* UniCredit to offload 17 bln euros in bad debt
* Pimco, Fortress to sell off some to other funds
* $7 bln raised for new toxic debt funds in 2016 - Preqin
By Simon Jessop and Maiya Keidan
LONDON, Dec 20 Investment funds have raised $7
billion in Europe this year to spend on toxic debt and will look
to cash in on Italian banks amid signs a broader clean-up of the
country's struggling lenders is finally under way.
Collectively bogged down by around 356 billion euros ($370
billion) of impaired debt, Italian banks have often balked at
selling it off at a price agreeable to funds as it would lead to
a too-hefty writedown, weakening their reported capital
However, last week top lender UniCredit announced
a major restructuring including a plan to hive off 17 billion
euros of bad loans, a change in gear that has buoyed sentiment
across debt and equity markets and whet the appetite of funds
that specialise in taking on the liabilities.
"Clearly there is an acceleration of Italian bank clean-ups
at the moment and that's why we have decided to start a second
fund," Massimo Massimilla, chief executive of Algebris Italy,
which launched an Italy-focused fund last week.
Alongside the UniCredit plan, Italy is also expected to bail
out its third biggest lender, Monte dei Paschi, and
other struggling banks, which should pave the way for them to
also start shifting more bad loans off their balance sheets.
Consultants PwC said loans with a paper value of 50 billion
euros could hit the market in 2017. Funds would pay well below
that to take on the risk and banks will need to be careful to
pace the deals so as not to drive prices lower still.
"By investing in NPLs, we are going to help Italian banks
clean their balance sheets, which is a condition necessary to
complete capital increases and restart lending to the real
economy," Massimilla said.
Four new Europe-focused distressed debt funds raised $7
billion in 2016, data from industry tracker Preqin showed, up
from $6.4 billion in 2015 and $3.9 billion in 2014.
The largest was KKR's Special Situations Fund II, which
closed in March with just over $3.3 billion, followed by Avenue
Capital Group's Avenue Europe Special Situations Fund III, which
raised $2 billion.
As well as the money raised this year, funds raised in
previous years may also have money to invest and all are likely
to use leverage, potentially taking the figure past $15 billion.
Fabio Longo, managing director at $30 billion Bain Capital
Credit, said even a conservative view of deal flow meant Italy
presented an attractive opportunity for investors, given the
relatively small amount of money raised.
In return for locking their money up for up to eight years,
pension funds and other investors can often achieve internal
rates of return in the 15-20 percent range.
Unlike in Spain, which also moved to clean up its banks
following a real estate crash in the wake of the financial
crisis, the loan books of Italian lenders cover a broad
cross-section of the economy. That makes the task of choosing
and managing loans more complex.
The range of debt being offloaded ranges from personal and
small-business loans to mortgages, real estate and shipping.
While the Spanish government set up a state-backed 'bad
bank' for NPLs, Italy has been prevented from doing so by new
European Union rules that require investors in ailing lenders to
bear losses before the state can step in.
Eyeing a private sector solution, Italy has set up rescue
fund Atlante, which raised funds from the country's top banks
and insurers, as well as state-owned entities and will play a
key role in a planned 28 billion euro bad loan sale from BMPS.
UniCredit, however, said it will instead move its bad debt
into two special purpose vehicles, controlled by U.S. bond house
Pimco and hedge fund Fortress Investments.
One of the biggest potential pitfalls for any fund looking
to take on secured Italian bad debt is the time it can take to
recover the assets in the event the loan cannot be repaid.
While Italy passed a law in April to make the legal process
quicker, Algebris' Massimilla said the process was still complex
and took a long time.
"The average time of foreclosure is 4.7 years in Italy
versus 0.7 years in Spain or 0.8 in Germany or 1.7 in France.
There have been positive steps recently to improve the recovery
process but there is still a long way to go," he said.
($1 = 0.9570 euros)
(Additional reporting by Valentina Za in Milan and Jesus Aguado
in Madrid; Editing by Susan Fenton)