The Capital Markets Recovery Package of 15 February 2021 introduced a dedicated framework for securitising non-performing exposures ("NPE securitisations"), designed to help banks deleverage distressed portfolios through the capital markets.
Key points
- An NPE securitisation is a securitisation backed by a pool of non-performing exposures.
- An NPE securitisation is a sub-type of traditional securitisation.
- The 5% risk retention threshold is measured against the net value of the non-performing exposures, not the nominal.
- The special servicer can act as risk-retention holder — reflecting the economic importance of servicing for NPE transactions.
What counts as a non-performing exposure
The Regulation defines a non-performing exposure by reference to four alternative indicators. A risk position is "non-performing" if:
- the obligor is considered to be in default under Article 178 CRR;
- the exposure is considered to be impaired under the applicable accounting framework;
- additional forbearance measures are being granted; or
- the exposure is more than 30 days past due.
Undrawn commitments are also treated as non-performing if the resulting receivable is unlikely to be repaid in full without the realisation of collateral. Recourse claims under guarantees and sureties equally qualify as non-performing if the criteria for non-performing receivables are met at the guarantee level.
Why a dedicated framework?
Before 2021, securitising NPEs under the general framework was difficult in several respects — in particular because the calibration of risk retention and due diligence assumed performing portfolios. The 2021 amendment:
- confirmed that an NPE securitisation takes the form of a traditional securitisation;
- adjusted the risk retention rules to reference net values rather than nominal values;
- opened the risk-retention role to the special servicer, recognising that servicing intensity is the main driver of recoveries on distressed books;
- adapted the credit-granting criteria — the relevant benchmark for NPE transactions is that the same standards apply to selection and pricing, not necessarily the same underwriting standards that applied when the original loan was made.
Practical considerations
Because the underlying receivables are non-performing, a number of peculiarities have to be taken into account in structuring an NPE securitisation: recovery cash-flow modelling is central, collateral enforcement strategies drive the economics, servicing intensity is a value driver rather than a cost line, and the cash-flow waterfall has to absorb materially higher volatility than a performing portfolio would exhibit.