UK EU referendum update – European loan portfolio sales
July 22, 2016
- Loan portfolio transactions set to pick up in September and October.
- The bid-ask gap returns.
- Bank restructuring remains key.
I have been asked many times over the last few weeks by both the buyers and sellers of loan portfolios across Europe the likely implications of the results of the recent UK referendum. At this stage my response is very simple: it is too early to form any definitive conclusions, but there are a number of competing forces that will shape the market over the next few months.
September and October set to be busy
Looking at transactions that are currently in progress, my observation is that some have continued regardless, there are others where the vendor has decided to pause the process and others where, due to changes in investor appetite, vendors have decided to halt. Where transactions have proceeded, in a small number of cases the result of the referendum has been viewed as an opportunity by buyers to attempt to price chip – sometimes with success. Where there have been pauses, a consensus is emerging of a restart in September. This could mean September and October will be very busy months.
One result of the referendum has been to seize up the market for debt to finance transactions - but it is too early to say what the impact will be on "confirmed" spreads. Certainly an increase of 100+bps does not seem out of court at the moment.
Return of the bid-ask gap?
Whilst a number of buyers believe that increased uncertainty should result in a fall in prices, there is less clarity of the view of vendors who will continue to be highly constrained by an inability to take losses on transactions. I wonder whether we will see a greater incidence of a bid-ask gap that was so prevalent in a number of European markets a few years ago. One very good reason for an increase in the incidence of such a gap will be from increased uncertainty and volatility in the macro economic outlook, asset prices and currencies. With a more unstable outlook there is much greater potential for the parties in a transaction to take different views on key price drivers. This could ultimately lead to differing views on value.
A decline in the value of sterling could be a boost to dollar funded investors in the UK market, but I am not yet sure how much of this benefit will be offset by the impact of increased economic and asset price uncertainty in that market.
Bank restructuring still key
One thing is for sure though, the need for continued bank restructuring remains. And, indeed, pressures could increase due to, for example, the likelihood of a continued low interest rate environment, potential structural changes and potentially increased capital requirements needed under a UK exit from the EU. So, potentially a short term blip in the market but there will still be plenty to do.
Do get in touch if you would like to discuss your situation.