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‘Nowhere left to hide’ as Italy’s banks targeted by short-sellers
The Australian 12:00am November 29, 2016
Michael Roddan
Pepper managed huge pools of DEBT and now excited about making huge profits from managing largest collection of debt in the world and watching the misery of others!!!
A POX ON THESE BANKERS!
Italian banks teetering on the edge of collapse are being far too optimistic and the hedge funds looking to acquire portfolios of the lenders’ non-performing loans are being too aggressive.
That’s the assessment of Patrick Tuttle, the co-chief executive of Australian lender and distressed debt administrator Pepper Group, who is looking to profit from what appears to be the next big financial system crisis.
“Of all the markets we operate in, we think Italy is the one that has been extending and pretending for longer than most,” Mr Tuttle told The Australian.
“The reality is that there’s nowhere left to hide. At some point these banks are going to have to clean up their balance sheets.”
Pepper is close to acquiring an existing platform in Europe that is managing more than $5.5 billion worth of assets. Pepper wants to buy it and expand its business.
“If we could acquire that and use that as a platform to participate in the non-performing loan selldown over the next few years then that would be our strategy,” Mr Tuttle said.
While incoming US president Donald Trump has captured the immediate attention of financial markets, Italy’s shaky banks have garnered some high-profile watchers.
Steve Eisman, the hedge fund hero at the centre of The Big Short who foresaw the collapse of subprime mortgage securities in the US, has singled out Italy’s banks as a major target of his short-selling. Mr Eisman, who works on Wall Street for Neuberger Berman, says the Italian banks are full of non-performing loans that haven’t been written down nearly as much as they should have.
“The guy from The Big Short — there’s some element of truth in that,” Mr Tuttle said.
As the banks try to sell portfolios of non-performing loans that they have written down by about 40-50 per cent, hedge funds are anecdotally buying the already written down loans at a further 50 per cent discount.
“If the banks have not done enough provisioning it’s going to make those loan sales quite traumatic,” Mr Tuttle said. “If they sell those loans at a value below which they’re carrying them on their balance sheets it’s going to clearly drive losses that will eat into the equity of those Italian banks.”
Italian banks have about €390bn ($513bn) worth of non-performing loans on their books — equivalent to about 20 per cent of the country’s GDP.
The government recently brought in reforms to speed up the real estate auction process and has also introduced laws allowing bids up to 25 per cent below reserve price to go ahead in an attempt to stabilise the balance sheets of the banks.
“The hedge funds have been too aggressive in terms of the price they’re willing to pay and the banks are being too optimistic about what the underlying loans are worth,” Mr Tuttle said. “Those two things have to converge in order for this market to work.”
He said Banco Monte dei Paschi di Siena, Italy’s third-largest lender, was the biggest immediate threat to the financial system, as a third of its loans were non-performing.
Monte dei Paschi is Europe’s weakest lender according to industry stress tests and on Friday the bank’s shares dropped 13 per cent after it asked investors to fund a €5bn recapitalisation plan. The capital needed seven times the lender’s market cap, about €700 million and the bank has €28bn of bad loans on its books.
But Pepper Group, which manages distressed debt on behalf of investors, sees the financial instability as an opportunity. “There’s going to be a huge opportunity for Pepper over the next 12 to 36 months as these portfolios start to trade,” Mr Tuttle said.
TUTTLE MANAGES THE DEBT LAUNDROMAT!!!