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European Commission Communication on the best-execution process for sales of non-performing loans on secondary markets



With the aim to support and facilitate the sales of non-performing exposures (NPLs) on the secondary markets through the development of a more standardized and efficient sales process, on 21 October 2022 the European Commission has published voluntary guidelines for a best-execution process for sales of non-performing loans on secondary markets (2022/C 405/01) (the “Guidelines”).
The notion of NPLs includes also so called unlikely to pay exposures (UTPs), which are exposures where the level of default and the overall conditions of the debtors are less severe than in a fully defaulted loan, and, therefore, the underlying agreement has not been terminated or accelerated. Accordingly, the sale of UTPs would require an additional level of attention, since the sale would regard the disposal of exposures originating by agreements which are still in place with the relevant debtors.

The Guidelines have been prepared with the input of market participants and are particularly useful as they are published in the current marco-economic scenario, in which an increase of NPLs is expected, and that particularly requires banks to reduce exposures to vulnerable companies by selling them to third party investors, so to allow them to divert resources for lending activities and support the economy recovery.

The Guidelines are not mandatory. Rather, they are designed to offer assistance to sellers and buyers with limited experience in transactions on the NPLs secondary markets, by providing certain practices and conditions which are deemed necessary for a positive outcome of the transaction.

The Guidelines define the best sale practices describing the sequence of main activities to be performed within the preparation of a competitive sale process from the portfolio selection to post closing activities.

As indicated in its introduction “This document summarises the best practices following the sequence of main activities to be performed within the preparation of the competitive transaction process. Throughout all the different phases, the Guidelines provide clear suggestions on what would constitute an efficient and effective approach. The document illustrates in detail the main process and materials that are provided to external investors in standard market transactions. […]”. 

In particular, the Guidelines provide for the sales process to be composed of the following 7 stages as described on a chronological basis, describing, for each stage, the key activities to be performed and consequential key deliverables, as well as other relevant information or advice on a given phase:
  1. Transaction structuring: portfolio selection1
The Guidelines stresses that the “Portfolio selection plays an important role in any transaction as the right choice of a portfolio is key to a successful execution. The portfolio selection process needs to reflect the requirements and strategic targets of the Seller and simultaneously to attract investor demands, which might not necessarily be aligned to the Seller. […]”
  1. Preparation phase2
  1. Pre-marketing phase
This phase provides for the assessment of the market appetite with regard to the transaction and the execution of various preparatory activities for the sale process3.
  1. Non-binding phase (Phase 1)
This phase provides for a series of activities for the purpose of the sellers to receive, within the given term, NBOs from all eligible investors4.
  1. Binding phase (Phase 2)
This phase provides for a series of activities for the purpose of the sellers to receive, within the given term, BOs from all eligible investors5.
  1. Signing of the transaction and closing6, and
  1. Post-closing.
This phase includes a series of activities that require the cooperation of and coordination between seller and purchaser which would allow to strengthen the seller’s reputation in the market, avoid conflicts and attract further investors resulting in an efficient relation with investors and better conditions in potential future deals7.

The Guidelines also focus on certain steps that are more important for a specific type (and in certain cases a specific size) of transaction and/or asset class (i.e. whether the portfolio is secured or unsecured, vis-à-vis SMEs or consumers, etc.). 

Finally, it is worth mentioning that the Guidelines stress the utility of NPL transaction platforms (i.e. online marketplaces that connect buyers and sellers of NPLs and help organise the sales process). They facilitate NPL transactions, since they enable the sellers to reach a broader base of investors and provides technological support (including a virtual data room services or VDR) in the sale process, facilitating the interaction with multiple potential bidders.   

A cura di:
Avv. Carmelo Raimondo
Avv. Lorenzo Musso
1The key activities in this first phase include, inter alia:
- the assessment of legal/tax/consumer protection restrictions;
- the review existing IT system to enable optimising the selection process, and
- the definition of the transaction perimeter / selection of the portfolio to sell.

2The key activities in this first phase include, inter alia:
- the definition by the seller of the number of phases of the process (2-Phase-Process with NBOs and BOs, or 1-Phase-Process, directly with BOs);
- the setting of the timeline of sale process;
- the preparation of the main marketing documents (mainly Teaser and Information Memorandum) and other documents throughout the process (Management Presentation, NDA, Process Letter, etc.);
- the preparation of a Loan Data Tape and retrieve documentation;
- the setting up of a VDR;
- the preparation of a LSPA (Loan Sale and Purchase Agreement).

3The key activities in this phase include, inter alia:
- a market sounding (usually providing a teaser of the transaction);
- the definition of the best marketing strategy (providing either a 2-Phases-Process or a 1-Phase-Process, and defining the modalities of the sale process, and, in particular, provide either for a Broad Auction (whereby a large list of investors is invited to submit an indicative NBO. Following this first auction stage, a due diligence process is run with a restricted short list of investors which is invited to submit a final BO. Following this second auction stage, a single preferred bidder is selected, with whom the seller enters into the negotiation of the LSPA and potentially additional transaction agreements), a Target Auction (similar to the Broad Auction, but involves a shorter list of potential investors), a Negotiated Sale (a bilateral process involving a single potential investor);
- the negotiation of NDAs;
- the preparation of LSPA Term Sheet, and
- continuing the preparation of the process and marketing materials (e.g. investor presentation) for the Phase 1 and Phase 2.

4The key activities in this first phase include, inter alia:
- the management of the investor VDR (incl. opening, user and access management, VDR reporting, etc.);
- the disclosure of the process and marketing materials;
- the management of a (limited) Q&A process;
- the analysis of NBOs that have been submitted and comments on LSPA /Term Sheet, and
- the selection of a short list of bidders to admit to the Binding Offer Phase.

5The key activities in this phase include, inter alia:
- the provision of Phase 2 Data and Documents to eligible investors;
- the management of Q&A Process;
- the organisation of the auction (if applicable);
- the analysis of submitted BO Letters and Investor LSPA Mark-Ups;
- the selection of Preferred Bidder, and
- the finalisation of the NPL portfolio, potentially excluding certain ineligible NPLs from the portfolio (i) if they do not match the original selection criteria (anymore) or (ii) based on the reasonable request of investors.
6The key activities in this phase include, inter alia:
- the execution of the LSPA and, if applicable, further transaction documentation;  
- the financial closing;
- the finalisation of the transfer of data and documents;
- the negotiation on the transition of the NPL servicing, and
- the migration process: transfer of NPLs and relevant information and documentation to the purchaser to ensure a smooth on-boarding.

7The key activities in this phase include, inter alia:
- the implementation of the post-closing obligations according to the LSPA;
- the cooperation between seller and purchaser pursuant to the LSPA, and
- the completion of migration of information and the delivery of the relevant portfolio documentation.


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