Giving the Right Value to Bad Loans

MARCO GRIMALDI, BOCCONI ALUMNUS AND MANAGER AT ARROW GLOBAL, OUTLINES THE FUTURE OF THE SECTOR SAYING THAT NOT EVERYTHING IS BAD BECAUSE VALUING A CREDIT MEANS SELLING IT AT A GOOD PRICE, THAT IS, GIVING VALUE TO THE GOOD THAT IS LEFT IN A COMPANY

In the career of a manager, it’s not often that you can say "I saw this sector being born." However, when it comes to non-performing loans (NPLs), Marco Grimaldi's CV speaks for itself. A Bocconi graduate, the financial executive now oversees the Portfolio Management of the Arrow Global Group in Italy and, among other things, manages investments in distressed Italian loans. “In fact, already in 1997, during my first job in London after graduating from Bocconi, I was working in securitization, a sector that in Italy was not yet regulated by a law. Back in my home country, I found I was one of the few NPL experts, an area contiguous to securitization which was in the process of becoming more and more strategic, and not only for banks."
 
A young market that has already changed a lot over the years: can you provide a quick summary?
To get an idea of ​​the changes, just look at Italy’s rather paradigmatic history over the last thirteen years. Following the 2008 crisis, thanks to the abundance of liquidity and a banking system that targeted volumes rather than assessing creditworthiness, Italy had come to accumulate over €300 billion of non-performing loans, the highest number in Europe. It wasn't a good record. NPLs piled up in the financial statements of institutions for many reasons, not least the practice of handing creditors to the legal office at the first sign of hardship, the long timeframe of the courts, the lack of a market for investors. The economic crisis led banks to sell these credits on the financial market. Since then specialized operators have come into being and the scenario has changed: procedures and management times have shortened, a varied and competitive market has been created around loans, and some bad debts have been turned around. The amount of NPLs was thus reduced to the current value of €120-130 billion. Add to that the action of the government which, through a mechanism of public guarantees (GACS), has encouraged the movement of large amounts of credit. All this, however, was happening before Covid.
 
What future awaits this market?
We all expect new growth in NPLs. However, the banking system seems much better prepared today to deal with the situation. Compared to fifteen years ago, the institutions are more solid, better capitalized, with more trained professionals on the subject. Legal proceedings have also been shortened. In addition, there is an overall EU guidance that coordinates public interventions in all countries to cope with the post-pandemic crisis. That has activated funds, guarantees and moratoriums, and these are non-short-term solutions that can help companies overcome difficulties and therefore facilitate the resolution of certain credit defaults. In short, I do not expect a major adverse impact like that of the 2007-2008 economic crisis, but rather a mixed picture in the various sectors.
 
Which industries are suffering the greatest?
Those that the pandemic hit the hardest, namely tourism, transport and, in part, also real estate, which underlies many loans. Here too, however, things are changing and real estate, which had always been a separate market, is now intrinsic to securitization and therefore has become more liquid and more amenable to transactions. On the contrary, the sectors that will be the first to emerge from the crisis will be those where entrepreneurs are capable of embracing new technologies, meet ESG requirements more quickly and return to full productivity.
 
Behind an NPL there is often a company in crisis. From your point of view, what is your idea of ​​the difficulties faced by entrepreneurs?
As Arrow, we invest mainly in "single name" companies, i.e. businesses are that are facing pre-bankruptcy proceedings, so I am very familiar with the subject. The production stoppage was a serious and an objective problem for almost everyone. Sometimes, however, we find ourselves faced with entrepreneurs who are struggling because they are short-sighted, not open to dialogue and not very competent in managerial culture. This is why I believe that the first antidote to any crisis is to spread economic culture by providing training at every company level, starting with young and very young people who are interested in the world of credit and finance in general. Understanding how a crisis arises or how it spreads from the real world to the financial one must be a subject of study at school before university, because many entrepreneurs may not start from there.
 
Without NPLs, specialized operators like you would be out of work…
(laughs) Unfortunately, the body of non-performing loans in Italy is so bulky that it will be decades before we run into this risk. Anyway, working on NPLs also has a noble and important goal. Being able to value a credit means being able to sell it at a good price, which means giving value to the good that is left in a company or property, by putting wealth and skills back into circulation, with benefits to the entire banking system and entrepreneurial community, and thus to the whole real economy.
 
Biography
Marco Grimaldi, 48 years old, is Head of Portfolio Management of the Arrow Global Group in Italy. After graduating from Bocconi in Business Administration (with a thesis on "Securitization on the Euromarket") he worked at the ABN AMRO Bank in Milan and London dealing with corporate finance and securitization. He was then managing director at Dresdner Kleinwort Wasserstein (later Commerzbank) in principal finance and securitization and, since 2009, he has managed the bad bank of the Commerzbank group. “Coming from Southern Italy, the first time I set foot in Via Sarfatti I was 17 and very anxious about my performance,” recalls the manager. "The environment and organization at Bocconi, however, won me over immediately precisely because they made studying easier, providing the right kind of input, encouragement and necessary access to firms and public organizations. They were formative years especially from a personal point of view, because here they taught me an open-mindedness that I find essential to interpreting today’s market signals and also for creating a network of professionals I’m still in touch with."

by Emanuele Elli