– Thoughts on Strategy and Management

Good times for restructuring experts

We all come across various pieces of news and information every day. Most of them don’t get our attention, taken on their own. However, sometimes two seemingly unrelated pieces of information team up in our minds and suddenly become more interesting.

This just happened to me. Last weekend, during my course of Real Estate Investment Banking, we discussed the potential future development of Non Performing Loans (NPL) transactions activity in Germany. There is no doubt that NPL transactions had an unprecedented peak in Germany over the last two years. Everybody expects transaction levels to go down again. Especially, the era of mega deals with billion Euro volumes is over. The question is, however, what will happen in the medium-term.

One group in our class argued that there won’t be many more NPL transactions at all. Banks have made their homework. Forced by their own painful experience and by the regulations of Basle II they will not again accumulate significant amounts of NPLs. An other group argued that banks are already issuing tomorrows NPLs today. They referred to facts like the peak in transactions of German real estate which are most often highly leveraged. With increasing prices (also for problem properties with high vacancies) and potentially rising interest rates German real estate sees a yield compression that could drive many investors into trouble.

That was the first bit of information – interesting but nothing to think about longer. The second one came to my attention during my daily FT reading: German bank “Sal Oppenheim to acquire 10% stake in US investment bank” – not overly interesting either. Globalisation and foreign investment is so much part of every day news that I don’t try to keep track of everything. However, the combination of these two issues actually is interesting:
Investment bank Miller Buckfire is the former restructuring unit of Dredner Kleinwort. FT writes “The move indicates how both groups believe the rapid growth in capital markets financing and private equity deals in Germany and other European countries may lead to significant defaults and corporate restructuring opportunities.” So they too believe in tomorrows Non Performing Loans.

What does that tell us:

  • First – my gut feeling is probably right again. If something booms that much that the media get exited about it, it is high time to become worried. In nearly all kinds of businesses there are followers. They lack the experience and know how of the early entrants and jump into a market only when they read about it in the newspapers. By that time, they are under high pressure to deliver results and they will enter almost every business opportunity no matter what risks are associated with the potential rewards. This is why industry leader Lone Stare already stopped buying NPLs in Germany and this also is why I am concerned about the future of our Digital Bohemians who are so present in the media these days.
  • Second – If you are a restructuring expert or if you have the chance to become one quickly – there are good times ahead for you.

One final remark on the German NPL transactions. I strongly believe that there will be new NPLs. But for several reasons I think that we will not soon see such high transaction volumes as in 2005 and 2006 again:

  • The volumes sold in these years were accumulated over long periods. Banks now know how to get rid of their bad loans and won’t wait until they have a billion for sale. So this will even out.
  • Banks actually have better risk management systems now. Due to the Basle II capital requirements banks will take higher risk premiums for higher risk businesses.
  • Unlike former years, banks will not longer keep the total loan volumes on their balance sheet (buy & hold approach). Today they forward significant parts of their loan business to the capital market via securisation, syndication and other instruments (buy & sell approach). Hence, defaults will not hit them as hard as before. The risks and potential losses are spread and virtually atomized among various investors.
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