disclosure framework under the EU Securitisations Regulation (EU 2017/2402). Alantra’s Secured Funding and Asset Backed Securities (SFBAS) team has a strong focus on successfully advising on NPL securitisations having completed 12 securitisations with c. €43BN of GBV in the last two years and being named ‘Advisor of the Year’ at SCI’s NPL Securitisation Awards 2022. Additionally, SCI named Project Galaxy – for which Alantra advised – ‘Transaction of the Year’. It was also the second largest rated NPE securitisation in Europe.
The adoption of ITS by the EBA for NPL transaction data templates brings forth numerous benefits.
By establishing a common data standard, information asymmetries are reduced, resulting in cost savings during analysis and due diligence. The uniformity of data templates accelerates the speed of business and enhances the efficiency of NPL transactions accelerating the adoption of NPL valuation and trading technology. Moreover, standardised definitions and characteristics increase traction in secondary markets, facilitating transactions for smaller institutions and investors.
However, there are still a number of challenges that banks will need to overcome, such as sourcing and processing large amounts of granular loan-by-loan information to enable the production of the templates, and ensuring the final templates provide meaningful information to potential investors. At first, the high number of data fields in the templates could cause an increase in deal costs and time-to-market of NPL portfolios with long-term benefits likely only becoming visible through subsequent trades. Technology will be a key enabler to overcome these challenges.
Ultimately, these standards are expected to attract a wider investor base and encourage the development of electronic platforms for NPL sales. Through these benefits, the EBA aims to strengthen the stability and effectiveness of the European banking sector as a whole.