Italian bad loans draw hedge fund interest

Algebris Investments, a London-based asset manager, is seeking to raise €1bn for a second fund aimed at Italy’s non-performing loans as investors’ interest in what’s been the Achilles heel of the country’s banking sector intensifies.

The launch by Algebris, which has $6bn in assets under management, comes amid increased focus by foreign investors on the potential of Italy’s pile of €360bn of problem loans, of which €200bn are classed as gross NPLs.

UniCredit, Italy’s largest bank by assets and only globally significant bank, will on Tuesday announce the securitisation of its portfolio of €50bn of gross NPLs as part of a capital-boosting plan, say people informed of the plan.

Monte dei Paschi di Siena, Italy’s troubled third-largest lender, which is seeking to raise €5bn in the next week or face a taxpayer funded bailout, is also on track to hive off €28bn of gross NPLs as part of its restructuring.

In a statement, Algebris said its NPL Fund II will invest mainly in NPLs of Italian banks with a focus on loans secured by real estate located in northern and central Italy, a tranche of the market considered to have the most value.

It follows the first Algebris NPL fund which was launched in October 2014 and has so far invested €400m in 36 deals closed with 24 banks.

Chief executive Davide Serra said Algebris, which has its own team of servicers in Milan, said he was launching the new fund with an eye to “the acceleration” of a clean-up in Italian bank balance sheets in the light of demands by the ECB bank supervisor.

“If we assume a return to pre-crisis levels, the amount of NPLs that may be sold by Italian banks in the next three to five years is about €140bn, of which €65bn are secured,” Mr Serra said.

The second fund, which aims to meet its €1bn goal by the end of 2017, has signed commitments for a total amount of €210m and has visibility on further commitments for €500m from major global institutional investors, Mr Serra said. It has a term of six years, including a required three-year investment period.

Italian banks’ NPLs have worried investors in the past year, leading to a precipitous fall in Italian bank stocks. The lenders have held the loans on their books at around 35 cents to 40 cents compared with a market value of around 20 cents, according to Italian bankers, stymying disposals and weighing on balance sheets.

“To unblock the situation, Italian banks need to mark down the value of the loans as well as raise equity to shore up their balance sheet,” Philippe Bodereau, global head of financial research at Pimco, wrote in a report on Monday.

Mr Bodereau estimates a “manageable” amount of €30bn-€40bn of new equity is needed to bolster Italian bank balance sheets, funds that could be raised from existing or new investors as in the case of UniCredit or via taxpayer funded bailouts for weaker lenders such as Monte Paschi.