Cash flow models for non-performing loan securitisations



Asset-backed securities (ABS) of non-performing loans (NPL) in Europe have been issued mostly in Italy thus far with a few deals in Portugal, Spain, Ireland and Greece. The current downturn caused by Covid-19 is expected to increase the volumes of NPL securitisation as an important tool for banks to transfer larger portfolios to investors to reduce NPL from their balance sheets.


We explain the relevant aspects of the European securitisation regulation for NPL ABS and the prevalence and use of different structural details highlighting some of the differences to performing loan ABS. We explain the regulatory requirements for due diligence and disclosure including the provision for cash flow models. Cash flow models are a necessary component of analysing and valuing structured transactions and securitisations. Certain aspects of cash flow models are unique to the NPL asset class such as collection and profitability based performance triggers, the availability of senior tranche government guarantee schemes in some countries and the importance of special servicing fees across different positions of the liability cash flow.

Liability cash flow waterfall models are currently not part of the disclosure requirements for NPL securitisations in the EU and the US and thus investors will either develop these models themselves or rely on commercial vendors. The new ESMA securitisation disclosures that will enter into force on September 23, 2020 will provide additional exposure-level disclosures for NPL in Annex 10 and report details of the cash flow waterfalls in Annex 12. However, as long as there is no smart contract with a precise coding of the cash flow allocation it is possible that arrangers, agents, or investors will encounter hard to reconcile differences in their models. We propose technical solutions that ensure that the next generation of cash flow models can ensure consistency, immutability and acceptance by IT departments while ensuring user-friendliness with a particular focus on modelling the asset characteristics specific to NPL.

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