By Paula Lichtensztein, Leonardo Scavo, Structured Finance

Recoveries on unsecured NPLs have outperformed recoveries on secured loans relative to our expectations. Unsecured collection rates are broadly in line with historical data provided by servicers for the initial rating analysis. We expect this to continue, although as transactions approach the tail of the underlying portfolios, collections will level off.

The pace of unsecured collections has been sustained by resilient economies and improved labour market conditions despite the multiple challenges of recent years. In particular, government support to households and corporates during the Covid-19 pandemic and amid the energy crisis have helped avoid a shortfall in recoveries.

By contrast, the performance of the secured NPL segment, particularly in Italy, has been impaired by the liquidation of collateral at significantly bigger discounts than initially expected. Amid tight financial conditions, the value of loan collateral has depreciated quickly because of long legal proceedings, poor property maintenance, and low liquidity at property auctions.

Jurisdictions like Spain and Portugal have proven much more resilient to rising interest rates, partly because unlike Italy, they allow for repossession of assets. This fosters market liquidity and encourages servicers to maintain or improve the quality of assets, which slows depreciation. Spanish NPL collateral has been liquidated at small discounts, although secured NPL securitisation performance has suffered from higher-than-expected transaction costs. Portuguese transactions have outperformed our expectations because of the booming local real estate market.

In strong contrast to the struggles in the secured segment, some purely unsecured NPL transactions have fully repaid more quickly than expected, although the unsecured segment is generally of minor importance to the performance of mixed NPL securitisations as secured loans typically account for 70% to 80% of total collections.

On a broad sample of Italian, Spanish and Portuguese NPL securitisations rated by Scope backed by mixed NPL portfolios, the average realised unsecured recovery rate was 9.4% as of June 2024, exceeding our expectation of 7.9% (Figure 1). Approximately 90% of the transactions we analysed exceeded our unsecured recovery expectations up to June 2024, while one-third of the transactions have already surpassed our lifetime recovery expectations.

Of note, portfolios of highly seasoned unsecured NPLs (more than 7 years) have most strongly exceeded our initial expectations (Figure 2). The upside has mainly been driven by recoveries from private individuals as opposed to corporate NPLs, as the ability of servicers to initiate workout activities around individuals does not significantly decay over time.

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