25 years: Securitisation
In his previous videos, Francesco Dissera explained the securitisation process in general and covered some of the assets that are typically securitised. In this video, Francesco explains the non-performing loans (NPLs) securitisation process.
In his previous videos, Francesco Dissera explained the securitisation process in general and covered some of the assets that are typically securitised. In this video, Francesco explains the non-performing loans (NPLs) securitisation process.
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8 mins 12 secs
NPL securitisation is used to deleverage NPL exposures with the issuance of securities. NPLs have emerged in recent years due to the current macroeconomic environment. Most prominently, these public NPL transactions have emerged after the launch of APS schemes in Italy (GACS) and Greece (HAPS).
Key learning objectives:
Understand what is securitisation
Understand what is an ABS backed by NPL
Understand the key characteristics of an NPL
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Securitisation relates to the financing of assets that carry credit risk (as opposed to market or other risks). It involves the structuring of tranched debt with at least two classes of seniority with a senior and a junior note (in some cases, a mezzanine note can be included). The effective exposure is only to the assets financed during the life of the deal. An NPL is securitised at a discount to its nominal or outstanding value and reflects the market’s and the special servicers’ assessment generating sufficient cash flows and asset recoveries. The risk for investors is therefore that the effective collection and workout of the assets do not generate sufficient cash flows to cover the net value at which the NPL has been purchased by the special purpose vehicle, or SPV. Typically, investors are therefore not exposed to the book value of the portfolio but to the discounted value -- net of the price discount at which the underlying assets are transferred.
The loan is typically accelerated and foreclosure procedures or bankruptcy will start soon after. Bank has to further increase its provisioning, impacting its profitability. Banks will have to dedicate more resources to recovery and less to the origination of new loans. Ultimately, as banks cannot generate interest, they will have less money available to create new loans and to pay operating costs. The regulator has set a threshold of 5%, particularly for Significant Institutions. Institutions with an NPL ratio greater than 5% will need to change this by either managing the NPL stock or reducing the NPL stock.
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