By Simon Miller

Despite the growing turmoil in Europe, investor appetite for acquiring non-core loan assets from European banks is on the rise according to a survey from PwC.

The survey of investment banks, hedge funds and private equity groups found that investors accumulated nearly €60bn (£49.4bn) to invest in non-core European loan assets with portfolios with a face value of €50bn expected to change hands this year.

Investors expect the sale of European loan portfolios to peak in 2013, as banks begin to plan their refinancing of the liquidity injections received from the European Central Bank with the deleveraging process, now underway at European banks, expected to take at least five years, while the number who believe it will take more than ten years - a view shared by PwC -has doubled since the previous survey was carried out a year ago.

Richard Thompson, PwC’s European Portfolio Advisory Group chairman, commented: "In the past year the banking sector has been much more open to deleveraging strategies. We estimate there are €2.5trn of non-core loan portfolios in the European banking sector, representing 6% of European banking assets.

"The run-off or sale of these loan assets will continue for many years and will make up a major proportion of future M&A activity. Based on our discussions with the major banks around Europe, we expect portfolios with a face value of €50bn to trade this year and €500bn to trade in the next five to ten years."

Thompson added that new investors were entering the market such as insurance companies, pension funds and sovereign wealth funds demanding more stable returns from longer maturity assets.

Leverage continues to be an important factor in enabling transactions to be completed by increasing prices and liquidity in the market. Over 60% of survey respondents said they plan to use funding for their investments in 2012. Despite the uncertainty in the European financial system, investors remain confident that funding will be available for transactions in 2012 and beyond. Only 18% of respondents thought it would be more difficult to raise debt this year compared to 2011.

Thompson continued: "Leverage will play an important role in increasing prices and liquidity in the European loan portfolio market and investors remain optimistic about accessing further funding for transactions this year.
However, whether this funding will be available remains to be seen."

The survey also showed that while the UK, Germany and Spain continue to dominate the market for loan portfolio sales, investor interest in Ireland and Portugal was also on the rise, driven by the active steps taken by regulators in those countries to restructure their banking system.

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