Italy’s Bad Loans Get New Shine in Light of Low-Yield Choices

Italian banks are finally starting to clean up their balance sheets as plunging asset yields encourage investors into corners of the market they previously shunned.

About 250 investors are in Venice to attend Banca Ifis SpA’s non-performing loan conference, twice as many as last year, said Giovanni Bossi, chief executive officer of the financial services firm. The host said on Thursday that it bought bad loans with a face value of 420 million euros ($472 million), part of the 2 billion euros it plans to purchase by the end of the year.

Giovanni Bossi

Photographer: Matthew Lloyd/Bloomberg

Some of the biggest buyers of distressed assets, from Apollo Global Management LLC to AnaCap Financial Partners LLP, are also looking to soured Italian loans as yields across Europe tumble to records. At the same time, the European Central Bank is increasing pressure on the country’s lenders to reduce their pile of more than 360 billion euros of troubled loans, equal to about a quarter of Italy’s gross domestic product.

“Investors know that bad debt can provide returns you can’t find in any other asset class at the moment,” Bossi said before the conference. “While international buyers were initially looking at 20 percent yield on Italian portfolios, now they may be happy with 10 percent or even less.”

Italian lenders have lagged behind their European counterparts in reducing bad loans since the 2008 financial crisis as the country’s longest recession since World War II left businesses and households struggling to repay debt.

That’s starting to change as it becomes harder for investors to make money. Average yields on European junk debt dropped to a record 3.8 percent last week from 11.5 percent five years ago, according to Bloomberg Barclays index data. 

Cassa di Risparmio di Bolzano SpA sold 320 million euros of bad loans in July and UniCredit SpA sold 570 million euros earlier this month. Italy’s largest lender may sell a large portion of soured debt, people familiar with the matter have said. Banca Monte dei Paschi di Siena SpA said in July that it will sell its 28 billion-euro book of bad loans for 9.2 billion euros, or 33 percent of its gross value, and then raise fresh money.

“Our bad loans department has never had so many deals to look at,” Bossi said. “More deals may come in the months before the end of the year, since banks want to clean their balance sheets.” He expects about 30 billion euros of transactions to close in 2016, and even more next year.

Sales may get a further boost from a new agreement between the European Commission and the Italian government allowing the country’s banks to bundle bad loans into securities they can sell. Lenders can buy a state guarantee for the least-risky portion to make the debt more appealing to investors.

The agreement is one of the measures approved by the government of Prime Minister Matteo Renzi to shore up Italian banks. The government also backed the creation of a 4 billion-euro bank rescue fund called Atlante, which will buy the riskiest portions of securitized bad debts to facilitate sales. The fund committed to buy a piece of the Monte Paschi securitization deal.

“Investors now know that there will be a buyer of last resort in the most complicated situations,” Bossi said.

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