In the wave of the COVID-19 pandemic, there has been a significant increase in debt held by both consumers and companies. Over the coming years, we expect to see a large number of debt and distressed asset deals. In this viewpoint, Garrigues provides in this documentan analysis of the debt market situation and trends in Latin America, Spain and Portugal, where there is a clear move toward greater sophistication in these deals.
The COVID-19 health crisis has brought the debt and distressed asset market to a standstill, in particular for deals involving non-performing loans (NPLs) and real-estate owned (REO) portfolios.
Situation up to 1Q 2020
Up until the first quarter of 2020, portfolio deals were at center stage in the global financial and legal arena, with dozens of sellers (financial institutions) looking to shed these assets to clean up their balance sheets and bolster their capital ratios, and just as many buyers looking to invest their (sizable) cash while increasing their exposure to certain strategic assets (chiefly hotels, shopping centers, logistics centers and land) or to a specific type of consumer. In early 2020, new players made a noticeable entrance on the scene as well, gaining a firm foothold in a market that had previously been the exclusive domain of global investment funds.
Following the outbreak of COVID-19, specialized publications reported on the many deals that had taken off before March 2020 but that were tabled around that time. Some of these deals were finalized with very different terms to those initially planned, while others were simply dropped. Indeed, as economic activity ground to a halt around the world, the main debt market players took a step back to adjust their forecasts, rethink their investment criteria and prepare for the financial boomerang to swing back around after COVID-19.
The pandemic is already having a boomerang effect, in that the additional emergency cash injected into the economies of a large number of countries has spurred a sizable increase in borrowing by consumers and companies. Loan forbearance and other relief measures rolled out to temporarily ease the financial burden on a large number of borrowers have either ended or are close to wrapping up. Against this backdrop, all market operators agree that debt and distressed asset deals are set to soar over the coming years. This is because, for one thing, financial institutions will have to shore up their capital ratios, and those that do not need to do so will try to ward off a surge in loan defaults. In both cases, entities will need to empty or clean their balance sheets by selling or securitizing debt or assets. In addition, traditional buy-side players will surely feel the temptation to refocus their investments, shedding those portfolios that are no longer strategic under their new plans, either due to the type of debt or the attached security.
A look ahead
What, then, are the main trends we can already make out in the main LatAm markets and in Spain and Portugal? Which investments will continue to be made in these countries and under what conditions? Clearly, there is evidence of a move toward sophistication and the creation of innovative products, and away from outdated mechanisms, because sellers want to obtain greater returns than just the selling price, whereas investors as seeking longer-term and safer exposure to the assets that appeal to them.
Garrigues is pleased to share our view of the main trends in these debt markets, drawing from our on-the-ground network of offices in Brazil, Chile, Colombia, Spain, Mexico, Peru and Portugal.