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Document 52022XC1021(01)

Communication from the Commission on guidelines for a best-execution process for sales of non-performing loans on secondary markets 2022/C 405/01


OJ C 405, 21.10.2022, p. 1–49 (BG, ES, CS, DA, DE, ET, EL, EN, FR, GA, HR, IT, LV, LT, HU, MT, NL, PL, PT, RO, SK, SL, FI, SV)



Official Journal of the European Union

C 405/1

Communication from the Commission on guidelines for a best-execution process for sales of non-performing loans on secondary markets

(2022/C 405/01)

Table of contents



Transaction structuring: Portfolio selection 12


Key activities 12


Assess legal/tax/consumer protection restrictions 13


Objectives of the portfolio selection process 14


Technical aspects of the portfolio selection process 16


Reflecting upon the necessary use of internal resources and potential additional need for external support 17


Organisational issues 17


Preparation phase 18


Key activities 18


Number of phases of the process and timeline 18


Preparation of main documents 19


Loan data tape preparation and documentation retrieving 19


Decision on VDR set-up 20


Preparation of the Loan Sale and Purchase Agreement 21


Pre-marketing phase 22


Key activities 22


Market sounding 22


Definition of the best marketing strategy 23


Preparation of the process and marketing materials for the Non-Binding and Binding Phase 25


Non-binding Offer Phase (Phase 1) 27


Key activities 27


Launch of the bidding process and distribution of the Information pack 28


Bidders undertaking initial Due Diligence 29


Submission of Non-Binding Offers by bidders and selection of shortlisted bidders to be advanced to second round 29


Binding Offer Phase (Phase 2) 29


Key activities 29


Seller Deliverables 30


Best practices 30


Signing of the transaction and closing 34


Key activities 34


Key risk considerations 35


LSPA Considerations 36


Other considerations 36


Price allocation 36


Post-closing 37


Key activities 37


Migration process 37


Seller’s responsibilities 38


After-sale activities 38




An NPL sales process that only foresees a Binding Offer Phase (Phase 2).


An NPL sales process that foresees both a Non-Binding Offer Phase (Phase 1) and a Binding-Offer Phase (Phase 2).


Money laundering is a type of financial crime. It involves taking criminally obtained proceeds (‘dirty money’) and disguising their origins so they will appear to be from a legitimate source. Anti-money laundering (AML) refers to the activities financial institutions perform to achieve compliance with legal requirements to actively monitor for and report suspicious activities.

Analysis Report

Once the Seller receives the NBOs from Phase 1 Investors, the Seller will compare and analyse them, which results in an Analysis Report of the NBOs. This supports the Seller in shortlisting the relevant bidders, which may then move on to Phase 2. Once the Seller receives the BOs from Phase 2 Investors, the Seller will again compare and analyse them, resulting in an Analysis Report of the BOs.

Auction Types

The Seller can choose an Auction Type for the intended NPL sale. A list of commonly used Auction Types is attached as Annex 4 to these Guidelines.

AUP Report

The agreed-upon procedures (AUP) Report is part of the vendor Due Diligence that should be provided to investors. AUP engagements involve a practitioner performing specified procedures that have been agreed to by the practitioner, the Seller and any appropriate third parties. On the basis of the factual findings of such Due Diligence efforts, an AUP Report is prepared by the practitioner and shared with those parties that have agreed to the procedures.


The Binding Offer to be submitted by the Phase 2 Investors.

BO Date

The deadline set by the Seller for receipt of a BO from the Phase 2 Investors.

BO Guidelines

Written guidelines provided by the Seller to Phase 2 Investors detailing the form and content of the BO.

Broad Auction

A Broad Auction is a typical 2-Phase-Process, whereby a large list of investors is invited to submit an indicative NBO. Following this first auction stage, a Due Diligence process is run with a restricted shortlist of investors, which is invited to submit a final BO. Following this second auction stage, a single Preferred Bidder is selected, with whom the Seller enters into the negotiation of the LSPA and potentially additional transaction agreements. The Guidelines represent a Broad Auction process.


The date on which the NPL transaction is legally closed and customarily the date on which the purchase price is paid and ownership of the NPLs is transferred to the Purchaser.

