NPL, what is it?

Explanation of what NPL means

 

Recently you may have heard of NPL, related to financial operations or other bank topics but what are NPLs and why is it so up to date this word?

NPL stands for Non-Performing Loan, and it refers to a loan in which the borrower has failed to make payments for a significant period. When a loan becomes non-performing, it means that the borrower has stopped paying either the principal or interest, so banks consider these loans risky as they reduce their ability to generate revenue and can cause financial losses.

There are two main types of NPLs:

  • Secured NPLs: Backed by collateral, such as real estate or other assets.
  • Unsecured NPLs: Not backed by any collateral (e.g., personal loans or credit cards).

Some exaples can help to understand and make the matter easier.

1. Example of a Non-Performing Loan

Imagine that Antonio takes out a €150,000 mortgage to buy a house. He makes regular payments for a few years, but then loses his job and is no longer able to pay the mortgage. After 120 days of missed payments, the bank classifies Luca’s mortgage as an NPL (Non-Performing Loan).

At this point, the bank can:

  1. Try to renegotiate the debt with Antonio to help him resume payments.
  2. Sell the NPL to a specialized investor at a discounted price.
  3. Proceed with foreclosure to recover the money by selling the property.

If the house is sold for €120,000, but Antonio’s mortgage was €150,000, the bank suffers a loss of €30,000.

2. Example of an NPL in the Real Estate Sector

Imagine a real estate company borrows €5 million from a bank to build a residential complex. However, the real estate market declines, and the company is unable to sell enough apartments to repay the loan.

After 120 days of missed payments, the bank classifies the loan as an NPL. At this point, the bank can:

  1. Try to renegotiate the debt with the company.
  2. Sell the NPL to an investor at a reduced price (e.g., €2 million instead of €5 million).
  3. Seize the properties and sell them to recover part of the capital.

An investor might buy the loan for €2 million, negotiate with the company, and resell the apartments for €3.5 million, making a €1.5 million profit.

3. Example of the subprime mortgages Crisis on the Italian Real Estate Market

The 2008 financial crisis and the subsequent sovereign debt crisis had a significant impact on the Italian real estate market.

·         Increase in NPLs: Many families and businesses failed to repay mortgages, leading to a sharp rise in bank NPLs.

·         Drop in property prices: Demand for real estate decreased, causing home prices to plummet in many Italian cities.

·         Problems for banks: Italian banks’ balance sheets became filled with bad loans, putting pressure on the financial system.

·         Sale of NPLs to foreign investors: Many Italian banks, such as Monte dei Paschi di Siena, sold large NPL portfolios to international investment funds to improve financial stability.

Today, the NPL market in Italy is more regulated, but it remains an investment opportunity for those who know how to manage these loans.

 

How to Profit from Buying NPLs

Like most of critical situations in the economic world there are also several opportunities that investors can benefit from buying NPLs. Actually buying NPLs can be highly profitable, but it requires a well-defined strategy. Here are the main methods:

1. Buying at a Discount and Renegotiating the Debt

✔ Strategy: Buy the NPL at a reduced price and negotiate a partial payment with the borrower.
✔ Example:

  • You buy an NPL worth €100,000 for €30,000.
  • You offer the borrower the option to settle the debt for €50,000.
  • The borrower agrees, and you make a €20,000 profit.

2. Recovering and Selling Real Estate (For Secured NPLs)

✔ Strategy: If the borrower doesn’t pay, foreclose and sell the collateral.
✔ Example:

  • You buy a €500,000 real estate NPL for €150,000.
  • After foreclosure, you sell the property for €300,000.
  • After expenses, your profit is around €120,000.

3. Reselling the NPL (Credit Flipping)

✔ Strategy: Buy NPLs in bulk and resell them to one or more investors at a higher price.
✔ Example:

  • You buy an NPL portfolio for €5 million.
  • After a few months, you resell it for €7 million.
  • Profit: €2 million without recovering a single debt.

4. Legal Actions and Debt Recovery

✔ Strategy: If the borrower refuses to pay, take legal action to enforce debt recovery.
✔ Example:

  • You buy a €50,000 corporate NPL.
  • Through legal action, you recover €150,000 from the debtor’s assets.
  • After legal costs, your profit is €100,000.

 

Conclusion: Opportunities in the Italian NPL Market.

What is needed to succeed in NPL investments in Italy?

Ø  Choose NPLs backed by real estate assets.

Ø  Buy at highly discounted prices (30%-40% of the original value).

Ø  Make use of professional’s expertise and skills to close deals with financial institutions or debtors .

Ø  Know the debt recovery laws in the country.

NPLs in Italy still represent a huge investment opportunity, especially for those who know how to manage debt recovery and debt restructuring, but to get the most of it it’s very important to rely on professionals who know the Real Estate, the Legal and Financial sectors.