Quaestio Capital Management SGR S.p.A.
Atlante Fund Presentation
29 April 2016
Quaestio Capital Management SGR S.p.a. is an Asset Management Company authorized to operate as such by the Bank of Italy.
Enrolled in the register of UCITS Operators under registration No. 43 Enrolled in the register of AIF Operators under registration No. 149.
Contents List
A. The Facts
B. Banking Sector Issues
C. Banks - How we intend to operate
D. NPLs - The Market in Italy
E. NPLs - How we intend to operate
F. Conclusions
Appendix – Quaestio
2
A. THE FACTS
3
Characteristics of the Fund
• A closed-end alternative investment fund regulated by Italian law, reserved for professional investors.
• Fund Size: € 4,249,000,000.
• Investors: 67 Italian and foreign institutions which include banks, insurance companies, banking
foundations and the Cassa Depositi e Prestiti.
• Individual investment stakes are never greater than 20% of the size of the Fund.
• Fund closing date: 29 April 2016
• Fund Term of five years, plus three years, renewable each year.
• Investment period of 18 months, that can be extended by another six months to finalize on-going
transactions.
• Fund maximum leverage of 110% (commitment method) to satisfy temporary liquidity requirements.
• NAV each 6 months.
• Fund Administrator: Quaestio Capital Management SGR S.p.A.: 0.07% commission per annum.
• Custodian Bank: RBC Investor Services Bank S.A. (Milan Branch): 0.0125% commission per annum.
• Auditors: PriceWaterhouseCoopers.
• Asset Evaluators: Deloitte & Touche.
4
Fund Scope and Investment Policy
A. Up to 70% of the Fund: can be invested in banks with a lower capital ratio than the minimum
established in the context of the SREP and that therefore, upon request by the Supervisory Authority,
implement initiatives to reinforce capital by means of a share capital increase:
• by underwriting shares on offer in the market, by means of agreements with one or more members
of the underwriting syndicate or by private placement dedicated to the Fund or by means of coinvestments;
• the Fund does not underwrite more than 75% of an individual issue, unless the underwriting of a
higher stake is necessary for the purpose of the successful completion of the operation;
• further investments are possible for the share capital increase of banks in the Fund portfolio - if
requested by the Supervisor Authority - until 30 June 2019 provided that such investments do not
exceed the maximum limit of 70% that can be invested in bank shares and provided that there are
subscription commitments that are still “callable”;
• investments that involve a Mandatory Tender Offer are excluded.
B. At least 30% of the Fund: will be invested in Non-Performing Loans (NPLs) from several Italian
banks, even guaranteed by assets through:
• junior tranche, occasionally mezzanine, in the securitisation of NPLs even as a form of coinvestment;
• ad hoc vehicles (SPV), including investment funds with underlying NPLs;
• tangible or intangible assets or other rights (even non-guaranteed) for NPLs transactions;
• after 30 June 2017, all the portion of the Fund that is not invested in banks can be invested in NPLs.
5
Fund Scope and Investment Policy
The Fund’s Financial Objective: a return of approximately 6% per annum.
Investment time-frame: medium to long term, in any case within the 5 year term of the Fund, which can
be extended by another three years each year.
Equity Investments:
-
the Fund does not carry out any direct management activity in relation to the banks in which it
invests;
there is the possibility to carry out partnerships or co-investment operations of any type with other
investors.
-
Non-Performing Loans:
- mainly junior tranches with a lower IRR than that traditionally requested by specialized investors
but in any case adequate, and coherent with a IRR of a bond with an average rating of
approximately single B.
• As an example, it should be noted moreover, that the net median IRR achieved by investors of about
14,000 funds that are specialized in distressed debt is 12.2%*, which is equivalent to approximately
16% - 18% gross-of-fees.
• As an example, consider the performance of the High Yield Corporate Bond indices** shown below:
-
BofA Merrill Lynch Euro High Yield Index BB (YTM): 3.15%
BofA Merrill Lynch Euro High Yield Index B (YTM): 6.23%
BofA Merrill Lynch Euro High Yield Index CCC (YTM): 18.98%
(*): source Preqin(2016).
(**): data as of 27 April 2016, source: Factset Research Systems.
6
Fund Governance
A fundamental principle of the Fund is the independence of the Asset Management Company
(the SGR) management from shareholders and investors.
• Investment decisions taken by the SGR for the Fund are subject to the prior non-binding opinion of the
Investors’ Committee (the “Committee”).
• The SGR has procedures in place aimed at preventing the insurgence of conflict of interest, managing
operations with related parties adequately and guaranteeing maximum transparency in the investment
process.
• The Committee is made up of nine members and it is elected by the Investors’ Meeting on the basis of
a list voting system.
• The independence of decisions made by the SGR is subject to continuous monitoring by the ECB.
Governance of the Fund’s significant investments:
•
the SGR votes for the appointment of directors during the shareholders’ meetings of the banks in
which the Fund holds an investment, adhering to strict requirements of independence;
•
the SGR does not exercise a management or co-ordination role with respect to the banks;
•
the SGR does not intervene in the ordinary management of the bank.