Cut-Off Date

Seller customarily determines and communicates to the Phase 2 Investors a Cut-Off-Date from which onwards the proceeds in respect of the NPLs are due to the Purchaser.

Defective NPLs

NPLs which either do not fulfil all Eligibility Criteria or fulfil at least one Exclusion Criterion.

Disclosure Qualifier

Seller can qualify certain Representations and Warranties (R&Ws) to disclosure, an example could be: ‘Seller warrants that all securities are 1st rank mortgages unless as duly disclosed by Seller (in a form that can be evidenced by Seller) to Purchaser until [date of last disclosure].’

Due Diligence and Due Diligence Documentation

In the course of a Due Diligence, the Seller customarily provides in a legally compliant manner physical or virtual access to relevant Due Diligence Documentation based on which legal and operational experts of the Phase 2 Investors can review and verify document quality and availability, validate assumptions made in pricing and assess R&W requirements for the LSPA.

Exclusion Criteria or Eligibility Criteria

Eligibility Criteria are criteria agreed in the LSPA all of which have to be fulfilled by each sold NPL. Exclusion Criteria are criteria agreed in the LSPA which none of the sold NPLs (should) fulfil.

External Service Providers

External Service Providers are service providers offering general support to a Seller for an NPL sales process, including Financial Advisors, Technical Advisors, Transaction Platforms and VDR providers. More information on specific categories of external service providers can be found in Annex 3.

Information Memorandum

The Information Memorandum provides a short presentation of the main features of the NPLs to be sold.

Investor LSPA Mark-Up

Mark-up of the draft Loan Sale and Purchase Agreement (LSPA) provided by a Phase 2 Investor in Phase 2, customarily delivered on the BO Date.


The know your customer or know your client (KYC) standards are used within the financial services industry, stipulating requirements to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of anti-money laundering (AML) policy.

Loan Data Tape

The Loan Data Tape denotes an electronic file or set of files that captures lending product data from a financial firm’s systems. It can be considered as a one-time snapshot of a subset of a Seller’s credit portfolio information. It includes the information provided by the Seller during Phase 2 to the Phase 2 Investors.


The Loan Sale and Purchase Agreement, sometimes also referred to as Sale and Purchase Agreement or Debt Sale Agreement. In the Guidelines, the abbreviation LSPA will be used.

LSPA Term Sheet

A term sheet of no more than 2-4 pages, which includes major terms of the LSPA (e.g. envisaged transaction structure, Seller R&Ws, liability regime), on which the Seller wants to obtain investors’ feedback early on during the process, e.g. in Phase 1.

Management Meeting

Meeting(s) offered by the Seller to Phase 2 Investors in which Phase 2 Investors will receive background information on the NPLs to be sold and explanations of workout or pre-processing activities and where Phase 2 Investors can pose questions to employees of the Seller who have profound knowledge of the NPLs to be sold as well as prior workout actions.

Negotiated Sale

The Negotiated Sale is a bilateral process involving a single potential investor. Due to the lack of competition, the main steps (with relevant documentation shared) and the outcome of the marketing process vary significantly from the Broad Auction.


The Non-Binding Offer, i.e. an indicative offer submitted by a Phase 1 Investor, i.e. an offer that is not legally binding on the bidder.

NBO Date

The deadline set by the Seller for receipt of a NBO from the Phase 1 Investors.

Non-Disclosure Agreements (NDAs)

A Non-Disclosure Agreement is a confidentiality agreement signed by Seller and interested investors. In the NDA, the conditions are set out under which the Seller is willing to share confidential information. Investors need to sign the agreement before gaining access to the relevant data and initiating Due Diligence.

Non-performing loans (NPLs)

A bank loan is considered non-performing when there are indications that the borrower is unlikely to repay the loan (hence, the sub-category of ‘unlikely to pay’ (UTP)), or more than 90 days pass without the borrower paying the agreed instalments or interest.

Phase 1 = Non-Binding Offer Phase

The phase at the end of which the Seller expects to receive NBOs from all Phase 1 Investors.

Phase 1 Investor

An investor that was admitted by the Seller to participate in Phase 1 of an NPL sales process.

