Heterogeneity matters: the benefits of loan-level investor reports for NPL transactions



Larger NPL portfolios, whether sold outright or securitised, are typically heterogeneous in terms of default vintage, borrower type, collateral type and legal processes. Investors monitoring the performance of these NPL portfolios can benefit from granular performance reports which fully reflect the heterogeneity of the pool. Standardized reports at loan level are expected to become more readily available during the course of this year, benefitting from the ESMA disclosure regime for European securitisation transactions and the data template for NPL transactions published by the EBA.

In this article, we demonstrate that for large heterogenous NPL portfolios, the monitoring of the pool’s performance on a total aggregated basis may not be adequate. Investors need to drill into the individual exposures and portfolio segments for a more accurate picture of performance, comparing actual collections versus their original and updated projections on a segment by segment basis. We highlight two performance pitfalls. First, the masking of actual underperformance overall due to the early outperformance by one segment. Second, we highlight the upwards bias in the profitability of loans that are resolved within one or two years after default.

The ESMA disclosures of underlying exposures will provide investors with standardized granular information on NPL securitisation transaction. However, we expect data providers to make widespread use of the The No Data Option in Securitization Disclosures as many data fields will not be readily available in the short term. The reporting of updated projections of recovery cash flows is not part of the ESMA disclosure template, but is expected to continue in non-standard form and at different levels of granularity. Overall we expect investor reports to change and improve as the new disclosure templates are phased in. Investors should check the scope and granularity of the information available regarding historical and projected collection cash flows to ensure the monitoring of each heterogeneous portfolio segment.

You can access the full technical paper by clicking here: Heterogeneity matters: the benefits of loan-level investor reports for non-performing loans