Moody's NPL H1 2022 Update
Performance continues to deteriorate and lags plan
In its recent NPL Sector Update Moody’s investor service pointed out how
Performance remains weak for most deals rated.
Collections have picked up but are still below 2019 levels.
A deterioration in investors sentiment in case of a prolonged military conflict in Ukraine will also weaken nonperforming loan (NPL) securitisations
NPL deal volume increased significantly in H2 2021 and is likely to grow.
Of the 40 nonperforming loan (NPL) transactions rated by Moody’s, 18 continue to underperform their original business plans, with further performance deterioration over the past six months for most deals. One Italian transaction had its reserve fund drawn and no payments made to the senior notes for the first time in H2 2021. Given slower than anticipated cash flow, since the last publication we downgraded the ratings on nine tranches in six deals.
There are also ratings upgrade on six tranches in three deals to reflect better than expected collateral performance. Collections have picked up but are still below 2019 levels. The median variations in gross collections in a sample of 18 Italian NPL transactions that closed in 2019 or earlier show a decrease of 21% in H2 2021 compared with H2 2020, however same ratio comparing H2 2021 with H2 2019 was 27%.
A deterioration in investors sentiment in case of a prolonged military conflict in Ukraine will also weaken nonperforming loan (NPL) securitisations, which had also already been weakened significantly by the pandemic. Type of valuations have been affected by the pandemic restrictions. As a consequence of the pandemic, we have observed an increase in AVM (statistical) and Desktop-based valuations in new transactions, while there has been a reduction in Driveby valuations as a proportion of total valuations.
Collateral composition continues to evolve. NPL deals will continue to include leases and unsecured collateral, and we expect to see sponsor-backed transactions or the restructuring (ie. retranching or adjustment) of existing transactions. NPL deal volume increased significantly in H2 2021 and is likely to grow. Rated NPL deals increased to six in H2 2021 from three in H1 2021. Italy's latest extension of the state-sponsored Garanzia sulla Cartolarizzazione delle Sofferenze (GACS) guarantee scheme was one of the drivers of the increase in NPL volumes. Issuance volume is likely to grow further, with pandemic-related public support measures phasing out, and subsequent stress on small and medium-sized enterprises from higher energy and raw materials costs.
References
https://www.moodys.com/research/Nonperforming-Loans-Europe-Sector-Update-H1-2022-Performance-continues-to--PBS_1312174