7
Chronology and Next Steps
11 April Presentation of the project to investors and announcement of the Fund launch.
12 April The SGR instituted the Fund and approved the Fund’s Prospectus.
18 April Sub-underwriting agreement signed with Unicredit for Banca Popolare di Vicenza (BPVi).
20 April Consob authorization for the marketing of the Fund .
21 April Announcement to the effect that the minimum threshold of € 4 billion has been reached and Fund is activated.
25 April
Sub-underwriting agreement with Unicredit is extended to apply in the case that Banca Popolare di Vicenza
(BPVi) does not achieve listing.
25 April ECB / Bank of Italy authorization to purchase a significant investment in BPVi.
29 April
Fund closing date: The Fund can be reopened at a later date following a change in the Prospectus that
requires the consent of 66.6% of the shares represented in the Shareholders’ Meeting.
16 May First Shareholders’ Meeting is convened and the Investors’ Committee is appointed.
17 May First Investors’ Committee Meeting is convened.
May 2016 - Maximum of 30% can be invested in NPLs.
June 2017 The rest is available for investment in equity in accordance with the requirements of the Fund Regulations.
June 2017 Remaining portion of the Investment Period when commitments can be freely undertaken in accordance with
Nov 2017 the Fund Regulations, and of which at least 30% to be invested in NPLs.
Nov 2017 - The Investment Period has ended, but it is possible to finalize operations that were started during the
May 2018 Investment Period.
Until The Fund can participate in share capital increases of banks that are already in the Fund’s portfolio that have
30 June 2019 been requested by the Supervisory Authorities, within the limit of 70% of the Fund’s total assets.
Until
The Fund can only disinvest.
29 Apr 2021
After The Fund term can be extended each year for three years with the consent of 66.6% of the shares represented
29 Apr 2021 in the Shareholders’ Meeting.
8
B. BANKING SECTOR ISSUES
9
Banking Sector Issues
Comparison between Italian and European Bank Multiples
Note: data as of 31 March 2016, source: Factset Research Systems.
10
Banking Sector Issues
Italian Bank Multiples and the BTP/Bund Spread
Note: data as of 31 March 2016, source: Factset Research Systems.
11
Banking Sector Issues
Comparison of the discount between Italian and European Banks
• Comparison between Italian and European discount rates with respect to their Tangible Book Value
PRICE/
RANKING
BANK
COUNTRY TANGIBLE
BOOK VALUE
1
CYBG
GB
1.91x
2
Ringkjoebing Landbobank
DK
1.91x
3
Banque Cantonale Vaudoise
CH
1.76x
4
Bankinter
ES
1.73x
5
Swedbank
SE
1.72x
6
Svenska Handelsbanken
SE
1.71x
7
Skandinaviska Enskilda
SE
1.41x
8
KBC Groupe
BE
1.40x
9
Nordea Bank
SE
1.27x
10
UBS
CH
1.25x
11
Danske Bank
DK
1.22x
12
Sydbank
DK
1.19x
13
Erste Group Bank
AT
1.17x
14
BBVA
ES
1.13x
15
ABN AMRO
NL
1.11x
16
St.Galler Kantonalbank
CH
1.10x
17
Banco Santander
ES
1.09x
18
Bank of Ireland
IE
1.07x
19
Credito Emiliano
IT
1.02x
20
Intesa Sanpaolo
IT
1.02x
21
HSBC Holdings
GB
0.92x
22
Banco de Sabadell
ES
0.90x
23
BNP Paribas
FR
0.87x
24
Bankia
ES
0.83x
25
Valiant Holding
CH
0.82x
RANKING
BANK
26
27
28
CaixaBank
Credit Agricole
Credit Suisse Group
29
Royal Bank of Scotland
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Standard Chartered
BPM
Société Générale
Banca Pop. di Sondrio
Barclays
Raiffeisen Bank
BPER
Banco Popular Espanol
Banco Comercial Portugues
UniCredit
Deutsche Bank
UBI Banca
Alpha Bank
Commerzbank
National Bank of Greece
Eurobank Ergasias
Credito Valtellinese
Banco Popolare SC
Piraeus Bank
Banca CARIGE
Banca MPS
PRICE/
COUNTRY
TANGIBLE
BOOK VALUE
ES
0.81x
FR
0.77x
CH
0.75x
GB
0.72x
GB
IT
FR
IT
GB
AT
IT
ES
PT
IT
RESID.
IT
GR
RESID.
GR
GR
IT
IT
GR
IT
IT
0.67x
0.65x
0.64x
0.63x
0.62x
0.56x
0.56x
0.55x
0.52x
0.51x
0.44x
0.42x
0.40x
0.40x
0.39x
0.36x
0.36x
0.35x
0.30x
0.26x
0.22x
Note: data as of 22 April 2016, source: Factset Research Systems. European Banks with a capitalization of at least € 800 million.
