DBRS on European NPLS
Emerging from the COVID-19 Pandemic
DBRS explains in a dedicated commentary, the rationale for removing any remaining adjustments to expected performance in the analysis of European nonperforming loan (NPL) transactions secured by retail and hospitality properties.
The Coronavirus Disease (COVID-19) pandemic resulted in several challenges for the European Banks, including causing asset qualities to deteriorate and NPLs to spike in some cases. Although some areas of concern still remain, the overall macro outlook, as far as NPLs are concerned, has improved.
With three years already having passed since the outbreak of the pandemic, DBRS Morningstar observes that:
Barring a few exceptions, the underperformance of European NPL transactions issued prior to the outbreak of the pandemic continued in 2022 at a much slower pace as compared to the previous two years, with a few transactions even reversing their downward trends during this period. •
European NPL transactions issued after the outbreak of the pandemic have generally displayed stronger performance compared with the executed business plans, reflecting servicers’ adjusted expectations in terms of expected timing and recoveries.
In its April 2020 commentary, European NPL Transactions’ Risk Exposure to Coronavirus (COVID-19) Effects, DBRS Morningstar highlighted that the performance of all NPL transactions was expected to be negatively affected in the short and medium term, while each NPL subsector was going to be affected unevenly, depending on extrinsic factors (e.g., local policies, external disruptions, and other economic aspects), which are country-specific, and intrinsic factors (e.g., structural features, pool composition, performance, etc.), which are transaction-specific.
Exposure to commercial real estate collateral, in particular retail and hospitality, was identified by DBRS Morningstar among the intrinsic factors perceived as having the highest sensitivity to the pandemic.
In March 2022, DBRS Morningstar placed its ratings on 14 tranches of seven NPL securitisations Under Review with Positive Implications (UR-Pos.), following the removal of the coronavirus-related adjustments on residential and commercial real estate property types other than retail and hospitality.
DBRS now believe that the risks of severe disruption caused specifically by the pandemic to retail and hospitality sectors have subsided and we have factored in the servicers’ business plan. Therefore, no further adjustments to expected performance are warranted in our analysis of European NPL transactions. We observe that the exposure to retail and hospitality sectors, in terms of underlying assets securing the loans, varies across the NPL transactions rated by DBRS Morningstar and is not relevant for two out of the six European NPL jurisdictions, namely Ireland (five publicly rated outstanding deals mainly secured by residential assets) and the United Kingdom (one publicly rated outstanding deal collateralised by a pool of entirely unsecured reperforming receivables).
Performance Evolution
Based on the latest information received from the servicers, DBRS reviewed the performance of all NPL transactions over the last two years. The data confirms that, for transactions rated up to 2019 (pre-pandemic), the recovery ratios have generally continued to deteriorate but at a slower pace compared with previous year, save for a few exceptions.
Transactions issued in the years following the outbreak of the pandemic had built the effects of the pandemic into the servicers' business plans and have therefore displayed to date a stronger performance compared with servicers' expectations. DBRS Morningstar also observes an overall slowdown in downward revisions to business plans in terms of amount of gross proceeds initially estimated by the servicer and the latest updated business plan forecasts (including actual performance as of the relevant cut-off date).
Link to the report:
https://www.dbrsmorningstar.com/research/412278/european-npls-emerging-from-the-covid-19-pandemic
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