NPL Forward Flow Deals
Forward Flow Agreements offer workout departments a new option for a seamless disposal of assets with an exceptional level of customizability. The fixed pricing conditions over the period of the agreement provide predictability to sellers and investors entering into this mutually beneficial relationship.
The decrease in non-performing loans (NPL) stock in Europe is an overall positive development and is changing the nature of NPL deals. Investors seek significant investment tickets that are sometimes not available anymore in many jurisdictions. This situation challenges the economics of one-off (small) portfolio disposals that incur then disproportionate financial costs and staff time consumption.
In addition, changes in regulatory framework (IFRS 9, new EBA guidelines on NPL…) call for a more dynamic optimization of banks non-performing exposures.
A Forward Flow Agreement (FFA) establishes an asset disposal channel between a bank and an investor, where eligible loans are transferred as per agreed-upon conditions (eligibility, price, timing, documentation, data, etc.). In practice, the seller periodically selects assets to transfer, shares relevant data and settles the transaction based on an agreed-price. In order to avoid adverse selection, i.e. that the seller includes only the worst claims in the pool, most FFAs include either exclusivity clauses or at least a right of first refusal.
The highly customizable nature of FFAs can be adapted to a wide range of specifics matching banks’ business and investors’ appetite. Among the key negotiable features of FFAs, we would list, most notably: asset categories, eligibility criteria, pricing matrix, committed amount, buy-back obligations and documentation requirements.
Compared to one-off deals, the on-going nature of FFAs, i.e. that one agreement defines a framework for current and future assets, minimizes the costs of sale execution and operational expenses.
In the context of non-performing loans, FFAs are particularly well suited for consumer loans where they often lead to superior overall value recovery. Indeed, core value drivers are the so-called “days-past-due” (DPDs) along with the number and nature of attempted collection actions.
FFAs enable banks to avoid that NPLs pile up and “get old” while their value is negatively correlated with time. The integration of the FFA within the workout collection process allows banks to undertake a more active steering, or control, of their level of non-performing exposure and supports their decision making as regards whether to pursue further (internal) recovery actions or external disposal.
For all its benefits, the path to reaching a successful FFA deal is paved with challenges. First and foremost, as for all long-term relationships, the agreed-upon terms are of paramount importance. The pricing variables (e.g. DPD, type and number of collection actions, nominal value, counterparty information, geography…) are typically summarized in a multi-dimensional pricing matrix that drives the FFA economics. Furthermore, possible contingent pricing features along with eligibility criteria must be thoroughly analyzed in order to fully forecast the economic benefits of the agreement.
Operationally, the periodic asset feeding process, i.e. the selection of assets to be sold via the FFA, is key in order for the arrangement to achieve to its full potential.
Forward Flow Agreements can provide long-term benefits via an increased selling price, disposal predictability and cost efficiency for sellers, while serving as an attractive asset-sourcing solution for investors. In order to maximize the payoffs, banks need to find the best investors, optimally tailor the multi-dimensional pricing structure and efficiently integrate the agreement into the workout process.
How we can help
PwC can assist you throughout the deal process, from feasibility study and benefits assessment, asset selection, market sounding, investors selection to signing and beyond via benchmarking or active pool feeding optimization. PwC´s far-reaching professional network across countries and expertise fields enables seamless transaction services.
For more information please contact:
Senior Consultant, PwC Austria, FS Deals