12
Banking Sector Issues
• The resolution of four Italian banks towards the end of 2015 was an unexpected event for the market
that introduced an additional risk premium for the whole banking system.
• A self-sustaining risk of: (1) low valuation multiples, (2) a need for share capital increases, (3) no
financing from the market, (4) bail-in fear (5) liquidity crisis, (6) solvency crisis.
• Behavioural Theory tells us that when totally unexpected events occur – an event with practically
zero probability of occurring – there is a sudden change in the general perception of risk (Herding
Behaviour).
UNEXPECTED
EVENT
13
Banking Sector Issues
Performance of Subordinated Bonds* of the Banca Popolare di
Vicenza and Veneto Bank
105
100
Announcement of the launch of the
Atlante Fund on 11 April 2016
95
90
Price on 27 April
2016
€ 92.09
€ 90.77
85
80
75
70
65
60
55
nov-15
dic-15
dec-15
gen-16
jan-16
Banca Popolare di Vicenza
feb-16
mar-16
apr-16
Veneto Banca
(*): data as of 27 April 2016, Subordinated Bonds Tier 2 same coupon 9.5%, Veneto Banca (ISIN XS1327514045); BPVi (ISIN XS1300456420).
Source: Bloomberg.
14
C. BANKS - HOW WE INTEND TO OPERATE
15
Banks - How we intend to operate (I)
• In the initial phase Atlante will act as a back-stop facility, by eliminating excessive
supply with respect to the demand for shares, only for share capital increases of
banks facing problems related to capital requirements.
• Not all share capital increases qualify for potential investment by the Fund, but only
those that the market by itself (with or without an underwriting syndicate) cannot
secure and that can potentially involve the risk of a bail-in and/or induce a systemic
risk.
• The Fund intends to decide and sustain the most effective restructuring and
relaunching of the banks in its role as an anchor investor which has the interest of
investors as its sole objective.
• For share capital increases (as for NPLs) the principle is not “first come first served”,
but valuations are carried out solely based on the merit of the transaction taking into
account the objective of the Fund as set forth in the Prospectus.
• For the purpose of creating value for an investment and accelerating its divestiture,
the Fund can establish partnerships and/or co-investments with other investors
and/or financial institutions, and promote M&A transactions.
16
Banks - How we intend to operate (II)
• The SGR must assess and make investment decisions purely on the basis of merit,
in the sole interest of all investors in accordance with the objectives of the Fund.
• Investment in the Fund does not give the right to preferential treatment in the
evaluation process of investments.
• For the purpose of valuating an investment, the Fund can invest in a bank’s equity as
well as in the restructuring of NPLs.
• In the case of partnerships or co-investments, there must be a commonality of
interests between the Fund and the other partners.
• The Fund aims to generate interesting returns for all the Institutional Investors in a
scenario such as the current one that is characterized by low interest rates.
• Moreover, the Fund has the objective of intervening in critical situations (share
capital increases, NPLs) that can favour a re-rating of the entire banking sector.
• Given the composition of the Fund’s investors, the ECB will conduct careful and
continuous monitoring of the SGR governance, as well as of the opinions expressed
by the Investors’ Committee.
17
Banks - How we intend to operate (III)
• The banks’ restructuring / relaunch in which the Fund invests and the speed with which recovery is
achieved are key to the Fund’s success.
• The immediate re-rating of banks’ shares value as a consequence of the announcement reduces
systemic risk.
• The long term impact on the banks’ assessments however, will depend on the success of the
investment policy.
Note: data as of 27 April 2016, source: Factset Research Systems.
18
Investment Value Proposition
The medium to long term value proposition of the investment in the target banks is based on the
following expected effects, as a result of capital reinforcement:
• investments of “Private Investment in Public Equity” type in Italian banks characterized by a valuation
with a strong discount on net capital with respect to a “normalized” scenario, with the opportunity to
benefit from a general re-rating after the share capital increase operation, that is guaranteed by the
intervention of the Fund, thus mitigating the risk profile of the target banks themselves;
• the opportunity of a business turnaround and above average organic growth of the target banks
following recapitalization and the resulting increase in stability of banks as a whole;
• an expected positive impact of the capital increase operations on customer and investor trust, which
could in turn produce an increase in the deposit base and in funding flows;
• an opportunity to reduce the cost of all sources of funding for the target banks with the relative
improvement of the interest margin;
• the possibility to regain access to the capital markets on the basis of a reinforced capital position and
an improved market perception in terms of risk profile;
• the possibility to reinforce the capital profile and improve the asset quality risk profile of the target
banks;
• significant potential for the creation of value through sales, or M&A transactions, with other Italian
banks.
19
D. THE NPLs MARKET IN ITALY
20
The NPLs Problem
Comparison between Italy and Europe
• Disposal of NPLs is too slow compared with the rest of Europe.
• The objective of the Fund is to shorten the time of disposal.
• It is more like a marathon than a 100 m sprint.
