The Wall Street Journal reports,"for years after the financial crisis, European banks resisted selling their corporate loans for fear of having to record heavy losses. But recently, some European lenders have reversed their stance as demand for these assets has jumped. One reason for the shift: Defaults and bankruptcy filings have declined in the U.S., leaving investors with fewer opportunities to buy distressed debt and sell it for a profit in a restructuring.
"The prices have risen to the point where some banks are looking to sell because they're seeing transaction prices that imply" a much smaller loss for certain assets, said Ari Lefkovits, a managing director at Lazard Ltd. , who moved to London in August 2012 in part because of an anticipated uptick in European restructuring activity".
Centerbridge Partners LP, Oaktree Capital Management LP and Apollo Global Management LLC have been actively buying troubled debt from European banks, people familiar with the matter have said. These firms, some of which have raised big funds for distressed situations, often amass debt positions that give them significant control in a restructuring.
European banks had roughly $1.4 trillion in nonperforming loans on their books in 2013, up from $715 billion in 2008, according to PricewaterhouseCoopers. In 2013, banks sold $90.5 billion worth of troubled debt to investors, compared with $64 billion in 2012, an increase of more than 40%, according to a recent PwC report.
A lack of distressed debt in the U.S. has been a catalyst for the higher prices in Europe, some say. Investors have found few opportunities in the U.S. in recent years as defaults and bankruptcy filings have fallen sharply. U.S. commercial bankruptcy filings fell 24% in 2013, according to Epiq Systems Inc.
Higher prices mean smaller margins, but some distressed-debt investors see value in squeezing out small profits on large blocks of troubled loans. Others buy up the debt hoping to take control of the companies, a strategy known as "loan to own."
European banks, meanwhile, are under pressure to unload bad assets as the European Central Bank conducts its Asset Quality Review. Results are expected to be announced publicly in the fall, and that has been motivating some banks to sell faster.
Italy's UniCredit SpA recently set aside about $12.9 billion to cover bad loans in the fourth quarter, more than double what it allocated a year earlier. The balance-sheet cleanup resulted in one of the largest losses ever recorded by a European bank, but stock investors welcomed the move to get rid of the troubled debt.
Similarly, Royal Bank of Scotland Group PLC said in November it created an internal "bad bank" that would free up as much as $18 billion of capital. This vehicle includes a portfolio of shipping-company debt it already started selling, people familiar with the matter said.
At the end of 2013, RBS sold its roughly $800 million debt position in New York-based Eagle Bulk Shipping for between 85 and 88 cents on the dollar to buyers including Oaktree, people familiar with the transaction said. Eagle Bulk and some of its creditors are in restructuring talks, some of these people said.
Still, not all European banks are looking to sell.
Banco Bilbao Vizcaya Argentaria SA, Société Générale SA, Crédit Agricole CIB and Banco Espírito Santo SA largely remain unwilling to part with troubled loans with rosier long-term outlooks that can be refinanced or extended, restructuring advisers and distressed-debt investors said.