Phase 2 = Binding Offer Phase

The phase at the end of which the Seller expects to receive BOs from all Phase 2 Investors.

Phase 2 Investor

An investor that was admitted by the Seller to Phase 2 of an NPL sales process.

Phase 2 Data and Documents

Data and documents prepared during the preparation phase by the Seller to be provided to Phase 2 Investors at the beginning of Phase 2. Apart from loan-by-loan data in respect of all NPLs, Phase 2 Data and Documents customarily contain Due Diligence Documentation to be reviewed by Phase 2 Investors. Phase 2 Data and Documents should also contain any costs or fees that the Seller envisages the Purchaser to assume.

Preferred Bidder

The investor which submitted in the opinion of the Seller the best BO. Ideally and in most cases, the Preferred Bidder equals the Purchaser.

Process Letter

A Process Letter is a document that shows the steps of the sale process and the deadlines to be respected by all actors involved.


The investor with whom the Seller concludes an LSPA.

Q&A Process

A process usually conducted in Phase 2 whereby Phase 2 Investors may pose questions to be answered by the Seller.


Representations and Warranties given in an LSPA whereas the Seller R&Ws can include representations and warranties in respect of the NPLs, the underlying securities, pre-processing etc.

Servicing Transition Date

The date on which the Purchaser or a servicer acting on behalf of the Purchaser takes over the servicing of the acquired NPLs. The Servicing Transition Date customarily equals Closing, but can also be subsequent to Closing if so agreed between the Seller and Purchaser.


The signing of the final LSPA negotiated between Seller and Purchaser and signed by Seller and Purchaser. Depending on the complexity of the transaction, Signing can either precede or equal Closing.

Targeted Auction

A Targeted Auction is a competitive process similar to the Broad Auction, but involves a shorter list of potential investors (approximately 2 to 8). This option typically allows the Seller to have better control over the process whilst benefitting from a still competitive environment. It is usually a 2-Phase Process, although under specific circumstances and especially in high time-pressure situations, the first phase may be omitted.


A Teaser is an anonymous marketing document that contains the key transaction background and summary data on the NPLs to be disposed. It summarises the main elements of the investment opportunity.

Transaction platforms

Transaction platforms are online marketplaces that connect buyers and sellers of NPLs and help organise the sales process. They facilitate NPL transactions by providing access to investors and technological support (including a VDR). Transaction platforms offer to conduct online NPL auctions whereas the seller can choose the desired Auction Type.

Vendor Due Diligence

A review performed by the seller, the outcome of which is shared with investors. A Vendor Due Diligence can e.g. comprise: real estate revaluation, Loan Data Tape consistency checks, legal documentation review


Virtual Data Room, which can be used by the Seller to provide information, data and documents to all investors in Phase 2 (and Phase 1 unless Seller sets up the VDR only for Phase 2).

VDR Provider

A (tech) company offering the set-up and organisation of a VDR for an NPL sale.


As announced in its Action Plan of 16 December 2020, the Commission, in close cooperation with members and observers of the Commission’s NPL Advisory Panel, has developed Guidelines on a best-execution process for sales of NPLs on secondary markets. The objective of these Guidelines is to encourage good sell- and buy-side processes for NPL transactions in EU secondary markets and, in particular, to help sellers and buyers that may have less experience with secondary market transactions.

The document is based on best practices and describes the sequence of main activities to be performed within the preparation of the competitive transaction process. The Guidelines outline some practices and conditions considered necessary to achieve a successful outcome. While market participants are not obliged to follow the Guidelines, they provide NPL sellers and buyers with a clear and structured process that should enable them to achieve a successful outcome.

The main structure of the document follows a chronological reasoning. Each main chapter focuses on one of the specific stages that should be followed throughout a sales procedure. By default, a standard market transaction is defined in this document as a Broad Auction process that comprises multiple phases with two main stages: a Non-Binding Offer Phase (Phase 1) and a Binding Offer Phase (Phase 2).

The table below provides a stylised summary of the document, spanning across all phases of the transaction process. It highlights the key activities and key deliverables for each phase. More information on each of these elements can be found in the relevant chapters in the main body of the Guidelines.


