UTP: what they are
UTP is the acronym for “Unlikely To Pay”.
When we talk of UTPs we refer to bank credits which may lead to probable default. Sector specialists call them “impaired loans”: substantially, the banks consider their full repayment as improbable.
When a credit is classified as UTP the debtor has not yet been declared insolvent.
In this case the bank, or other entity granting the loan, establishes that probably the debtor will have difficulty in repaying the loan as they have already recorded delays in meeting the repayment installment deadlines.
Generally, these situations relate to temporary difficulties in which, with the appropriate support, the debtor could return to being performing.
NPL: the differences
UTPs are less risky than NPLs, Non Performing Loans.
When the debt is classified as an NPL, the debtor is judged to be permanently insolvent. In this case, the previously granted credit becomes uncollectible.
This means that the bank does not think that it will be able to recover the credit and, in the case of mortgage loans, it proceeds to seize the property; in the case of other types of loans, it may enforce the guarantee submitted by the debtor, or may decide to transfer the credit to third parties.
In the case of a UTP credit, the situation is less serious: a difficulty in meeting the payments is identified but, hopefully, this difficulty is only temporary. This is a typical situation in companies having to cope with a temporary liquidity crisis or loss of turnover, or in a family that has taken out a mortgage and suddenly finds that they have lost a source of income from employment.
How to manage a UTP credit: transfer
PWC has estimated that in the first six months of 2019 there were 61 billion euros of UTP credits (a negative trend compared to previous years), 82% of which concentrated in the top 10 Italian banks (Source: report The Italian NPL Market – June 2020 https://www.pwc.com/it/it/publications/npl/doc/The-Italian-NPL-Market-giugno-2020.pdf).
This year, the consequences of the lockdown, which put many businesses in difficulty, risk increasing this figure further, putting the banks themselves in difficulty.
The PWC report of June 2020 states “The recent outbreak of Coronavirus will for sure have a strong impact on the UTP market, representing a new challenge for the Italian banking system.”
The report also highlights that UTPs have not been covered by the recent decrees issued by the Italian Government, such as “Cura Italia” Decree and “Liquidità” Decree, making it possible to assume a higher danger rate for the next years.
The aim of the European Central Bank and the Bank of Italy should be to prevent this type of loans from becoming non-performing, recommending a management strategy to banks that involves the transfer of UTP credits.
How credit risk transfers work
This consists in transferring a credit to a third party, an investor, who acquires the related rights and the related risks. In this way banks can avoid keeping too many UTP credits.
As the credit is not impaired, a UTP credit opens new scenarios for negotiation, which may also offer more favorable conditions for the debtor who, for example, may be given more time to repay the loan, or may benefit from more advantageous conditions.
This is a theoretical situation. In practice, not all banks in Italy are equipped for UTP credit transfers, and these may not be correctly managed and therefore become impaired.
New opportunities and new players
The current macroeconomic situation, impacted heavily by the Covid-19 pandemic, will increase the number of UTPs and NPLs which, growing, will weigh increasingly more on the Italian banks’ balances.
In the coming months/years, a strong acceleration is expected on two fronts: transfer of UTP portfolios by the credit institutions and the consequent birth and consolidation of the supply chain of services able to manage the whole process. We cannot deny that this sector is still in its infancy. Speculative investors collect capital to acquire significant portfolios, constituting the so-called primary market. Other entities with lower investment capacities are positioned in the secondary market, acquiring already “processed” portfolios, which in technical jargon are known as “second time around” transactions.
The entities investing in these asset classes are in fact organized for debt collection but, depending on the nature of the credit - unsecured or mortgage, the arising needs are both highly vertical and widespread.
Focusing on mortgage loans, the need for entities with skills in fields running from Private Equity to general real estate services is clear. These are the skills needed in order to intervene in strategic, financial and operational fields, allowing actions for the recovery of the impaired loans to be planned.
The UTP era opens the door to ethical finance, joining forces to relaunch companies and individuals in temporary difficulty.
