Distressed credit driving strong growth at illimity

December 9, 2020

Andrea Clamer's editorial

Head of Distressed Credit Investment and Servicing

Pioneering use of data is reshaping the industry and generating new opportunities in high-growth areas As the effects of the global pandemic continue to ripple through the business sector, Italy’s enterprises are battling tough conditions—just like their counterparts across Europe.

Banks reported a net tightening of credit standards for loans in the third quarter and for some companies, Covid-19 has tipped them over the edge into insolvency. The amount of “gross book value” of non-performing loans (NPLs) disposed of across Italy is expected to double in 2022 to between €40 billion and €45 billion, from the levels seen so far in 2020 and projected into 2021. The Financial Times also reported recently that analysts expect the level of NPLs in Italy will jump to 11 percent of total banking assets next year, from 6 percent in July.

This, of course, presents a challenging picture for many entrepreneurs—as I have seen first-hand. But such conditions also set the stage for significant and continued growth in illimity’s largest business segment, the Distressed Credit Investment and Servicing (DCIS) division.

This division purchases secured and unsecured corporate NPLs and UTPs in competitive processes or off-market purchases, on both primary and secondary markets. It also engages in financing services (mainly in the form of senior financing to investors in distressed loans), and management of corporate NPL portfolios and underlying assets through a specialized servicing platform called neprix, a company in which all the bank's distressed credit management activities are concentrated. This makes illimity the first and only end-to-end Italian player to provide purchasing, financing, servicing and re-selling in the sector.

Consolidating a strong position

We recently participated in one of the largest such disposals, by UniCredit, involving a portfolio with a gross book value of €692 million, and consisting of loans from corporate borrowers that were guaranteed by real estate assets. The move, which followed a larger purchase of NPLs from Banca Monte dei Paschi di Siena in December 2019, and several other investments, allowed us to consolidate a significant position in the distressed portfolio market with leading players in the Italian credit market.

These deals, and others concluded since, signal how illimity is making significant inroads into the distressed credit sector.

In May, the bank set up a joint venture with VEI Green II, a renewable-energy investment firm, to help “green” businesses restructure their debts. The venture created a securitization vehicle for distressed loans with underlying assets that produce electricity from renewable sources—the first structure of its kind in the Italian market, and one which underlines illimity’s innovative approach to growth. It has already completed a transaction on the domestic secondary energy market involving the purchase of a portfolio of loans with photovoltaic systems as their underlying assets. This initiative was in line with our strategy of diversification and specialization in corporate distressed loans.

As with illimity’s approach to its SME business, the key to success in projects like this is to apply specialist, technical knowledge to a complex situation, doing so flexibly and nimbly. The bank is better positioned than many ordinary buy-out funds because, being a deposit-taking institution, our cost of capital is comparatively lower.

Our DCIS unit is also leveraging data and digital technology in ways that are significantly more advanced than many larger banks. Having only launched in recent years, illimity has been able to build its digital infrastructure without legacy constraints—to leapfrog our competitors, in other words, in the digital stakes.

Machine-learning tools are used to obtain much more data about debtors and companies than is available in a portfolio that has just been purchased from a selling bank. You can have 10 times more data, which means you’re not just painting a picture “in the moment,” but are making a sort of movie of your debtor over its lifetime.

Two key capabilities have been acquired to help in this effort. First, illimity set up neprix. Then, in January 2020, we acquired—through neprix—IT Auction, a platform specializing in managing and selling property and capital goods originating from insolvency proceedings and foreclosures through its network of platforms, online auctions and professionals operating across Italy.

IT Auction is on the front line when it comes knowing what distressed assets are up for auction. This is because it obtains mandates from tribunals and courts for the sale of assets as part of disposals—a sort of eBay of real-estate assets. IT Auction then follows the entire process through to disposal, gathering information digitally. This allows illimity to track and record buyers of certain assets in a particular geographic location—and advertise similar assets for sale to them later.

These advantages—both in approach and infrastructure—are providing the DCIS division with the solid foundations needed to offer distinctive, highly profitable distressed credit operations in the challenging years ahead. Since the summer, illimity has generated €250 million in new investments in this segment, taking total business generated so far to over €1.1 billion.

We continue to position ourselves as a dynamic player, focused on establishing strategic and long-term relationships right along the credit value chain, from purchase to management and re-selling.