Key to the effectiveness of the IBC is that it introduces a time-bound and court-monitored resolution process which, upon approval of a resolution by the National Company Law Tribunal, is binding upon third-party stakeholders such as the bidder, the corporate debtor, other creditors, employees and guarantors.
NPLs, as both an investment thesis and an asset class, have established a global reach and outlook. In the aftermath of the global financial crisis, the emergence of significant volumes of NPLs in Western Europe provided investors with opportunities to pursue new investment strategies. Early market successes for first-movers, combined with a broadening market supply and increasing volumes of undeployed capital, have fuelled the development of specialist NPL investing and continually spread its geographical reach.
What is promising is that the international NPL investor community is becoming ever more sophisticated in terms of knowledge of the strategies that work best in each country and the pitfalls to avoid their deep knowledge of their ply demonstrated in the results of our research.
In respect of sell-side institutions, while supply shows no signs of abating, the mix and frequency of portfolios that will come to the market will likely become even more varied investors with fluid investment strategies and a breadth of expertise in terms of the types of NPLs they can acquire and work out are likely to fare better when it comes to deal flow.
While the above are opinions based on the conclusions of our research, one thing is an undisputed fact: NPL market resolution which looked to be a short-term opportunistic market some 10 years ago is here to stay in the long term.
Clearly, when evaluating transaction pipeline, sell-side need has to be matched by investor community appetite and the ability to deliver appropriate levels of return to investors. Our research demonstrates an expectation among investors and financial advisors that, in general, IRRs are set to rise the data indicates that this general expectation spans not only emerging erica, India and China) but also some of the mature markets (UK significant link, Ireland and Italy).
In other words, most investors are looking for a smaller collection of higher value connections upon which they can deploy their work-out expertise. These are very much the types of portfolios that dominated the early market in Western Europe and were popular with investors on loan-to-own enforcement strategies.
Our research shows that investors remain positive about the anticipated IRR over the next two years: 76% of investors and financial advisors expect their target rate for the country to be 16% or higher for secured NPLs while over half would set their target IRR at the same level for secured NPLs in Greece (64%), Spain (67%) and the United Kingdom (55%).
While such hive-down structures still remain popular for the transfer of real estate assets forming part of a portfolio, it is now increasingly common for the loans assets themselves within a portfolio to be sold directly to the purchaser.
Having said that, Greece remains a new and developing market, with an economy that remains susceptible to wider market shocks, as evidenced late last year with a period of sustained and aggressive bank stock sell-off. This first half of 2019 will likely prove pivotal in assessing Greeces prospects as a sustainable NPL market, with the country in pre-election mode.
In terms of the regulatory landscapes for NPL resolution in the emerging regions, our respondents views were mixed. While Mexico, Indonesia and Brazil are deemed relatively efficient, the Middle East, Argentina and India are ranked at the bottom.
While increased NPL volumes and an improving landscape for overseas investors all ostensibly give cause for optimism for European and US investors in China, our view is that acquiring NPL portfolios in this region will remain challenging for such offshore investors. This is principally because of the dominance of domestic investors who have been prolific in their home territory.
Things to watch out for
It should be noted though that even if this proposal is implemented and becomes law, its impact on the attractiveness of historic NPLs will likely be limited as the AECE has to be agreed between the lender and its borrower upfront.
Fairness and Transparency
The IBC provides for the implementation of liquidations of defaulting corporate debtors within more certain timeframes and introduces a more creditor-friendly restructuring regime. In particular, the IBC facilitates the sale of corporate debtors as a going concern, thereby seeking to preserve asset values, minimise disputes and ensure continuity of the business by transferring the corporate debtor to the purchaser. Therefore, insolvency resolution has emerged as being far more viable than liquidation.