Key activities

Key deliverables

Image 1

Assess possible legal/tax/consumer protection restrictions

Review existing IT system to enable optimising the selection process

Definition of the transaction perimeter / selection of the portfolio to sell

Decide upon the use of External Service Providers and / or other external advisors

Determine most efficient and effective organisational set-up to run the process (if relevant supported by External Service Providers)

Other considerations around servicing, portfolio modelling and setting of the ‘reserve price’

Possible amendments to IT system

Selection of portfolio for sale

Establish organisational structure to manage transaction process

Contracts with External Service Providers (if relevant/required)

Image 2

Define the number of phases of the process (namely, 2-Phase-Process with NBOs and BOs, or 1-Phase-Process, directly with BOs)

Set the timeline – including internal steps and approach to the market (taking into account involvement of legal and consulting advisors)

Prepare the main marketing documents (mainly Teaser and Information Memorandum). A Management Presentation may be required during Due Diligence in the BO Phase. Preparation of the main process documents (mainly investor NDA, Process Letter (if required separately for Phase 1 and Phase 2), BO Guidelines and, if relevant, NBO Guidelines)

Prepare Loan Data Tape and retrieve documentation

Set up VDR  (1) (including a detailed VDR index), unless cost-benefit analysis would dissuade use of VDR, especially for small portfolios

Preparation of LSPA

Investor VDR (Phase 1 VDR ready for opening, Phase 2 VDR in preparation)


Information Memorandum

Early draft of Management Presentation

Early draft of Process Letter

Early draft of LSPA

Loan Data Tape

Draft NDA

VDR rules (for Phases 1 and 2)

Image 3

Market sounding

Definition of the best marketing strategy

Negotiation of NDAs

Preparation of LSPA Term Sheet

Continue preparation of the process and marketing materials (e.g. investor presentation) for the Phase 1 and Phase 2

Process Letter

Due Diligence material inventory

LSPA Term Sheet

Signed NDAs

Investors long list

Optional: Expressions of Interest

Image 4

Management of the Phase 1 investor VDR (incl. opening, user and access management, VDR reporting, etc.)

(Continued) preparation of the Phase 2 Data and Documents as well as investor VDR, if applicable

Disclosure of the process and marketing materials for Phase 1

Disclosure of (meaningful) data tapes to investors (via the VDR)

Management of a (limited) Q&A Process if applicable due to the complexity of the perimeter and/or the number of bidders

Analysis of NBOs that have been submitted and comments on LSPA Term Sheets, if applicable

Selection of a short list of bidders to admit to the Binding Offer Phase

Selection of an Auction Type and preparation of auction

Finalisation of the NPL portfolio, potentially excluding certain ineligible NPLs from the portfolio (i) if they do not match the original selection criteria (anymore) or (ii) based on the reasonable request of investors.

Investor VDR (Phase 2 VDR ready for opening) or other means of sharing data with investors

Loan Data Tapes (full set)

Optional: Vendor Due Diligence materials prepared (AUP Report, legal Due Diligence, etc.)

VDR reporting (e.g. on bidder activity and areas of interest)

Answers to questions based on Q&A, if applicable

Analysis Report of NBOs and shortlist of bidders

Optional (if not included in the Process Letter): Draft Q&A Process guidelines (for Phase 2)

Image 5

Provision of Phase 2 Data and Documents to Phase 2 Investors

Management of Q&A Process

Optional: Organisation of Management Meeting(s) and summarising / providing outcome to all Phase 2 Investors

Organisation of the auction

Analysis of submitted BO Letters and Investor LSPA Mark-Ups

Selection of Preferred Bidder / Purchaser

Optional: KYC Process

Finalisation of the NPL portfolio, potentially excluding certain ineligible NPLs from the portfolio (i) if they do not match the original selection criteria (anymore) or (ii) based on the reasonable request of investors

Provision of Process Information to Phase 2 Investors

Provision of draft LSPA to Phase 2 Investors

Provision of BO Guidelines to Phase 2 Investors

Final Management Presentation

New or updated information (including any costs in connection with the NPLs or the transaction that Seller wishes Purchaser to assume) to be provided to investors via the VDR and the Q&A Process