Ratio between total NPLs of Italian banks and those of other Eurozone Banks
From March 1992 to April 2016
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
Totali
Deteriorati
TotalCrediti
impaired
loans
Note: data as of 22 April 2016, source: Factset Research Systems.
21
NPLs – Market Conditions
Breakdown of Credit Categories
Impaired Loans – breakdown (Q4 - 2015)
Breakdown for Counterparties (Feb. 2015)
Source: Banca d’Italia, Statistical Bulletin, Q1 – 2016.
Source: Banca d’Italia, Statistical Bulletin, 11 April 2016 (Loans to public administrations and other residents are
excluded).
Evolution of Gross and Net Bad Loans
Evolution of the coverage ratio*
55,7%
52,9%
2010
In Eur Billion
Public
At 31 December 2015
Administrations
(a) Gross Bad Loans
0.22
(b) of w hich: backed by real guarantees
0.08
(b)/(a) Ratio
36.36%
54,0%
51,8%
2011
48,2%
48,7%
2012
2013
Financials
Companies
3.53
Non-Financials
Companies
157.60
Producing
Families
15.78
Consuming
Families
34.94
1.85
69.59
7.96
21.00
52.45%
44.15%
50.43%
60.10%
2014
2015
Source: Statistical Bulletin (B4.10) - Q1 2016.
Source: Bank of Italy Statistical Bulletin and ABI Monthly Outlook.
(*): the coverage ratio refers only to the bad loans.
22
NPLs – Market Conditions
Sale of NPLs in Italy
• The sale of NPLs in Italy is limited: approximately € 11 bn gross of NPLs sold in Italy between 2014
and 2016 YTD.
Italian Loan Sales
Italian Loan Sales by Type
2014–2016 YTD
€ MM
2014–2016 YTD
6.000
Others
5.048
Secured
1%
5.000
17%
Unsecured
4.000
REOs 6%
35%
2.859
3.000
2.314
CRE Loans
2.000
16%
1.000
Resi / CRE
76
80
205
21%
Resi Loans
4%
0
Source: C&W Loan Sales 2014–2016, Debtwire, CNBC, Apax, Deloitte NPL Outlook 2014–2015, Italy24, KPMG Loan Sales Feb 2016.
23
NPLs – Market Conditions
Example of an Inefficient Market
The problem of the “market price” being too low.
One afternoon of day X: 500 people in Italy go to the car dealer closest to their home to sell their
second hand car for cash by evening of that same day. Car dealers do not have the time to have each
car checked in the workshop before making an offer.
Car Dealer 1
Car Dealer 2
Car Dealer 5
Car Dealer 1
Car Dealer 3
MILAN
Car Dealer 5
PALERMO
Car Dealer 4
Car Dealer 4
Car Dealer 2
Car Dealer 3
Car Dealer 1
Car Dealer 6
KEY:
KEY:
Car Dealer 2
BUYS
ROME
SELLS
Car Dealer 5
Car Dealer 4
BUYS
SELLS
Car Dealer 3
The average price that the 500 people succeed in securing for their own car will be far less than the
average price at which the car dealer will sell their cars.
24
NPLs – Market Conditions
Example of the Creation of an Efficient Market
One afternoon of dayX: what would happen if an online website is created to act as a single market in
Italy?
Sales ensue at a much higher price:
• in an efficient market information is distributed;
• demand meets supply in different places;
• the cost of information search is greatly reduced.
25
NPLs – Market Conditions
Bid-ask spread
There is never a single market price for financial assets.
In every transaction there are always 2 different prices:
• the bid price,
• the ask price.
There is always a difference between these two prices (bid/ask spread) in any
negotiation and it varies according to the characteristics of the object under
negotiation. For example*:
- liquid share: 0% - 1%
- corporate bond up to € 200 mln: 2.5% - 5%
- corporate bond HY over € 200 mln: 5% - 10%
- non-liquid share: 10% - 20%
- NPLs: 30% - 50%
The problem with Non-Performing Loans lies in understanding why the bid-ask
spread is so wide.
(*): approximate ranges.
26
NPLs – Market Conditions
Bid-ask spread
The factors that determine the bid/ask spread of NPLs are:
• Data quality: the quality of the process of archiving and maintaining information in
databases.
• Servicing: the efficiency and the cost of the credit collection services.
• Time to recovery: the time it takes to recover the credit.
• State Guarantee on the Securitisation of Bad Loans (GACS - Garanzia
Cartolarizzazione Sofferenze): the possibility to create a multiplier by using the
warranty scheme.
• Market conditions: prospective trends of the Italian economy and real estate
premiums.
Contrary to all other financial assets, NPLs do not generate cash flows. The cash
flow associated with NPLs coincides with the recovered credit, whose value is
difficult to assess and has an uncertain schedule.
27
NPLs – Market Conditions
Data Quality
• Data quality: low visibility of individual NPLs, due to the lack of well organized,
homogeneous and complete data available in the banks’ databases.
