NPLs, there’s trouble ahead for German alternative debt sector

It is a tale of two types of lenders in Germany when it comes to NPL transactions, delegates heard at Real Asset Media’s Trends 2023: European Debt, Finance & Investment briefing, which was held in Frankfurt recently.

“There are two elephants in the room that no one wants to talk about,” said Oliver Platt, managing partner, Arcida Advisors. “The senior lenders still feel very comfortable, they still have an NPL debt ratio of 1.85% which is very low, but the alternative debt sector is in trouble.”

Mezzanine lenders find themselves in a difficult situation if they do not have a personal guarantee from the sponsor. The number of transactions is increasing as alternative debt providers are selling off loans at a discount and, according to Platt, “some senior lenders might follow soon”.

The second “elephant” is that prices had been allowed to be too high. “In hindsight, inaccurate lending values of properties have led to loose lending,” said Platt. “But as soon as there is some devaluation and we have realistic prices in the market, then we’ll see more transactions.”

Talk about NPLs has not become common parlance yet, but there are problems bubbling under the surface.

“The mid-sized banks in particular are under pressure because they realise the NPL backstop will hit soon,” said Platt. “Banks like Berlin Hyp or Helaba know how to deal with the NPL backstop, but for smaller banks forbearance measures are a real threat to their Tier1 capital because they don’t have any solutions for their loans.”

The NPL backstop, a European banking law, was adopted in 2019 as a tool to prevent the excessive build-up of non-performing loans on bank balance sheets by creating buffers which allow banks to tackle NPLs in a timely manner through sales or write-offs.

There is still time to act, as for unsecured loans the banks need to provide a solution after two years and for secured loans they have seven years. But rather than indulge in a false sense of security they should act now to build up new workout teams or decide to sell.

“I think many will realise they need to sell and that will really bring new deals to the market,” said Platt. “Not the big billion deals we saw in the early 2000s, but more in the €80-€100 million range. But the smaller the players, the more of a problem they are going to have.”