GLOBAL – More than 30% of distressed debt investors are looking to tap the European market after the US market failed to live up to their expectations, according to a survey published this week by Ernst & Young.
Most of the investors polled (65.6%) continued to see opportunities in the $164bn (€125.6bn) US distressed debt market, notably in the commercial real estate assets that make up, on average, 26% of assets held by banks with less than $10bn.
But a faster-than-expected decline in banks' non-performing loan (NPL) portfolios, the decision of some banks to stay out of the market and, in some cases, the inability to agree on price have depleted potential opportunities, the report said.
In contrast, 31% of the investors polled will target European banks with NPLs in total worth €1tn, especially those collateralised by commercial assets in Germany (46%), the UK (39%), Spain (33%) and Ireland (30%).
More than half of the investors surveyed believed the European debt market would be active for the next 36-48 months, compared with a 12-month forecast for the US.
Although US private equity firms have been the primary acquirers of European NPLs to date, the report points to new entrants, including sovereign wealth funds, willing to pay higher prices for individual assets and small portfolios.
Despite its forecast for an increase in offloaded loans in 2013, the report pointed to weak activity in the €183bn German NPL market as a result of bank reluctance to offload debt until investors' pricing expectations more closely corresponds to that of banks.
Meanwhile, the report predicted the €190bn Spanish NPL market could become one of Europe's most active, despite limited transactions to date, as regulatory reforms remove minimum pricing, and bid/ask spreads narrow.
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