Bad Loans Glut Buoys Debt Collectors as Kruk Yield Tumbles: Poland Credit

Rising sales of delinquent loans by banks are boosting business for Polish debt collectors and cutting their borrowing costs by as much as 45 percent from a year ago.

Kruk SA, the country’s largest debt collector, paid 330 basis points more than the benchmark three-month Warsaw interbank offered rate on two-year bonds sold last month, compared with 450 basis points on notes it sold in March and 600 in July 2010, data compiled by Bloomberg show. Wroclaw-based Kruk’s spread compares with 625 basis points, or 6.25 percentage points, on two-year notes issued by Gant Development SA (GNT), the country’s third-biggest homebuilder. Both companies are unrated.

Polish non-performing loans rose to 64 billion zloty ($20.2 billion) on Aug. 31 from 61.4 billion zloty at the end of 2010 and totaled 8.4 percent of overall borrowing. Bad debt accounts for 11.3 percent of total credit in Hungary and 6.3 percent in the Czech Republic, the latest data from financial regulators show. Polish banks are stepping up sales to a record 8 billion zloty this year from 4.5 billion zloty in 2010 to raise cash for expansion, Kruk Chief Executive Officer Piotr Krupa said.

“Debt collectors are having their moment of fame as banks are offering bad loan portfolios at attractive prices,” Marek Kuczalski, who helps manage the equivalent of $690 million at Warsaw-based mutual fund TFI Allianz Polska SA, said by phone.

Banks sell non-performing retail loans for about 15 percent of their face value and corporate liabilities for less than 5 percent, according to Krupa.

Bad Debt

Kruk bought bad debt this year from Warsaw-based PKO Bank Polski SA, the country’s biggest lender, and Telekomunikacja Polska SA, Poland’s largest phone company, according to Kruk’s statements. It agreed to pay 29.7 million zloty, or 13 percent of face value, for 236 million zloty of problem loans from the Czech and Slovak units of Banco Santander SA (SAN), Spain’s largest bank, according to a regulatory statement on Sept. 7.

Santander’s Bank Zachodni WBK SA (BZW), the third-largest Polish lender by market value, plans to sell between 10 percent and 20 percent of its bad loans each year to free up cash, Witold Grodzinski, head of the debt-restructuring department, said by phone from Poznan, western Poland.

“The dynamic growth” of lending in Poland before the peak of the global credit crisis is causing the increase in sales of problem loans now, said Grodzinski. Bank lending almost doubled to 627.9 billion zloty at the end of 2009 from 322.8 billion zloty at the end of 2006 as the economy expanded, data from Poland’s financial regulator show.

Bond Sales

Debt collectors accounted for 32 percent of the 198 bond sales by Polish companies this year and raised 620 million zloty, according to Fitch Ratings. The companies are set to borrow 600 million zloty more in the next six months to help buy problem debt as banks are likely to unload another 4.5 billion zloty, Krupa said.

While Kruk’s borrowing costs have dropped, the yield on Santander’s euro-denominated bonds due in 2015 climbed to 313 basis points over benchmark German bunds yesterday from 289 on Jan. 3, data compiled by Bloomberg show.

Kruk sold 369.2 million zloty of shares in an initial public offering in April and raised 256 million zloty from bonds this year, according to data compiled by Bloomberg. The company posted a 124 percent increase in first-half net income, while Warsaw-based competitor GPM Vindexus SA (VIN) lifted profit 795 percent.

Reaching Bottom

“Spreads on bonds offered by debt collectors have probably reached their bottom and are unlikely to fall further,” said Lukasz Witkowski, who helps manage the equivalent of $2.7 billion at Warsaw-based mutual fund PKO TFI SA. The “significant economic slowdown” has increased the risk of investing in corporate bonds, including those of debt collectors, he said.

The extra yield investors demand to hold Polish government dollar-denominated bonds rather than U.S. Treasuries fell 10 basis points to 244 basis points, indexes compiled by JPMorgan Chase & Co. showed. The spread over German euro-denominated bonds dropped 15 basis points to 358 at 12:01 p.m. in Warsaw. The difference is down from 443 basis points on Sept. 22, according to data compiled by Bloomberg.

Yields on government zloty bonds due in a decade dropped five basis points to 5.72 percent.

Default Swaps

Polish five-year credit default swaps rose four basis points to 252 yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Polish swaps cost 57 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in Markit iTraxx SovX CEEMEA Index, compared with an 85 basis-point discount a year ago.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The zloty gained 0.4 percent to 4.3421 per euro today. The currency has climbed 1.8 percent against the euro this month after losing 10 percent in the third quarter, the third biggest drop among 25 emerging-market currencies tracked by Bloomberg. The zloty weakened 17 percent against the dollar last quarter.

Kruk recovers debt by offering to reduce monthly payments and maintains “flexibility and empathy” in dealing with debtors, according to the company’s website.

Kruk plans to sell 20 million zloty of bonds, the company said on Oct. 18. Electus SA, a Lubin-based company that collects debt from hospitals, will offer as much as 150 million zloty of bonds, it said in a regulatory statement on Aug. 18. MW Trade SA (MWT), controlled by Polish billionaire Leszek Czarnecki, has plans to sell bonds to expand, the Wroclaw-based company said Sept. 28.

“If banks were to dump loans more quickly, there wouldn’t be enough money on the investors’ side because practically all debt collectors issue bonds to finance the purchases,” said Krupa. “Compared to the total bad loan figure, it’s like letting air out from a balloon through a small valve.”

To contact the reporters on this story: Pawel Kozlowski in Warsaw pkozlowski@bloomberg.net; Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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