One in Five Savings Banks Now Using Credit Trading Platforms

In the podcast: Timur Peters

According to the Debitos founder, every fifth savings bank is connected to the credit trading platform

By Philipp Habdank, Frankfurt

Savings banks and banks in Germany can no longer postpone the problems in the commercial real estate sector. “We believe that this is already a serious problem, which will lead to even more problems that need to be solved in the next twelve to 18 months,” says Timur Peters in the Private Markets Podcast “Bet on billions“. According to the founder of the credit trading platform Debitos, commercial real estate loans are currently under pressure in Germany with a volume of 40 to 60 billion euros that investors can deal with.

Although not all of these loans are non-performing, they all have some issues that need to be resolved. In any case, the financed projects or buildings are not worth what they once were – especially in the case of office buildings. A prominent example of this is “The Squaire” at Frankfurt Airport, whose market value has fallen by around 40% to 517 million euros, according to a recent report by the rating agency S&P.

Banks are delaying value correction

According to Peters, valuation corrections in the banks’ portfolio have only been made in small drops in recent years. To avoid depreciation that put pressure on equity, banks did two things in particular: First, they avoided selling real estate entirely during this period so they wouldn’t have to value comparable real estate. On the other hand, they avoided classifying a loan as usual as far as possible. To achieve this, current interest payments, for example, can be postponed until the end of the loan term.

However, Peters assumes that banks will depreciate even more at the end of the year. This also applies to savings banks, whose major institutions have significantly increased their risk provisions this year due to real estate. When Debitos was founded in 2012, Peters says it was almost impossible to convince a savings bank to use the credit trading platform. So he was a little surprised that around 70 savings banks have entered the platform in the last year and a half. With the 348 active savings banks, that’s almost exactly one in five institutions.

Debitos is benefiting from restructuring issues in the promissory note market

However, it was not the property market that led the savings banks to the credit trading platform. According to Peters, most of the inquiries from the savings bank warehouse came from the promissory note market. Promissory note loans are usually arranged by the state banks and then distributed to the savings banks in small installments. Recently, however, several promissory note loans have had to be restructured. Well-known public examples include car supplier Leonie and battery manufacturer Varta. But prefabricated house builder Helma Hause also had promissory notes when they were renovated.

According to Peters, loan restructuring is a challenge, especially for smaller and medium-sized banks. Unlike big banks, they have much less experience in dealing with problem loans, they are overwhelmed by the situation and are therefore open to suggestions for solutions. At the same time, after the financial crisis, German banks financed much riskier real estate projects than, for example, their competitors in southern Europe.

Concerned investors are suddenly looking at Germany

These developments in Germany are not going unnoticed by investors. Having grown up trading distressed loans in southern Europe, the Debitos founder reports that investors are increasingly interested in the German market. According to Peters, his platform has around 2,000 investors from 48 countries. According to a recent study, these investors have about 25 billion euros in free capital that can be invested.

According to Peters, this capital is needed in Germany. “The local liquidity in the commercial real estate market is not enough at the moment to bring sellers and buyers together,” said Peters, insisting that international investors are needed for this. They have learned in the past that they have staying power in this business. They are currently looking for new, exciting markets.

Investors want high discounts

As a result, there are enough takers for the bad loans from German banks. But this is also a financial issue for the banks, as investors are only buying loans at a discount. According to Peters, for highly secured loans where the borrower has access to the financed property, the discounts are already between 30 and 50%. In contrast, almost anything is possible with subloans when it comes to discounts.