Optional: Vendor Due Diligence reports to be provided to Phase 2 Investors

Optional and if applicable: VDR reporting (e.g. on bidder activity and areas of interest)

BO Analysis Report and selection of Preferred Bidder

Image 6

Manage a smooth exit from the portfolio once the NPL sale is completed, inter alia by defining after-sale activities of Seller and Purchaser

Execute LSPA and, if applicable, further transaction documentation

Financial closing

Finalise preparation of transfer of data and documents

Negotiate and agree on the transition of the NPL servicing from the currently acting servicer to the Purchaser or its servicer

Accounting of the transaction

Upon Closing: Migration process: transfer of NPLs and relevant information and documentation to the Purchaser to ensure a smooth on-boarding.

VDR archives

Final LSPA

Image 7

Conduct and implement post-Closing obligations according to the LSPA.

Cooperation between seller and Purchaser as foreseen in the LSPA and, if applicable, on an ad-hoc basis if problems occur or non-foreseen actions become necessary.



The COVID-19 pandemic has led to a sharp economic downturn in the EU and worldwide. Despite vast support schemes implemented by governments, banks are exposed to companies and individuals that have become financially more vulnerable, in particular small and medium-sized enterprises (SMEs). Addressing a renewed build-up of NPLs on banks’ balance sheets as early as possible is a key lesson from the last economic crisis. In this context, further structural measures are needed to prevent the accumulation of NPLs on banks’ balance sheets as a result of the ongoing pandemic and related effects.

In order to provide banks with a further tool to face challenges to credit risk due to the COVID-19 pandemic, the Commission has outlined targeted action to improve secondary markets for NPLs in its December 2020 Action Plan on ‘Tackling NPLs in the aftermath of the COVID-19 pandemic’. The further development of secondary markets for distressed debt is one of the key policy areas in this regard. A deep and liquid secondary market for distressed assets across the EU would better allow banks to reduce their NPLs by selling them to third-party investors. If banks are better able to off-load non-performing assets from their balance sheet via secondary markets, this would help banks focus on their lending activities, free up space in their balance sheets for new lending and hence enable them to fund the economic recovery (2). Easier market entry and participation should be encouraged, especially for smaller sellers and purchasers who may be crucial for local-level NPL resolution.

As the economic repercussions of the COVID-19 pandemic have set in, NPL trading activity initially declined markedly, but has recently picked up pace again. When national support measures are phased out, it is likely that insolvencies may rise and the balance sheets of banks may be impacted by this stress. Banks need to be ready to identify debtor distress early, engage proactively with their borrowers in a timely manner and consider appropriate restructuring when needed (3). In the event that a sale of (portfolios of) NPLs to third-party investors is considered a suitable approach, banks should be ready to conduct an efficient and effective transaction process, leading to the best possible outcome. This would result in a better price for the NPLs, sold to a reputable purchaser that ensures compliance with laws including consumer protections.

To this end, the Commission announced in its Action Plan that it would develop guidance for sellers of NPLs, in cooperation with the European Banking Authority (EBA) and relevant stakeholders. The Commission therefore publishes the Guidelines on a best-execution process for sales of NPLs on secondary markets. The objective of these Guidelines is to encourage good sell- and buy-side processes for NPL transactions in EU secondary markets and, in particular, to help sellers and buyers that may have less experience with secondary market transactions. The Guidelines could lead to a number of benefits for EU secondary markets, by enabling more standardisation of processes, increasing efficiency and transparency of the timeline of transactions, and improving market practices in Member States, in particular where secondary markets are less developed.

This document summarises the best practices following the sequence of main activities to be performed within the preparation of the competitive transaction process. Throughout all of the different phases, the Guidelines provide clear suggestions on what would constitute an efficient and effective approach. The document illustrates in detail the main process and materials that are provided to external investors in standard market transactions. Considering the significant importance of sharing relevant data and information, the Guidelines include suggestions specifically on the scope of disclosure in the respective phases.

