Non-performing loan (NPL) transactions are still a new feature
to the German market and there have been few transactions to date.
Nonetheless, many banks in Germany have growing portfolios of
non-performing loans on their balance sheets due to the current
economic climate. Individual banks, most notably Dresdner Bank and
Hypo Real Estate, have recognized that they need to divest
themselves of their troubled loans. The portfolios of
non-performing loans represent an increasing business risk to the
banks: the number of NPLs on the balance sheets rises while the
value of the underlying securities falls, in particular in respect
of commercial properties in the eastern part of Germany. This
results in higher costs for the work-out procedures as well as for
servicing such loans.
Apart from that, banks need to clean up their balance sheets not
only in view of the impending Basel II rules on capital adequacy
but also, more imminently, due...