December 6, 2022 5:13 pm

News, Press releases

Implementing best execution sales guidelines for NPL transactions with Debitos

The European Commission (EC) published important guidelines for market participants on the best execution process for conducting non-performing loan (NPL) transactions in secondary markets. The objective is to encourage good sell- and buy-side processes for NPL transactions in EU secondary markets and support participants with less experience.

The role of transaction platforms, such as Debitos, is central in implementing the EC’s recommended seven-stage sequence. Transaction platforms are online marketplaces connecting buyers and sellers and organising sales processes. In the EC’s own words, “transaction platforms are designed to shift the complexity of interacting with multiple possible investors from the seller to a purpose-built platform”.

The guidelines are comprehensive. In this article, we aim to summarise the practical implementation of the seven-stage guidelines and alignment with the Debitos platform. Market participants are not obliged, but recommended, to adopt these guidelines, to ensure successful outcomes and improve efficiency and transparency.

 

1. Transaction structuring: Portfolio selection

 

The first stage focuses on assembling a marketable portfolio to attract buyers, with success correlated to execution certainty. The guidelines notes vendors must reflect upon available internal resources and the potential need for external service providers, specifically transaction platforms. Several questions are posed to help vendors decide on the need for an external service provider. These include assessing whether vendors have sufficient internal expertise to manage a sales process, including assembling a data room, managing a due diligence process and curating an investor database.

For most NPL vendors, the answer will be no, as this expertise falls beyond the boundaries of commercial activities. The Debitos platform covers all these requirements and more.

The guidelines recommend establishing an independent specialised transaction team to run effective NPL sales transactions, with knowledge “about NPL markets and experience with market dynamics in different countries/jurisdictions”. Such a team, the guidelines continue, could advise on NPL portfolio selection. Debitos comprehensively offers this expertise and fulfils a broader range of requirements than other cited external service providers (e.g., financial, legal, tax and technical advisors).

The Debitos platform digitalises the entire NPL sale process from stage 1 to 7, reducing disposal time and providing access to more than 1,700 specialized registered investors across Europe. To support portfolio selection, Debitos provides analytics related to specific liquidity competition and reference prices across different jurisdictions, asset classes and ticket sizes to advise the seller in how to select a proper portfolio for the expected outcome.

 

2. Preparation phase

 

This stage refers to defining sale process steps (including whether the process is a targeted auction or a negotiated sale), timeline and assembling of documents, Loan Data Tape, virtual data room (VDR) set up and preparation of a Non-Disclosure Agreement (NDA) and a Loan Sale and Purchase Agreement (LSPA).

Debitos can manage this stage for NPL sellers. In particular, Debitos can support with preparing asset specific Loan Data Tapes according to vendors’ bespoke standards or aligned to EBA NPL templates, as well as collecting, structuring and presenting all documents in a fully integrated, secure VDR within our platform. Debitos’ experience managing NPL transactions reinforces the ability to identify and deliver the required information in different jurisdications and asset classes and provides ready to use data room structures. Debitos can anticipate prospective buyer questions with specific information/data requirements. The more accurate and relevant information is translated into a lower bid-ask spread on NPL transactions and increased execution probability. Alongside this, best practice templates for SPAs and NDAs are available to draw upon within the Debitos platform.

The guidelines advise adopting the European Banking Authority’s (EBA) NPL data templates, which will become mandatory in 2023. Debitos is already fully compliant with EBA templates.

 

3. Pre-marketing phase

 

This stage focuses on the portfolio’s market appetite assessment alongside various preparatory sale activities (e.g., an initial investor survey to identify prospective buyers, portfolio teaser, information memorandum, process letter, and draft LSPA term sheet).

Starting from the data structure of the Preparation Phase, Debitos can generate graphical visualisations of the portfolio, teaser, information memorandum and process letter. After selecting the short list of investors for the Non-binding phase (Phase 1), Debitos automatically kicks-off the distribution of investor invitations with secure links to the transaction page, NDA and additional documents.

Debitos provides a centralised onboarding process to manage the non-disclosure agreements (NDAs) collection and ongoing management of all interested investor onboarding.

 

4. Non-binding phase (Phase 1)

 

In the non-binding offer phase, the guidelines outline the process to ensure an equitable, transparent sales process without favour to any party. During this stage, the guidelines recommend external service providers, such as transaction platforms, that could help manage investors’ questions in a centralised manner, making all information available to the invited investors on a centralised transaction page. Debitos executes this process with smart management of all Broad Auction participants in a centralised platform with individual access right management. Sellers and Buyers are automatically informed about new questions/answers and other changes in the data room via email.

The indicative bid form is made available on the deal transaction page within the Debitos platform.  At the end of the Phase 1, all indicative bid ranges are summarised with specific investor information provided in a secure and convenient way for vendor review, to support the Binding phase (Phase 2) process.

 

5. Binding phase (Phase 2)

 

The phase includes the final steps required to move towards receiving binding offers from eligible investors. After reviewing the Indicative Bids from Phase 1, Debitos advises the vendor on the Phase 2 investor short list. Debitos can represent the vendor to support Phase 1 investor feedback and support upscaling data/document information for the final due diligence.

Additionally, in this stage, portfolio construction, data and information requests, including potential sub-portfolios, are all finalised. For the final bids, Debitos supports two primary bidding processes – a British Auction and a Sealed Bid Auction to maximise price for the vendor. These two bidding processes are aligned to regulatory best practices, which improves transaction certainty. In Phase 2, certain bid conditions (e.g., price mark-ups on the SPA) can be exchanged via the Debitos platform.

After reviewing all Binding Bids and identifying a preferred investor, or the highest bidder in a British Auction, the vendor will enter the Signing & Closing phase.

 

6. & 7. Signing of the transaction and closing & post-closing

 

These final two phases are a collaborative effort between vendor and buyer, supported by external service providers, to mitigate late conflicts, price and portfolio re-negotiations. The guidelines emphasise the benefits of NPL transaction platforms, as helping to reach a broader universe of investors across multiple jurisdictions and to log-in a final bid with specific bid conditions. The general Terms & Conditions of the Debitos platform does not leave much room for conflicts after a final bid is accepted. Debitos’ team helps in the final steps of Signing & Settlement and moderates the process until completion.

Together with a selected specialised mix of market participants, the Debitos’ team has advised the European Commission in the creation of these guidelines as a market standard to help institutionalise the NPL secondary market. Debitos highly supports these guidelines, and the platform is already fully compliant as we aim to reinforce the consensus across the NPL secondary market industry. The secondary NPL market within the EU market is still broadly unregulated, which makes the EC’s guidelines so valuable as they help to structure the market. These guidelines standardise NPL sales best practices, and transaction platforms have a role to play in that process. They have already proven to be an effective tool for achieving NPL deleveraging. We expect the benefits to be more evident over time – from deepened transparency, process predictability, and standardised data structure to drawing in a broader pool of investors and capital and reducing the bid-ask spread in transactions.

If you would like to learn more about the Debitos platform, and how we can manage your NPL secondary sale process, do not hesitate to get in touch with us today. We would be delighted to support your transaction and help your institution achieve the best recovery and deliver an efficient sales process.

 

(Image rights: https://www.istockphoto.com/de/portfolio/amtitus)

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