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They were the bank assets nobody would touch during Europe's financial crisis. Late payments on credit cards, underwater mortgages and failed loans to small businesses. Now everybody wants them.
The number of funds in the region's distressed debt market doubled to 200 in the past two years as money managers seek to boost returns in a world of record-low interest rates, according to KPMG. Amid the increasingly crowded playing field, prices have jumped more than 10 per cent since January, HSBC data shows.
"Investors are flocking to Europe because they see it as the best place for buying distressed portfolios," said Vishal Soni, who bought real estate loans at Deutsche Bank in London before helping start consulting firm Oxane Partners. "The new players have yet to test the market, while those who have been around longer realise there's less chance of winning a bid now."
Lenders are relinquishing a record €100 billion (HK$971 billion) of loans this year to meet tougher rules requiring them to increase the capital they hold to absorb losses. They are also being scrutinised by the European Central Bank, which will announce the results of stress tests and an asset quality review this month.
Banks were getting from 5 cents to 40 cents on the euro for their bad loans at the beginning of the year, now the top of the range is an average of 50 cents, according to PwC. As prices increased, so has banks' willingness to offload them, said Dermot Murphy, who trades distressed debt as co-head of HSBC's credit situations group in London.
"The market for non-core and distressed assets has become more competitive," Murphy said. "The trend towards selling non-performing loans has been gathering momentum."
