Unsecured NPL Securitisations
Performance comparison with Mixed Portfolio Transactions
In the latest analysis by Scope Ratings, it has been revealed that unsecured non-performing loan (NPL) securitisations have outperformed those backed by mixed portfolios of unsecured and secured loans. This article delves into the factors contributing to this trend, especially focusing on Italy, Spain, and Portugal, where NPL securitisations are common.
Superior Performance of Unsecured NPLs
Unsecured NPLs have delivered higher-than-expected recovery rates, reflecting a better-than-anticipated outcome compared to secured loans. The recovery rates for unsecured NPLs were broadly aligned with historical data used during the initial rating analysis, suggesting stability in collection patterns despite the volatile global economic conditions over recent years.
As of June 2024, a significant sample of securitizations analyzed by Scope Ratings reported an average recovery rate of 9.4% for unsecured NPLs, surpassing the initial estimate of 7.9%. Remarkably, 90% of the transactions exceeded initial expectations, with some even surpassing their lifetime recovery targets. This trend was particularly prominent in portfolios with highly seasoned unsecured NPLs, especially those older than seven years, driven mainly by recoveries from private individuals rather than corporate entities.
Key Drivers for Unsecured NPL Outperformance
The primary factors that sustained the robust performance of unsecured NPLs include:
Resilient Economies: Strong economic conditions, especially post-pandemic, have bolstered recovery rates. Government support to households and businesses during the COVID-19 pandemic and through the energy crisis played a significant role in maintaining the pace of recoveries.
Labor Market Improvements: The steady recovery in labor markets has allowed individuals to resume loan payments, benefiting unsecured loan collections.
These factors allowed unsecured NPLs to perform consistently, even as the portfolios matured.
Challenges in the Secured NPL Segment
On the other hand, secured NPLs, particularly in Italy, have faced more significant challenges. These issues stem from various factors:
Collateral Depreciation: Collateral backing secured loans have suffered a sharp decline in value due to prolonged legal proceedings, property mismanagement, and poor liquidity at auctions.
Financial and Market Conditions: Tighter monetary conditions have further reduced the prices fetched for collateral properties, leading to lower recovery rates.
In contrast, countries like Spain and Portugal exhibited more resilience. In Spain, repossession rules ensured liquidity and helped maintain asset quality, allowing property liquidation at lower discounts. Similarly, Portugal's booming real estate market enabled higher recoveries on secured loans, exceeding expectations.
Mixed NPL Portfolios and Their Performance
While unsecured loans have performed exceptionally well, their role in mixed NPL securitizations is relatively minor. Typically, secured loans account for 70% to 80% of total collections in such portfolios. Despite this, the outperformance of unsecured NPLs has contributed positively to the overall portfolio performance, even if secured loans continue to dominate the recovery process in these mixed structures.
Conclusion
The performance of unsecured NPL securitizations has been notably strong in recent years, outpacing expectations in regions like Italy, Spain, and Portugal. The recovery rates have benefited from resilient economies, government support, and stable labor markets. Meanwhile, the secured NPL segment has faced more significant hurdles, particularly in Italy, where collateral depreciation and lengthy legal proceedings have diminished recovery prospects.
As the economic landscape continues to evolve, the ability of servicers to maintain or improve recovery rates will be critical, especially as transactions reach the later stages of their portfolios. Nonetheless, the outperformance of unsecured NPLs underscores their potential value in the securitization market.
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Relevant Links:
https://scoperatings.com/ratings-and-research/research/EN/177869
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