• The main problem is that investors do not have clear data that is organized in digital
format in order to assess portfolios of NPLs in a short time-frame.
• In many cases the documentation related to NPLs is still:
-
on paper,
incomplete,
on platforms that are incompatible with those of the external servicer,
cannot be easily obtained.
• Lack of accurate historical data on recovery times associated with various
procedures, districts and courts.
• Lack of accurate historical data on servicing activities for the agency rating process.
• Rating agencies check for any discrepancies between credit recovery plans and
objective credit recovery times.
28
NPLs – Market Conditions
Servicing
• Servicing: market fragmentation, lack of competence, lack of critical mass, low efficiency in recovery
processes.
• Some banks have internal servicing teams with limited competence and a lack of technology and
critical mass, others avail themselves of independent servicers.
• Not all servicers provide all round services: independent servicers are focused on specific NPLs
segments and/or are more active in certain geographic areas.
• Servicing costs prove to be higher than they would have been in a market made up of efficient
operators with an adequate critical mass (in terms of staff, services and contract, legal and IT skills).
• Recovery times and recovery rate are strongly influenced by the quality of the servicer.
NPL Types Managed (% of the nominal value)
Managed NPLs by Geographic Exposure (% of the nominal
value)
Source: PWC - The Italian NPL market - June 2015.
BANKING
GROUP
SERVICING STRUCTURES
Group 1
Servicer 1 + Servicer 2
Group 2
In house
Group 3
In house
Group 4
In house
Group 5
Servicer 2
Group 6
Servicer 1 + Servicer 2
Group 7
Servicer 1 + Servicer 2
Group 8
In house + Servicer 1 + … + Servicer 6
29
NPLs – Market Conditions
Time to Recovery
• Time to Recovery: uncertainty in the time of recovery and a wide divergence among the various
procedures and courts.
• Investors must take into account various hypotheses as applicable to the various procedures to
estimate recovery times.
• Only a few operators have access to a sufficiently detailed database that enables an accurate forecast
of the potential cash flows that can be generated by each NPL.
Source: Ministry of Justice statistics (2013).
30
NPLs – Market Conditions
Securitisation of NPLs and GACS
Securitisation with GACS
Without a GACS Scheme, it would be complex to predict the
actual development of a market for the securitisation of NPL
receivables in Italy.
Sale of NPLs
Italian
Republic
Originator
The Fund may invest in securitisations of the equity tranches
in order to exploit the multiplier effect* of this type of vehicle.
Example of a generic securitisation with the GACS scheme:
Guarantee
Cost
Sale price
of NPLs to
the SPV
• an SPV created ad hoc for the transaction issues tranches
with different seniorities;
Guarantee
• the Italian Government will only guarantee the senior
tranches, which must have an Investment Grade rating;
• the cost of the guarantee is market-based and relates to
the basket of Credit Default Swaps (CDS) with the same
rating and increases based on the recovery time of the
underlying assets (increases in 3, 5 and 7 years);
TrancheSenior
(rating
Investment
Grade)
Issuer
(SPV)
Assets
Liabilities
Tranche
Mezzanine
(optional)
• the guarantee is subject to the use of an external and
independent servicer for the recovery of the transferred
assets;
• the purchase of the equity tranches by a third-party
investor allows the deconsolidation of the NPLs;
NPL
ABS
Investors
Tranche
Equity
• the State guarantee enables a reduction in the senior
tranche coupon and consequently its cost.
(*): ratio between gross (nominal) value of impaired loans and the amount invested in the equity tranche.
31
NPLs – Market Conditions
Securitisation of NPLs and GACS
Example of a generic securitisation*: let us assume an investment in an equity tranche of € 100.
•
•
•
•
Example 1: assuming an equity tranche equal to 35–40%* of the total securitised assets, the
vehicle may acquire between € 250 and € 280 of the net impaired loans from one or more originator
banks.
Based on the purchase price, one obtains a multiplier of between 7x and 10x * compared to the
gross value of the impaired loans sold.
Example 2: the use of any mezzanine tranches, dependent on the actual demand from investors
other than the Fund, would allow an increase in the multiplier to between 18x and 20x * compared
to the gross value of the impaired loans sold.
The multiplier associated only with the Fund increases if the equity tranche is the object of coinvestment with other investors.
Example 2*
Example 1*
Tranche Senior
(rating Investment
Grade)
Tranche Senior
(rating Investment
Grade)
Investors
Investors
Assets
Tranche Mezzanine
Tranche Equity
Tranche Equity
(*): the values and characteristics of the securitisation may vary considerably depending on the type and composition of the sold portfolio
and the market conditions.
32
NPLs – Market Conditions
Buyers and Vendors
• The market currently consists of a large number of forced sellers and a low number of specialist large
scale buyers.
• The investor cost structure: high structural costs and high management fees increase the minimum IRR
level acceptable to the investors.
• Excess IRR: Private Equity funds generally have higher yield expectations than an Institutional Investor.
