* CEE countries turn up pressure on banks to tackle bad
* Debt investors attracted as returns fall in euro zone
* Buyers face legal challenges in fledgling markets for
By Marcin Goclowski and Gergely Szakacs
WARSAW/BUDAPEST March 23 Central and eastern
European countries are turning up the pressure on banks to clean
up their balance sheets, creating new opportunities for bad loan
investors that are seeing returns dwindle in recovering euro
Keen to bolster fragile economic growth, countries such as
Hungary, Poland and Romania are following the lead of their
western neighbours and urging banks to sell off bad debts so
they can lend more to businesses.
In some cases, it's the first time big portfolios of loans
have been put up for sale, raising a host of legal challenges
for would-be buyers, such as local banking secrecy rules,
consumer protection laws, and other regulatory hurdles.
But with one-time high-yielding favourites such as Ireland
and Portugal offering lower investment returns as they emerge
from sovereign bailouts, and interest rates remaining low across
the European Union, buyers are willing to put in the extra
leg-work for deals that can yield 25 percent per annum.
"It is not just American distressed funds, but quite a
number of potential buyers," said one mergers and acquisitions
(M&A) adviser in Hungary, who asked not to be named.
Many EU banks are deep into a drive to clean up their
balance sheets ahead of an assessment of their financial health
by the European Central Bank, which wants to rebuild confidence
in the industry and promote lending to support economic growth.
Data from research firm PwC shows that loan portfolio sales
from Ireland, Spain and the UK alone totalled 23 billion euros
($32 billion) in the first eight months of 2013, based on the
original value of the loans.
By comparison, an "other" group of countries that included
those from central and eastern Europe accounted for just 2
billion euros of loan sales.
However, that is starting to change, with Mayank Gupta, a
London-based partner at legal firm Mayer Brown who has worked on
some of the transactions, saying sales in the region increased
in 2013 and were set to rise further this year.
Last week, Volksbank Romania told Reuters it would sell 490
million euros of bad loans, while Robert Hejja, a Hungary-based
private equity adviser, told Reuters an unidentified U.S. hedge
fund was looking at a $100 million deal there.
Central and eastern European economies mostly saw a pick up
in growth towards the end of 2013. But a recovery from the
financial crisis is far from established and authorities see the
high level of non-performing loans on banks' balance sheets as a
particular brake on private sector expansion.
Non-performing loans (NPL) in Romania officially make up
about 22 percent of total loans, a percentage not too far away
from the 30 percent once seen in Greece. Mayer Brown's Gupta
said the actual figure could be as high as 40 percent.
In Hungary, bad loans are running at 18 percent of all
household debt, while in Latvia they are at almost 10 percent.
"The high NPL ratio continues to pose a risk, and therefore
we consider it extremely important that cleaning activity in the
banking sector be strengthened," the Hungarian central bank said
in its latest financial stability report, in language typical of
that being used by authorities across the region.
In Latvia, sales have already begun in earnest, though
largely because of the exit of foreign banks such as UniCredit
and GE Money and the bankruptcy of Lastvijas Krajbanka. Buyers
have included Swedbank, Latvia's Rietumu bank, Norwegian-owned
B2Kapital and Dutch-owned Stichting Galaxy Finance.
"We did not wait for five years as some others did, hoping
that the situation was not that bad and everything would recover
fast enough," Kristaps Zakulis, chairman of the Latvian
financial and capital markets commission, told Reuters.
The process can be painful. "The forced situation of the
sellers was more dominating in the price," he said. "Some
decided to keep (the bad loan portfolios) when they saw that the
discount rate was disadvantageous."
Mayer Brown's Gupta said buyers were typically hedge funds
or private equity firms seeking an annual rate of return of 15
to 25 percent. That implies getting the loans at a substantial
discount, since loans normally return less than 10 percent.
"The perennial problem is that views of the buyer and the
seller about the price are always very different," said the
Hungarian M&A adviser, pointing to the lack of activity so far.
The rates of return buyers are seeking may sound high, but
these deals are not for the faint hearted.
Market sources say would-be buyers are largely funds that
have snapped up loans in Spain and other euro zone countries hit
hard by the financial crisis. U.S. fund Apollo was mentioned by
several, though its New York-based spokesman said it had not
done any deals in the region and declined to comment further.
Loans are also being bought by locally-owned debt collecting
firms, such as Poland's Best.
"Over the last 3-4 years we were buying loan portfolios from
banks worth 1.1-1.2 billion zlotys ($361-$394 million) nominally
a year," Best CEO Krzysztof Borusowski said. "But this will
change, we've submitted an issue prospectus to the KNF (Polish
regulator) to be able to sell bonds on the public market."
With the proceeds of the bond issue, and cash it already
has, Best wants to buy 20-25 percent of the loan portfolios that
Polish banks sell each year. In 2013, portfolios with a nominal
value of 9.0-9.5 billion zlotys changed hands.
As well as the usual risks of bad loans never being repaid,
would-be buyers must contend with a whole raft of challenges.
"The possibility to vet these portfolios is rather limited
due to banking secrecy," said Hungarian private equity adviser
Hejja. "Banks would like to sell some of these portfolios but
they cannot divulge the data of their clients."
Regulations are sometimes being written almost as the deals
are being done, such as consumer protection rules for deals
involving portfolios of mortgages. Sometimes, the vehicle set up
to buy the loans has to get a banking licence.
Miklos Fekete, a Budapest-based PwC partner, said that while
the sale of small packages of mortgages and consumer loans was
common in Hungary, several larger deals had fallen though.
"Even a foreign fund needs someone to handle these assets in
Hungary and there are relatively few companies who can manage
this on such magnitude," he said, adding that regulatory
uncertainty was also hampering deals.
Similar challenges exist in some western European markets,
but the path has been so well beaten that buyers can have much
greater certainty about the outcome.
"It's never going to be as transparent as western Europe,"
said Mayer Brown's Gupta of central and eastern Europe. But
"there's a fair amount of upside if you get it right," he added.
($1 = 0.7255 Euros)
($1 = 3.0482 Polish Zlotys)
(Additional reporting Aija Krutaine in Riga, by Radu Marina in
Bucharest, and Claire Ruckin and Laura Noonan in London; Editing
by Mark Potter)