Serbia’s 23% Pile of Bad Loans Lure Distressed Debt Funds

Buyers of distressed debt are being lured by the prospect that Serbia will clean up its financial system amid mounting pressure from international creditors.

EOS Matrix, the Belgrade-based unit of Germany’s EOS, a company that began as a Hamburg debt-collection service, said it’s in talks with more banking clients after buying Serb non-performing corporate loans for 18 million euros ($23 million) in December. The junk-rated former Yugoslav republic needs to convince the International Monetary Fund that it’s working to stabilize the economy or risk being shut out of debt markets, a watchdog appointed by parliament said last month.

With non-performing loans, or NPLs, climbing more than 6 percentage points in the five years through June to 23 percent of lending, Serbia is among Balkan nations still reeling from the aftermath of Europe’s credit crisis. Bad debts in the region piled up losses for banks, weighing on growth.

“Resolving NPLs is crucial to revive bank lending and to jump-start the economy,” Dusko Vasiljevic, a World Bank economist in Belgrade and an author of a June report on the Balkans banking industry, said yesterday in a phone interview. “With high NPL ratios, new loans are more expensive. Selling them to third parties will free up funds for new lending.”

Debt Mountain

Serbia’s banks are grappling with about 3.5 billion euros in bad debts. That’s almost three times as big a share of all non-performing loans than in Poland, including mortgages.

Hypo Alpe-Adria-Bank International AG, which is being broken up after becoming one of Austria’s most costly bank failures, signed a deal in August to sell 169 million euros in retail NPLs from Slovenia, Croatia, Serbia and Montenegro.

EOS is one of the companies taking part in a conference in Belgrade today that include topics such as NPLs and distressed funds.

The number of funds in Europe’s distressed debt market doubled to 200 in the past two years as money managers seek to boost returns in a world of record-low interest rates, according to KPMG LLP.

Lenders are relinquishing a record 100 billion euros of loans this year to meet tougher rules requiring them to increase the capital they hold to absorb losses.

The yield on Serbia’s dollar note due September 2021 has risen 54 basis points since the start of last month to 5.31 percent by 2:04 p.m. in Belgrade, compared with 3.84 percent on Romania’s investment-grade notes due in February 2022. Serbia’s dollar debt lost 1.7 percent in September, the worst among 13 eastern European nations in the Bloomberg Dollar Emerging Market Sovereign Bond Index after Turkey and Ukraine.

Balkan Hurdles

Bad loans from southeast Europe have produced losses for lenders such as Austria’s Erste Group Bank AG and Raiffeisen Bank International AG. Volksbank Romania sold 490 million euros of bad loans earlier this year.

While Slovenian banks transferred billions of euros in toxic loans to a bank asset-management company, they still kept about two-thirds of NPLs on their balance sheets, Igo Gruden, a management board member of Maribor-based Probanka d.d., told the conference in Belgrade today.

“There’s a wide gap in what is selling and what should be buying prices,” Gruden said. “Investors are coming daily seeking 90 percent discounts, which is not acceptable.”

Regional Hurdles

Buyers of such assets face particular hurdles in the region. It takes about 20 percent more time, and costs a third more to resolve a business insolvency in the Western Balkans, compared with OECD high-income countries, the World Bank said in its report on the region called Fragile Stability.

“Lenders in the Western Balkans recover only about half as much of the debt in cents on the dollar than their peers in OECD high income countries,” the report said. Banks in Serbia have been reluctant to realize potential losses from NPLs as three recessions in five years eroded the value of real estate and land used as collateral, it said.

Changes in accounting rules allowing more efficient NPL restructuring will be a key step, Peter Attard Montalto, a London-based strategist at Nomura Holdings Inc., wrote in a Sept. 26 note after talking to policy makers in Belgrade.

“The National bank of Serbia hopes this will clean up bank balance sheets, allowing greater lending growth, particularly to corporates in the future,” Montalto wrote.

Sufficient Reserves

Serbian banks’ regulatory reserves more than cover NPLs and their capital wouldn’t be affected even if none of the bad loans could be collected, the central bank said in an e-mailed response to questions from Bloomberg yesterday. The central bank is considering regulatory changes on the handling of NPLs, it said, without giving details.

Writing off NPLs may be the only way out as red tape deters investment and distressed-debt buyers, Nikola Stefanovic, a managing director of the South Balkan Fund of SEAF, a New York-based non-profit that lends to smaller companies in developing countries, said in a Sept. 30 phone interview.

EOS is “communicating with several clients form the banking sector” about NPLs, Jelena Jovic Milentijevic, Managing Director at the company in Balgrade, said by phone Oct. 1. “The point with NPLs is to clean banks of the bad loan burden.”

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