Italian Loan Vendors
Italian Loan Buyers (3)
2014–2016 YTD
2014–2016 YTD
€ MM
€ MM
6.000
2.500
5.535
2.000
5.000
2.000
1.800
4.000
1.500
1.200
3.000
1.000
1.000
2.000
1.180
600
1.000
1.000
600
600
565
505
500
1.000
408
0
778
400
353
314
220
400
314
220
172
(1)
Source: C&W Loan Sales 2014–2016, Debtwire, CNBC, Apax, Deloitte NPL Outlook 2014–2015,
Italy24, KPMG Loan Sales Feb 2016.
0
(2)
Source: C&W Loan Sales 2014–2016, Debtwire, CNBC, Apax, Deloitte NPL Outlook 2014–2015,
Italy24, KPMG Loan Sales Feb 2016.
(1) Cassa di Risparmio di Cesena, Iccrea Bancalmpresa, Cassa di Risparmio di Ravenna, Creval, BTO Saraleasing, MS/Prelios.
(2) Algebris Investments, Morgan Stanley, Poste Vista, BAML, GS, Beni Stabili, Ares Management.
(3) For Consortium operations the notional amount of the transactions was assigned 50/50 for graphic requirements.
33
NPLs – Market Conditions
Hypothetical example of pricing construction
The graph takes as its starting point the direct sale of a portfolio of NPLs to a specialist operator and shows the development in prices obtainable
through the intervention of the Atlante Fund, to which various hypotheses are added, in order to arrive at a potentially obtainable final price.
The incremental path is divided as follows:
1. Straight sale: example of a sale to a hypothetical investor, who has an IRR target of 15%, of a portfolio with 65% secured and 35% unsecured.
2. Securitisation*: structuring of an un-guaranteed securitisation
- tranching: 65% senior, 35% junior
- yield of senior notes = 5%
- IRR required on the junior tranche equal to 15%
3. GACS Effect: structuring a securitisation including State guarantee on the senior tranche
- cost of senior notes = Italy risk + guarantee fee (CDS spread at 5/6/7 years on the BBB+ baskets identified under the regulations)
4. Atlante Effect:
- sale of a junior tranche of an ABS GACS to the Atlante Fund (IRR = 6%)
5. Analysis of incremental sensitivity:
a) reduction of the costs associated with servicing activities from 8% to 7%
b) reduction of the Time to Recovery from 7 to 5 years
c) increase in the Recovery Rate from 35% to 40%
(*): the values and characteristics of the securitisation may vary considerably depending on the type and composition of the sold portfolio
and the market conditions.
34
E. NPLs – HOW WE INTEND TO OPERATE
35
NPLs – How we intend to Operate (l)
• Purpose of the Fund is to promote the creation and development of an efficient market of distressed
assets in Italy.
• This does not mean “replacing” the market, but making it work better, so achieving lower costs,
bid/ask spreads and increased liquidity.
• The Fund aims to provide “seed money” with a modest capital cost for the best proposals for NPLs.
• Quaestio intends to make use of the best resources, professional skills and knowledge in the Italian
and international markets as regards management of NPLs, promoting cooperation with banks while
keeping the strategic direction and control over investments internally.
• The Fund does not aim to replace specialist funds, service providers or Investment Banks, but:
-
invests (or co-invests) in securitisation structures that are under construction that can meet its
performance requirements, in order to reduce the impact on banks’ balance sheets and accelerate
the disposal of NPLs;
- promotes the organisation of securitisation transactions by combining the best proposals from
banks, funds and service providers where it finances (co-finances) the equity tranche;
- if a bank independently finds a market solution, the Fund does not interfere but the presence of the
Fund nevertheless should reduce yields.
• The Fund optimises its own resources to solve the problems of banks by financing (or co-financing)
the equity tranche of the securitisations, promoting such transactions not on its own, but in
cooperation and in coordination with other parties.
• The SGR aims at co-investments and partnerships in order to prevent the risk of an NPL operation
staying solely with the Fund and/or to prevent the Fund not being able to benefit from the upside of
the equity following the transaction.
36
NPLs – How we intend to Operate (ll)
• The multiplier effect by investing primarily in the equity tranches, produces a much larger investment
potential, but in order for the leverage to exist, the GACS insurance is essential to allow the placement
of the senior tranches.
• The amount to be invested in NPLs may increase if:
a. the investments of the Fund in banks are quickly enhanced in value and disposed of;
b. the Fund can operate in partnership and/or by co-financing other funds and/or specialised
operators;
c. the Fund could be reopened to new subscribers in the event of success.
• It is in the interests of the Fund to promote and participate in the construction of an efficient
infrastructure for the servicing of NPLs.
• The objective is to facilitate the revival of the Italian market of NPLs, by accelerating the process of
their disposal, but without expecting to solve all the problems of the market immediately.
• The disposal of the NPLs also depends on the profitability of banks in the near future: the greater the
buffer compared to capital ratios, the easier it will be to absorb losses from the sale of the NPLs and
the faster will be the disposal, which will lead to lower required capital ratios (virtuous circle).
