Italy's Intesa clinches 10 billion euro soured loan deal with U.S. hedge fund

MILAN (Reuters) - Italy's biggest retail bank Intesa Sanpaolo ISP.MI has clinched a deal with U.S. hedge fund Davidson Kempner over 10 billion euros ($11 billion) in problem loans, moving closer to a 2021 target of cutting soured debts to 6% of total lending.

FILE PHOTO: Intesa Sanpaolo bank logo is seen at the headquarters during shareholders meeting in Turin, Italy, April 27, 2017. REUTERS/Giorgio Perottino

In reporting a higher-than-expected net profit for the second quarter, Intesa on Wednesday said it would sell 3 billion euros in so-called ‘unlikely-to-pay’ (UTP) loans to Prelios, a loan recovery specialist owned by the New York-based fund.

The loans will be sold at book value, or two-thirds of their face value. Under the deal, Prelios will also take under 10-year management a further 6.7 billion euros in corporate UTP loans.

Intesa did not disclose the management fees, saying only they were in line with market terms and included a large variable component.

Recovering UTPs can be more complex and costly than liquidating defaulted loans, often entailing debt restructuring, turnaround plans and new investment to return businesses to health.

UTP borrowers are not yet in default though they are deemed unlikely to repay their debt in full. Recovery strategies have economic implications and UTP disposals are under the radar of Italian authorities.

Intesa’s deal with Prelios is the largest UTP sale in Italy so far. The bank said the variable fee component provided an incentive to recover the loans by returning borrowers to health.

Italian banks’ efforts to tackle the legacy of a deep recession have so far focused on the worst-performing loans, which had been more heavily written down so as to minimise losses in the event of a sale.

A high book value has held back sales of UTPs which are seen as the next frontier if lenders are to comply with regulatory demands to cut their soured loan burden.

The Prelios deal will reduce Intesa’s gross impaired loans to 7.7% of total lending, from 8.4% at the end of June. The transaction is expected to close in November.

The accord follows Intesa's landmark sale of a majority stake in its bad-loan unit to Swedish debt collector Intrum INTRUM.ST last year, which allowed it to shed 10.8 billion euros in defaulted loans.

Sources have said the accord is likely to prompt other banks to follow suit, in the same way that the partnership with Intrum was followed by a similar deal struck by Banco BPM BAMI.MI with Elliott-owned Credito Fondiario.

Mediobanca, Rothschild, Intesa’s Banca IMI, Bain and JPMorgan acted as financial advisers on the deal. EY, KPMG, PwC, Deloitte and McKinsey as industrial advisers. Orrick, RCCD and Chiomenti as legal advisers.

Reporting by Valentina Za; Editing by Silvia Aloisi/Keith Weir