Non-performing loans tipped to be fresh source of deal liquidity

PricewaterhouseCoopers is predicting that the trading of non-performing loans between financial institutions will replace securitisation as the way many lenders secure liquidity.

In a report on consumer credit, the accountancy firm suggests that the combination of falling house prices, rising unemployment and the shift in consumer attitude to debt will increase demand for credit while supply shrinks.

As a result lenders will look for new ways to free up their balance sheets by selling assets that would have been disposed of via securitisations in previous years.

PwC suggests that the non-performing loans market could become the channel of choice.

The report states: “With the demise of the securitisation market and doubts over whether it will ever bounce back, we believe that a new market trend whereby non-performing loan portfolios are exchanged between different financial institutions is likely to emerge over the next three years.

“When one considers that much of the credit crisis stems from banks packaging consumer credit assets into complex structured vehicles and selling them to third parties, it is interesting to note that the fallout from this practice is evolving into a new market.”

It adds: “Financial institutions can still buy and sell similar assets, albeit non-performing ones, but for different reasons.”

Mortgage industry consultant Bob Sturges says he is not surprised by the findings because such loans are less risky and therefore more appealing than securitised assets.

He says: “Portfolio trades are nothing new but they are attractive because they are an efficient way of releasing liquidity and are more transparent than securitised loan books.

“Also, it’s a buyer’s market right now and anecdotal evidence sugg-ests that non-performing loans are going for a song.”