• The time for the creation of an efficient market of NPLs in Italy and the success of the Fund in
encouraging it, also depend on:
- the trends in the Italian economy over the coming years and the absence of deflation and
stagnation;
- the re-rating in the values of banks which facilitates the disposal of NPLs and vice versa;
- the ability of banks to return to high profitability levels;
- the real estate cycle in Italy.
37
NPLs – How we intend to Operate
Bad and Substandard Loans
Trend in Gross Bad Loans*
2013-2015
186,6
200
168,2
180
160
140
120
32,2
148,3
29,4
29,7
14,9
13,7
326,2
350
12,3
280,4
300
18,4
130,6
13,3
136,6
122,6
104,3
13,9
126,8
150
100
40
341,1
106,7
200
80
155,3
183,4
200,3
2014
2015
50
20
0
400
250
100
60
Trend in Impaired Loans*
2013-2015
3,0
2015
2,5
2014
1,1
2013
Financial Companies
Non-Financial Companies
Consumer Households
Total
Producer Households
0
2013
Bad Debts
Likely Defaults
Non-performing past due loans/exposures
Total
Aggregate Transition Matrices – 2014/2015 **
(*): re-processed by Quaestio SGR based on data in the Bank of Italy Statistical Report for the 1st quarter 2016, values in € billions.
(**): re-processed by SDA-Bocconi based on data from the Bank of Italy.
38
F. CONCLUSIONS
39
False Myths
• That Atlante holds up the world: perhaps it is a real overstatement in its choice of name.
• The idea is to win a marathon, not the 100-metres sprint.
• For the re-rating of Italian banks, there is no need to solve all the problems of profitability and the
NPLs: just a few success stories and the removal of tail risk is enough to change overall perception.
Markets function like this:
40
Conclusions (l)
• The Fund is a distressed securities fund (banks and NPLs), but its aim is not to
create ex novo a competitor with other well-established operators or a low cost
operator for internal use and consumption in Italy. It does not have the time nor the
large investments that would be required.
• The Fund’s intention is to create a large, efficient market, that is open to international
capital, and not to destroy what little there is.
• The SGR can leverage on its internal and external resources to:
1. leverage the abilities currently available in the world and in Italy to work on the
Italian financial institutions market;
2. promote the development of a non-banking credit market that does not exist in
Italy (in the US it took 80 years from the financing of the railways to the beginning
of the last century);
3. mobilise resources for the re-rating of the system, not only via the multiplier
effect in the NPLs, but also by drastically reducing the tail risks of the bail-ins and
promoting effective restructuring;
4. acts as a positive shock for reversing the market trend.
41
Conclusions (II)
Finally, the success of the Fund also depends on at least three crucial external factors:
1. the State must promptly change the procedures for the collection of credit and for bankruptcy
procedures because the legal system is one of the pillars of any financial system;
2. the ability of banks to quickly return to operating profitability, because the time for disposing of
NPLs depends on the ability to generate new profits that absorb the old losses, without
causing increases in capital and risks of bail-in. In addition, as profits gradually increase and
NPLs are reduced, the required regulatory capital is reduced, triggering a virtuous circle;
3. the absence of negative shocks over the next two years (geopolitical or Eurozone crisis,
stagnation and/or deflation), since the amount of bad loans is not just a question of the status
quo, but also depends on the rate at which other impaired loans become bad loans and those
performing loans become impaired. We must not, therefore, just look at stock of current bad
loans but also at the prospective ones. In the absence of a positive scenario in the economy
and taking into account that bad loans reach their maximum even three years after the
minimum in a recession: it is the future dynamic that must be monitored more closely than the
existing stock.
But, even the best ideas are worth nothing if they do not produce concrete results.
And a little luck helps, as with any investment.
42
APPENDIX – QUAESTIO
43
Quaestio
Key People
KEY PEOPLE
Alessandro Penati
years of experience: 39
Chairman
• He founded Quaestio SGR.
• He founded Epsilon Associati SGR.
• He has been a professor of Finance at the Catholic University of Milan, at the Wharton School, University of
Pennsylvania, Bocconi University, University of Padua and the FAME in Geneva.
• Economist at the Research Department of the International Monetary Fund.
• He has been a columnist for the Repubblica, for the Corriere della Sera and Il Sole-24 Ore.
• Ph.D in Economics from the University of Chicago.
Paolo Petrignani
years of experience: 29
Chief Executive Officer
• He has been Managing Director of UBS and JP Morgan.
• He worked with Salomon Brothers in New York and London.
• He holds an MBA from The Wharton School, University of Pennsylvania.
• Diploma of Certified European Financial Analyst (CEFA).
Christian Prinoth
years of experience: 17
Head of Equities, Senior Portfolio Manager
• He has been Stock Manager with Epsilon SGR and Duemme SGR, and has also served as Quantitative Research
manager at BPL Fondicri SGR.
