Irish banks set to tackle sour loans through securitization

There is likely to be a "rebound" in the sale of nonperforming loan (NPL) portfolios this year as Irish lenders continue to be put under pressure to resolve bad debts, according to ratings agency DBRS.

It has also predicted that Irish banks are likely to increasingly turn to securitising under-performing loans themselves, given the current favourable market conditions. "Following the gradual recovery of the housing market and economic environment in Ireland, many delinquent borrowers have started to make payments," noted DBRS in a European structured finance outlook published yesterday. "Accordingly, now that the loans are to an extent re-performing, they can be quite an appealing investment," it added.

DBRS expects three likely loan securitisations in Ireland this year, worth a total of between €600m and €900m. A securitisation of non-performing loans involves siphoning the loans off to a special-purpose vehicle, which finances the acquisition of the loans by issuing notes in the capital markets.

That can enable banks to remove non-performing loans from their own books, allowing them to clean up their balance sheets. "While Irish NPL portfolio sales in 2017 were lower compared with prior years, DBRS expects to see a rebound of sales in 2018," the agency noted.

"This is because of the continuing deleveraging of Irish lenders amid pressure to resolve bad debts following European regulatory reforms."

DBRS believes regulatory initiatives at European and national levels could provide a "more favourable framework" under which to dispose of NPLs. The ratings agency also said that, in its opinion, Irish banks are also likely to "turn increasingly" to securitise under-performing loans themselves, given current favourable market conditions. "Portfolio sales and potential securitisations in 2018 will come on the back of an improving Irish property market and stable economic performance," it added.

Last year, US private equity giant Lone Star completed a securitisation of almost €564m of mortgage loans that were originally granted to borrowers by Irish Nationwide Building Society (INBS).

The loans are now held by a vehicle called European Residential Loan Securitisation 20016-1.

Of the loans in that vehicle, almost 64pc were non-performing at the end of 2016, while just under 33pc were performing.

Last year, Oaktree affiliate Mars Capital securitised €332m of loans from INBS and Permanent TSB via a vehicle called Grand Canal Securities 1. It has also progressed plans for a second securitisation, of €542m of loans originated from Irish lenders.

DBRS said securitisations provide a "viable exit strategy" for investors and noted that there's strong investor appetite for such products. "With most private equity funds investing in NPLs having a typical investment horizon of three to six years, it makes sense for them to optimise their funding structure in currently favourable market conditions," added DBRS.

The amount of NPLs in Ireland hit a peak of €85.3bn at the end of 2013, representing 31.8pc of gross loans from Irish banks.

The NPL stock of loans in the Irish banking sector stood at 15pc of loans for households by the middle of last year, 25pc for SMEs, and 9pc for large corporates.