June 18, 2018 / 3:18 PM / 10 months ago

CORRECTED-Banco BPM's bad loan sale drawing strong interest -sources

(Corrects soured loan figure in penultimate paragraph to 19.5 billion euros instead of 10.4 billion)

By Valentina Za and Massimo Gaia

MILAN, June 18 (Reuters) - A bad loan sale by Italy’s third-largest bank Banco BPM is attracting strong interest from investors who are also keen to buy its debt collection business, two sources familiar with the matter said.

Resilient demand from investors in distressed debt is an encouraging sign for Italian lenders, whose share prices came under pressure on concerns that political turmoil could slow down bad loans sales demanded by regulators.

Banco BPM, born last year from the merger of Banco Popolare and Banca Popolare di Milano, has lagged larger rivals UniCredit and Intesa Sanpaolo in reducing bad debts.

It has recently put on the block a last batch of 3.5 billion euros ($4.1 billion) in bad debts it had earmarked for sale, to reach a 13 billion euro disposal target two years ahead of schedule.

Investors can offer to buy more, as Banco currently holds 15.5 billion euros in bad loans, and take on the collection unit as well, which is also expected to be sold, the sources said.

Bids for the defaulted loan portfolio and debt recovery business are expected from Italy’s top debt servicing firm doBank as well as rivals Credito Fondiario, Prelios, owned by U.S. fund Davidson Kempner Capital Management, and Guber, one-third owned by Minnesota-based Varde Partners, the sources said.

Also in the running is a consortium comprising U.S. fund Christofferson Robb & Co. next to SPAXS, a vehicle used by former Industry Minister Corrado Passera to set up a new bank, and debt collector Fire.

One source familiar with the matter said the process was expected to be “very competitive.”

All interested parties declined to comment.

Following a deep recession that ended in 2014, Italy has become Europe’s biggest market for soured bank loans. International investors hunting for double-digit returns have helped banks reduce their troubled debt pile to 285 billion euros from a peak of 360 billion.

Analysts have warned investor demand needs to remain resilient in the face of deeper political uncertainty under a new anti-establishment government for the clean-up to continue and pave the way for an expected round of consolidation.

Sources told Reuters last month that Banco BPM would follow rivals that have used the sale of coveted debt recovery units to cushion the loss from selling bad loans below their book value - shedding larger amounts than they would otherwise.

Intesa agreed in April to sell 51 percent of its bad loan unit to Sweden’s Intrum Justitia, in a landmark deal that reversed a strategy based on internal recoveries and allowed it to shed 11 billion euros in bad debts at book value while reaping a 400 million euro capital gain.

Two sources familiar with the matter said Intrum was also interested in Banco BPM’s unit, but the timing of the sale made it hard for Europe’s biggest debt collector to take part in the process while it was still working to close its previous deal.

Banco BPM’s CEO Giuseppe Castagna said this month the bank would decide by the summer whether to sell the debt collection unit and bump up its bad loan reduction targets.

A 5.1 billion euro securitisation sale the bank expects to close by June 30 is set to lower Banco BPM’s soured loans to 19.5 billion euros, or around 16 percent of its total lending. That compares with levels of 9.5 percent at UniCredit and Intesa after the Intrum deal.

Analysts at Equita and Deutsche Bank see Banco BPM’s soured loan ratio falling below 10 percent thanks to additional bad loan sales tied to the disposal of the debt collection business.

$1 = 0.8608 euros Editing by Susan Fenton/Adrian Croft

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