EUROPE - Asset managers could earn significant fees managing loan portfolios being sold by European banks - as the institutions look to de-leverage - on behalf of institutional clients, a report by Moody’s has said.
In a report on European bank portfolio asset sales, Moody’s Investors Service noted that, to comply with proposed capital regulations, banks were deleveraging their balance sheet by either raising equity or selling non-core assets.
Given their sensitivity to diluting existing shareholders by issuing further stock, many banks were likely to sell non-core assets, especially corporate credit, commercial real estate, aviation finance loans, student loans and structured products, according to Moody’s.
The agency nonetheless stressed that only asset managers with the right credit skill, investment infrastructure and longer-term committed capital would be able to take advantage of these sales.
Michael Eberhardt, senior analyst at Moody’s and author of the report, said: “Some asset managers are already investing in real estate, project finance and the other asset classes involved. This is a narrow expertise that is not easily acquired.
“However, some pension funds and sovereign wealth funds with large pools of assets may be making these kind of investments directly.”
In addition, Eberhardt stressed in his report that scale is an important differentiator for investment managers as many of the portfolios that banks are selling require significant amounts of committed capital, in many cases billions.
“While some deals will benefit from vendor financing, portfolio disposals will more likely be facilitated by managers that are capable of tapping investors with deep pockets and able to commit capital on a longer-term basis,” he said.
According to Eberhardt, such financing may therefore be supported by partnering with pension and sovereign wealth funds that have the requisite size and investment horizon to participate.
“When an asset manager acquires these bank loan portfolios, many of them contain illiquid positions that cannot be easily exited, which means that the acquiring manager may need to expect a long holding period,” the senior analyst said. “As a result, such manager needs sizeable capital that can be committed over the long-term.”
Eberhardt finally stressed that managers successfully executing these transactions are likely to generate further deal flow along with building assets under management, which offer a more stable, longer-term source of investment management revenue.
Extensive loan portfolios are not uncommon for pension funds, with Swiss schemes often holding mortgage books as part of their investment, while a number of German pension funds gain returns through exposure to student loans.
However, asset managers on the ground question whether there is a real incentive for banks to dispose of these loans, and observe that there is considerable political pressure to remain engaged with domestic SME debt markets.
“Bank de-leveraging in our view is much more a matter of reduced participation in new deals than a matter of selling of existing assets,” said Matthew Craston, head of alternative investments, European Credit Management (ECM), which has been managing open-ended loan funds since 2004.
“The argument that everyone would be forced to sell assets at large discounts to comply with Basel III was always flawed - if you sell at a discount and they are held on your balance sheet at par that’s just making your capital position worse. A reasonable amount was sold at prices close to par, and a few are now selling at distressed levels - there’s a Lloyds portfolio out in the UK now, for example - but the market got a little bit ahead of itself on fire sale expectations.”