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Asset recovery and NPLs in Central and Eastern Europe

  • Asset recovery
April 16, 2024
Matthew Toma

As highlighted by recent reporting from the Vienna Initiative,  the current economic landscape in the Central and Eastern Europe (CEE) region is characterized by heightened geopolitical risk, inflationary pressures and rising costs of living, all of which are straining the debt-servicing capacity of borrowers. While banking regulators and supervisors are closely monitoring the impact of these trends, early signs of credit stress are emerging across various borrower and asset classes. Despite the banking sector's resilience thus far, concerns about the medium-term outlook persist, especially regarding the potential impact of persistent inflation, rapid monetary policy tightening and geopolitical uncertainties on asset quality and non-performing loans (NPLs).

To address these challenges, lenders across the region must ensure they have robust credit risk monitoring and management strategies in place to navigate potential declines in asset quality effectively. However, once loans have been declared as non-performing, lenders must navigate the dual challenges of managing their NPL portfolios and unlocking value from their bad debt. While the secondary market for NPLs is well developed across the CEE region where banks have experience with both the securitization and sale of NPL portfolios, especially in larger jurisdictions like Poland, there are further steps lenders can take to unlock value from their bad debt without incurring additional costs and risks.

In this blog post, we explore key trends in NPL asset recovery and discuss how lenders in the CEE region can benefit from external legal finance.

A shift towards broader asset recovery strategies: Challenges and opportunities 

One notable trend in NPL asset recovery is the shift towards broader and more sophisticated international asset recovery strategies. Traditionally, asset recovery measures have been locally focused. However, there is a growing recognition of the importance of pursuing  cross-border recovery options. This is necessary to fully realize the value of bad debts, especially when loans may have been undercollateralized or to pursue guarantees provided by related parties.

Despite the growing interest in international recovery strategies, banks still face challenges in pursuing such actions. Pursuing assets internationally is often unfamiliar territory for banks, and the costs and complexities involved can be significant, especially where internal remedial departments may lack the specialized skills and knowledge required to formulate effective multi-jurisdictional recovery strategies. Especially in cases of unsecured lending, the lack of collateral means that lenders cannot underwrite the cost of international recovery matters from more straightforward local recoveries, further compounding the challenge of pursuing debts abroad. 

However, legal finance can help banks overcome the challenges of cross-border actions by providing a way to recover without risking additional funds in legal fees (e.g. ‘throwing good money after bad’). This allows lenders to remain focused on local enforcement while outsourcing larger and more complex cases to asset recovery specialists and professional advisors with regional and international experience.

The benefits of commercial legal finance 

In this context, legal finance can provide a valuable solution for CEE-based lenders. Legal finance allows clients access to capital secured against the expected proceeds of litigation and arbitration claims in its portfolio. Capital provided through legal finance is not debt, but rather a non-recourse investment: In other words, the company repays capital only if and when cases that are financed resolve successfully. Legal finance is thus an attractive alternative avenue to access capital compared to debt and equity. Legal finance companies like Burford are comfortable and equipped to assess and price litigation and its potential returns, unlike banks and traditional capital lenders.

Here are some ways in which legal finance and Burford’s specialist global asset recovery and enforcement business can help address the challenges faced by lenders when pursuing NPL recoveries:

•    Release liquidity: Burford can purchase high-value NPLs on an individual exposure or portfolio basis. This provides numerous immediate benefits to sellers, including balance sheet cleanup, forward looking budget clarity and the transfer of all future risk associated with the debts.

•    Access to specialist expertise: Working with a professional legal finance company provides access to specialized legal knowledge and experience that may not be available internally or externally to the company. Burford is the only leading legal finance provider with its own specialist global asset recovery and enforcement business. Composed of both former litigators and dedicated asset tracing professionals, our 20 person asset recovery team regularly advise creditors on navigating the intricacies of cross-border recovery matters.

•    Cut costs on legal spend: Legal finance can reduce or eliminate the legal fees and expenses associated with pursuing costly multi-jurisdictional asset recovery matters. This can help lenders save on legal budget and allocate capital more efficiently. Further, in case of loss in the underlying matters being financed, legal finance transfers the risk associated with these matters to the funder, who assumes the downside risk in exchange for a share of the upside reward. 

•    Enhance financial metrics: Because non-recourse capital does not affect a bank’s balance sheet or income statement—which is particularly beneficial for publicly traded companies—legal finance can enhance its financial metrics, such as cash flow, earnings, leverage ratio and interest coverage ratio. Improving its liquidity position and reducing financial distress provides strategic flexibility and more options and leverage in negotiating with its own creditors, shareholders or potential acquirers.

In conclusion, legal finance offers a transformative opportunity for Central and Eastern Europe-based lenders in how they deal with their NPL portfolios. By partnering with a specialized legal finance provider like Burford, lenders can unlock liquidity, gain access to unparalleled legal expertise, significantly reduce legal expenditures and improve financial metrics. This strategic approach not only alleviates the immediate financial burden, but also shifts the risk of asset recovery efforts, allowing lenders to focus on their core business objectives while potentially benefiting from successful recoveries. Ultimately, this innovative financial solution empowers CEE-based lenders to manage their NPL portfolios more effectively, turning potential liabilities into positive legal assets.