October 21, 2022 10:39 am

European Commission publishes “best execution sales” guidelines for secondary NPL transactions

  • detailed process descriptions are defined
  • overview of external advisors and intermediaries
  • the benefits of Transaction Platforms are highlighted

The European Commission (EC) has published voluntary guidelines on the best execution process regarding sales in the context of non-performing loan (NPL) transactions on the secondary markets. The guidelines define best sell-side practices across the seven-stage sequence of an NPL transaction – from portfolio selection through to post-closing obligations. They cover unsecured and secured portfolio and single-borrower NPL transactions – including residential, commercial, SME, unsecured consumer, and corporate as well as leasing. The objective is to accelerate the development and standardization of processes to the extent possible in the NPL secondary market, a cornerstone part of the European Banking Authority’s (EBA) strategy to reduce NPLs in the euro area.

Guidelines include specific recommendations on the scope of disclosure across the seven phases which aim to help secure successful outcomes and improve efficiency and transparency. Market participants are not obliged, but recommended, to follow the guidelines, which encompass the following seven stages:

  1. Transaction structuring: Portfolio selection
  2. Preparation phase
  3. Pre-marketing phase
  4. Non-binding phase (Phase 1)
  5. Binding phase (phase 2)
  6. Signing of the transaction and closing
  7. Post-closing

Accompanying the guidelines, in Annex 3, is a market overview of external advisors and intermediaries. A summary of competence is shown for financial, legal, and tax advisors, as well as technical advisors, VDR providers, transaction platforms, and auction platforms. Transaction platforms are shown with the widest spectrum of support in executing an NPL transaction.

Macro context

The guidelines are published in a complex macro context which increases their relevance and timeliness. First, markets are functioning in the long shadow of the COVID-19 pandemic and Russia’s invasion of Ukraine, two severe external shocks which have led to a sharp economic downturn in the eurozone and worldwide. This has created a difficult balancing act for the European Central Bank (ECB) in the years ahead: raise short-term interest rates and tighten financial conditions to reduce inflation, which has surged to 8.1% on an annual basis to May, up from 7.4% in April, according to Eurostat, driven by high energy prices, food, industrial goods and services.

On the one hand, the ECB needs to contain adverse consequences (e.g., soaring sovereign bond yields) of tightened financial conditions on weaker EU member states with already very high debt-to-GDP ratios. Failure to protect weaker economies increases recession risk and stagflation.  The current risks are exacerbated by the unwinding of far-reaching government and EU-level Covid-era support schemes, including a moratorium on creditor rights to apply for bankruptcy filings for over-indebted firms, postponements to tax filing deadlines and payments, and temporary suspension of director liabilities. The aftermath of this period left many corporate balance sheets burdened by high leverage which exposed weaker companies to insolvency risk. On the other hand, if the ECB had allowed financial conditions to remain loose, it would have prevented the self-cleaning traditions of the economy from removing persistently unprofitable “zombie” companies.  The process of removing unproductive, over-indebted firms is of course unpleasant for connected stakeholders, but it is necessary to reduce bottlenecks to dynamism in the economy and to create space for a new generation of productive, vibrant market participants.

Thus, banks need a mature secondary NPL market as a mechanism to reduce exposure to financially vulnerable companies, particularly small and medium-sized enterprises (SMEs), to free up lending capacity to support the sustainable majority of the economy. In the near term, an increase in NPLs and unlikely-to-pay (UtP) volumes are expected, as corporate earnings and debt serviceability both deteriorate.

The prospect of rising NPLs in the months and years ahead reinforces the timeliness and necessity for the EC’s push to institutionalise the secondary NPL market. “A deep and liquid secondary market for distressed assets across the EU would better allow banks to reduce their NPLs by selling them to third-party investors,” wrote the EC in its guidelines. “If banks are better able to off-load non-performing assets from their balance sheet via secondary markets, this would help banks focus on their lending activities, free up space in their balance sheets for new lending, and hence enable them to fund the economic recovery.”

The role of transaction platforms

The EC’s guidelines note the utility of NPL transaction platforms, such as Debitos’ own, for vendors targeting a broad audience and which operate across multiple jurisdictions. Transaction platforms are online marketplaces that connect buyers and sellers of NPLs and digitalise the sales process. The EC describes transaction platforms as offering “an efficient manner to minimise the disadvantage of dealing with a large number of investors,” and “are designed to shift the complexity of interacting with multiple possible investors from the seller to a purpose-built platform.” In particular, the guidelines recommend transaction platforms to centralise the on-boarding of interested investors.

The secondary NPL market within the EU market is still broadly unregulated which makes guidelines so valuable as they help to structure the market.  At Debitos, we are highly supportive of these guidelines. In fact, our platform already meets all guidelines in full, serving to underscore the deep consensus across the NPL community for objective and strategy to unwind euro area NPLs in the secondary market. The economy is in the midst of a shift in monetary tightening which will lead to a necessary cleaning up of the market. We expect the EC’s guidelines to standardise this process and transaction platforms have a role to play in that process; they have already proven to be an effective tool to achieve NPL deleveraging and we fully the benefits to become more evident over time – from deepened transparency, process predictability, standardised data structure, to drawing in a broader pool of investors and capital and reducing the bid-ask-spread in transactions.

As the EC’s guidelines, state, transaction platforms help with:

  • Deal structuring, portfolio selection, and indicative pricing;
  • Loan data tape preparation, standardisation, and validation;
  • Preparation of marketing materials;
  • Management of the marketing process (including advertising and purchaser vetting);
  • Vendor due diligence (VDR) and Q&A management;
  • Online management of transaction process and document management; and
  • Online management of bids and due diligence process.

At Debitos, we fully comply with the EC’s guidelines as part of our standard terms of service. Additionally, to this, we support functionalities listed on Auction platforms, in particular, facilitating NPL auction processes, offering different Auction Types, and conducting the NPL auction based on the instructions of the seller.

Debitos welcomes that the European Commission has introduced a ‘Best Execution Sales Process’. We have seen a similar development in the markets for financial instruments (MiFID) that has given automated platforms a strong push in the market. In combination with the EBA templates that will get mandatory in 2023, it is a big step forward for the European banking union.

This post was written by Timur Peters

Timur Peters is the founder of Debitos GmbH. He holds a diploma in finance and law. He has more than 10 years’ experience in the range of finance.
Before Founding Debitos Timur Peters was responsible in the distribution of Software for Banks and Financial Institutions for Comarch for the D/A/CH Region. Next to this he has worked for several years as a self employed Project Consultant in the area of Financing of Litigation cases, Peer2-Peer Credit Marketplaces and other online projects for financial institutions.


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(Image rights: https://www.istockphoto.com/de/portfolio/35007)

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