Developing the NPL Secondary Market in Latin America
Bonds & Loans
Published: 26 September 2017 12:58
Though Latin American lenders have developed sophisticated risk management practices, which have allowed them to successfully manage economic headwinds, they still trail behind lenders in more developed markets when it comes to efficiently offloading NPLs off their books and developing the secondary NPL market.
Developing the Non-Performing Loan (NPL) Secondary Market in Latin America
Latin American lenders have developed sophisticated risk management practices, which have allowed them to successfully manage economic headwinds, but they still trail behind lenders in more developed markets when it comes to efficiently offloading NPLs off their books and developing the secondary NPL market.
The banking system in Latin America has seen its share of crisis, which has at times threatened the economic stability of some countries in the region.
Although the recent economic downturns that have plagued some nations and certainly challenged asset quality, it has not led to full-blown contagion. This is largely because many lenders in the region, particularly those in the private banking sector, have implemented strategies allowing them to successfully cope with eroding economic fundamentals.
Despite attempts to tighten underwriting standards the banking sector has been hit by rising NPLs in the lenders books, in countries like Brazil (around 4%), Colombia (around 3%) and Peru and Argentina around (2- 3%), as GDP contractions put pressure on households and enterprises’ ability to repay debt.
NPL volumes have become exacerbated by a drop in public sector spending in many of these countries. Some companies that have historically relied heavily on a healthy government purse for infrastructure and construction projects have had challenges in meeting their financial obligations.
Offloading NPLs, an Opportunity?
Carefully managed NPLs can be transformed into new commercial opportunities for the region’s lenders, if the conditions are right. Tackling a growing accumulation of toxic assets in an efficient way generally requires a combination of supportive and robust legislation, state-sponsored securitization schemes, and crucially, the right technology and internal processes.
The regulatory landscape in Latin America is maturing in a way that supports the development of a viable secondary market for NPLs, allowing lenders to relieve their balance sheets. Many small local banks, however, often lack the necessary infrastructure and expertise to dispose of these assets efficiently.
According to Intralinks, who supports high-stakes financial transactions, partnership negotiations and strategic initiatives like capital raising and divestitures across the globe, “the foundation of any successful NPL sale is an accurate and detailed preparation of sale documents. Preparedness shows the commitment of the seller, and gives investors a clear understanding of the asset and opportunity.”
The processes underpinning largescale NPL sales are decisive – though often muted – in ensuring the success of these transactions. These deals typically require teams to spend up to five hours per day receiving and responding to questions over e-mail, logging them in Excel, and taking phone calls. Over two months, this amounts to more than 25 days of resources for a single transaction.
“One common denominator in all NPL transactions, in LATAM and other regions, is the need to share large volumes of sensitive information throughout the lifecycle of the deal. Leveraging the right technology partners, with subject matter expertise is key to establishing maturity within the NPL ecosystem,” Michelle Wu, Director of Strategy Debt Capital Markets for Intralinks explained. Accessing information efficiently is one way to reduce strain on internal resources and help ensure the success of these transactions. Having all of your deal information in one place is essential as it gives deal execution teams tighter control and more insight into the sales process.
NPL Best Practices, Overcoming a Risky Business
In Latin America, although each market has its own nuances, the secondary market for these instruments is still relatively small, largely due to regulatory constraints. It can be very complicated for creditors to recover a reasonable percentage of the value of these instruments as they often have to deal with complex judicial systems and bureaucratic hurdles, all of which discourage mainstream buyers.
These factors make it very challenging for banks in less mature economies to close the pricing gap with their peers in more developed markets, often leading lenders to sell these assets at a discounted valuation. To tackle this problem, governments and banks alike must align their regulatory environments and internal practices with the ones in more mature economies, and adopt best practices in every aspect of managing NPLs.
Intralinks highlights important considerations for the Latin American region to have successfully developed NPL secondary markets. These include, “implementing regulatory reforms that shorten court proceedings on the forced sale of collateral assets that can be combined with government sponsored securitization schemes; enhancing servicer markets to allow creditors to recover default claims with more ease; making the judicial systems more efficient so that they might expedite bankruptcy timelines; investing heavily in technology and partnering with IT companies with the required expertise to make managing the NPL lifecycle more efficient and less time consuming.”
“Promoting healthy secondary sales activity, whereas the NPLs that are acquired are restructured or go through further work out processes and are sold again, is good for everyone and this is why Intralinks works so hard to provide a technology platform that allows for a more efficient deal process,” Wu added.
Intralinks supports high-stakes financial transactions, partnership negotiations and strategic initiatives like capital raising, debt divestitures, mergers & acquisitions and investor reporting. With over USD31.3 tn worth of financial transactions executed on our platform, we support the entire deal lifecycle by streamlining operations, reducing risk, improving client experience, increasing visibility and better engaging deal participants. In our 20-year history we’ve earned the trust and business of more than 99% of the Fortune 1000. For more information, visit Intralinks.com
About the Author
Bonds & Loans is a trusted provider of news, analysis, and commentary that helps illuminate the most significant issues, events and trends impacting the global emerging credit markets.
- Colombia: A New State of Play
- Off The Record: The Top 5 Emerging Market Credit Trends in 2018
- CASE STUDY: Autopista del Sol's Dual-Currency Project Bond for Strategic Toll Road a Landmark Debut
- Latin American Governments Welcome Back Miners With Open Arms, Local Communities Less So
- Emerging Markets FX Technical Picture: How Far Can This Correction Go?
13 Dec 2017