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DBRS Morningstar Analysis on NPL Transactions in Spain, Portugal an Cyprus

A recent commentary analyses the performance of Spanish, Portuguese, and Cypriot nonperforming loan (NPL) transactions publicly rated by DBRS Morningstar.

The report is based on the latest available information provided by the servicers. It identifies key trends in the three jurisdictions, along with peculiarities observed at the transaction level based on deal-specific aspects and provides a summary of the macroeconomic scenario for each country and, for each transaction, provides an overview of the performance evolution, the evolution of the amortization and collateralization for the Class A notes, and the distribution of issuer available funds on note redemptions, interest payments, and costs.

Over the last three years, Spain, Portugal, and Cyprus have had a similar growth trajectory: economic contraction in 2020 due to the pandemic outbreak, followed by two consecutive years of strong GDP growth. As of early 2023, all three have reverted to pre-pandemic levels.

Despite the general underperformance observed relative to the initial servicer expectations, the credit rating actions reflect multiple factors including cost and timing considerations, notes amortization speed, credit enhancement, and hedging provisions.

Spanish NPL Transactions Performance

In line with the general trend in Europe, the volume of NPLs on the balance sheet of Spanish banks has declined to EUR 75.4 billion2 as of Q1 2023 compared with EUR 81.4 billion for the same period last year. However, when considering deleveraging since the pre-pandemic period, the decline is significantly lower than in other parts of Europe. This could partly be attributed to a lower NPL ratio of 3.2% as of Q4 2019 compared with that of other European countries (e.g., Italy 6.7% and Greece 35.2%) with high NPL volumes. The NPL ratio had a similar trend, however, falling to 2.8% in Q1 2023 from 3.0% a year earlier but still above the European average of 1.8%.

Portuguese NPL Transactions Performance

Consistent with the trend observed over the previous year, the volume of Portuguese NPLs on bank balance sheets has continued to decrease with a total stock of approximately EUR 6.4 billion as of Q1 202313 compared to EUR 7.8 billion one year ago. Portuguese NPLs exhibited an improved NPL ratio of 3.1% in the same period, which is just above Spain and lower than the ratio of 3.5% observed in Q1 2022, but still above the European average of 1.8%.

Cypriot NPL Transactions Performance

The Cypriot NPL stock on bank balance sheets has continued to reduce during the last 12 months and, as at Q1 2023, was approximately EUR 1.0 billion20 compared with EUR 1.3 billion at Q1 2022. Similarly, the NPL ratio dropped to 2.9% in Q1 2023 from 3.9% in Q1 2022, down from over 10% two years ago, but still above the European average of 1.8%.

Current Outlook and Expectations

The inflationary environment and efforts to contain it through policy rate changes are challenging the solvency of vulnerable debtors and liquidity in the Real Estate market, which could negatively affect recovery rates on the transactions covered in this commentary.

Although higher interest rates would translate to higher credit risk, such risk is adequately mitigated over the medium term in NPL transactions rated by DBRS Morningstar through structural features:

1. The three outstanding Spanish NPL transactions are currently overhedged (when the rated notes’ outstanding balance is compared to the hedging notional) and together with the low strike rates, benefit from considerable cap agreement proceeds.

2. Two Cypriot transactions (Titan and Capella) have fixed rates, while Hestia is currently adequately hedged but is at risk of becoming underhedged.

3. The outstanding Portuguese transaction (Guincho) has already fully repaid the senior notes, so the risk is limited to the remaining mezzanine notes.

Link to the commentary

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Blogger and Investment Management Advisor with focus on Distressed Assets & NPL. Massimo is Chief NPL & Fintech Editor at Credit Village Magazine.

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