• Graduated from Bocconi University in Milan.
Alessandro Potestà
years of experience: 23
Equities, Senior Portfolio Manager
• He has been CIO at Exor SpA.
• He previously worked as an analyst with Credit Suisse and as Chief Equity Analyst with Actinvest in London.
• Graduated in Economics (summa cum laude) from the University of Turin.
Giovanni Boscia
years of experience: 22
Head of Fixed Income and Credit, Senior Portfolio Manager
• He has worked in investment banking for Citigroup, Salomon Brothers and Lehman Brothers and in hedge funds such as
Endeavour Capital and Trafalgar Asset Managers.
• Graduated in Economics (summa cum laude) at the Bocconi University in Milan.
• MSc in Finance and an Executive MBA from the London School of Business.
Lorenzo Gallenga
years of experience: 20
Head of Global Macro, Senior Portfolio Manager
• He has been in charge of Fixed Income with Inter Fund Management (Family Office of Ikea).
• Previously, he was Bond Manager with Newton, Lombard Odier, Société Generale and Man-GLG.
• Degree from University College London.
44
Quaestio
Key People
Mario Baronci
years of experience: 26
Institutional Clients, Senior Portfolio Manager
• He has been Manager of Fixed Income and Multi-Manager Funds at Sella Gestioni.
• Previously he dealt with market making and proprietary trading of financial derivative portfolios with Manufacturers
Hanover Trust, Chemical Bank and Banca IMI.
• Degree in Economics from Bocconi University in Milan, MSc in Risk and Investment Management from Edhec Business
School (London - Nice).
Massimo Marzeglia
years of experience: 22
Institutional Clients, Senior Portfolio Manager
• He has been Lead Portfolio Manager in London dealing with Global MultiAsset Strategy and Managed Accounts.
• He previously held the position of Managing Director Fixed Income, Equity Currency & Commodities at Credit Suisse
and Executive Director with Goldman Sachs International.
• He graduated with honours from the Bocconi University in Milan.
Marco Filagrana
Head of Risk Management
•
From 1999 to 2015, he was with the Bank of Italy; he also gained extensive experience at international level in the field
of market, credit, interest rate and liquidity risk analyses, and the validation and monitoring of internal models.
•
He has written several papers specialising in the field of market risk.
•
Degree in Economics from the University of Trento, where he was also Professor of Financial Engineering.
years of experience: 20
Alberto Massa
years of experience: 15
Head of Sales
•
Previously he was Head of Relations with Institutional Clients for Lyxor in Paris and then in Milan.
•
He worked as Head of Fixed Income Sales in Banca IMI and Fortis Bank.
•
Graduated from Bocconi University in Milan.
45
Quaestio Group
FONDAZIONE
CARIPLO
CASSA
GEOMETRI
FONDAZIONE
FORLI’
6.75%
18%
37.65%
OPERA DON
BOSCO
LOCKE SRL
15.6%
22%
100%
QUAESTIO HOLDING SA
Investments holding Company, with
tax residency in Italy.
100%
100%
QUAESTIO CAPITAL
MANAGEMENT SGR
S.p.A.
QUAESTIO
INVESTMENTS S.A.
Investment Manager
Management Company
Authorised by the Bank of Italy and
Consob for:
•
Collective and individual
management;
•
Authorised UCITS and AIF.
 SGR founded in 2009
Authorised by the CSSF for:
• Management of UCITS
and AIF Funds.
 36 third-party delegated AM companies
 Assets under management: ~ € 14 billion  B2B Services for management companies
 More than 80 Institutional Customers
 Dynamic Pooling
 36 employees
 Look-through technology
46
Contacts
QUAESTIO CAPITAL MANAGEMENT SGR S.p.A.
Corso Como 15, 20154 Milan
Tel. +39 02 3676 5220
Fax +39 02 7201 6207
email [email protected]
www.quaestiocapital.com
47
Disclaimer
The information contained herein is provided by Quaestio Capital Management SGR S.p.A. and is intended only for
institutional investors.
The information contained herein does not constitute an offer to the public and is not intended for the public.
Although due diligence has been taken to ensure that the information contained herein is reliable, Quaestio Holding SA
and its subsidiaries cannot guarantee its absolute accuracy and completeness. Opinions and assessments contained
herein are subject to change without notice.
Quaestio Holding SA and its subsidiaries cannot be held liable for any damages, direct or indirect, that may arise from the
use of the information contained in this presentation. Consequently this same information should only be disseminated to
persons authorised to receive it or to persons subject to different legal forms but without this implying a violation of the
laws or regulations applicable thereto.
This presentation cannot be reproduced or distributed to third parties. Investment activities are subject to risk and any
subscription shall be subject to pre-contractual informative statements. Past performance is not indicative of
future results. Changes in exchange rates and other financial variables can increase or decrease the value of the
investment.
The Fund Regulations must be read in order to acquire all the detailed information. Additional risk factors are
described in the Regulations.
48