The Guidelines outline some practices and conditions considered necessary to achieve a successful outcome. Banks (as sellers of NPLs) are the main target audience and in particular smaller institutions that have less experience with offloading NPLs on secondary markets. However, the Guidelines also reflect the perspective of bigger banks, as this document could become a market practice standard for all sellers of NPLs. Beyond the banking sector, the Guidelines could also provide a reference document for other institutions that engage in sales of NPLs.

Market participants are not obliged to follow the Guidelines. These are rather meant to support NPL sellers and buyers in following a clear and structured process description that would enable arriving at a successful outcome. In particular, the Guidelines include indications on specific steps that the seller and buyer could take to improve the efficiency and effectiveness of the process. The Guidelines also point to certain steps that are more important for a specific type (and in certain cases a specific size) of transaction and/or asset class.

As regards the types of transactions, the Guidelines cover outright sales of (large) NPL portfolios and make reference to (large) single-name transactions (4). Both unsecured and secured loans are considered, including the following NPL categories:

Residential real estate (RRE) secured: requires many checks and proper documentation is essential.

Commercial real estate (CRE) secured: very heterogeneous in nature, with characteristics differing according to location, size, industry, use, etc.

Small and Medium Enterprise (SME) exposures: need strong focus on collateral valuation, cash flow analysis and the use of statistical methods and sampling.

Consumer unsecured: portfolios are typically made up of small exposures.

Corporate unsecured: implies heavier Due Diligence.

Leasing: has particular characteristics and specialisation (5).

The above implies that NPLs are a ‘special’ product. NPL sales are often highly portfolio-specific. Standardising the process entirely would therefore not be possible and is not the objective of the Guidelines.

The main structure of the document follows a chronological reasoning. Each main chapter focuses on one of the specific steps that should be followed throughout a sales procedure. The two main alternative standard strategies for setting up a competitive process are a Targeted Auction and a Negotiated Sale. The Guidelines elaborate on these two alternative strategies as relevant and their possible implications if chosen. The Guidelines represent a Broad Auction process, which is a typical 2-Phase-Process.

This document was developed by the Commission, in close cooperation with members and observers of the Commission’s NPL Advisory Panel. The latter’s membership can be found in Annex 1.

1.   Transaction structuring: Portfolio selection

1.1.   Key activities

The portfolio selection lays the foundation for a successful transaction. It is essential to select a marketable portfolio that complies with internal strategic targets and attracts investor demand. An early involvement of senior management during the portfolio selection process increases execution certainty, which is important for Seller as well as Purchaser. A marketable and well-selected portfolio reduces the execution risk, thus avoiding inefficient use of resources from all involved parties.

The key activities in this first phase are as follows:

Assessment of legal/tax/consumer protection restrictions.

Review existing IT system to enable optimising the selection process.

Definition of the transaction perimeter / selection of the portfolio to sell.

Decision upon (i) the use of internal resources vs External Service Providers, provided that a certain level of internal resources will always be needed (6); and (ii) Definition of the most efficient and effective organisational set-up to run the process.

Fine-tuning of other considerations around servicing, portfolio modelling and setting of the ‘reserve price’.

In order to optimise the selection process and to avoid high costs for data validation, data reconciliation and time-consuming manual changes, the existing IT system should be reviewed and adjusted, if necessary. The more complex a transaction is, the more likely that the design of a Seller’s internal organisational set-up as a project is advised, insofar that it allows a better alignment of all internal stakeholders in a transaction and closer monitoring of the transaction progress.

Portfolio selection plays an important role in any transaction as the right choice of a portfolio is key to a successful execution. The portfolio selection process needs to reflect the requirements and strategic targets of the Seller and simultaneously to attract investor demands, which might not necessarily be aligned to the Seller. The Seller’s goals may be driven by changes in strategy, regulatory pressure, and/or changes in risk appetite. While the Seller might have the expectations to sell more complex exposures at a high price, these goals may need to be adjusted because investors have a different yield expectation and cost calculation for work-out strategies for the NPLs offered. Decision to sell or to keep/retain to benefit from further upside is mainly driven by internal views within the Seller organisation (recovery value net of enforcement costs combined with P&L effect for different customer business segments) vs perceived market view (applicable for portfolio or single ticket).

The portfolio selection process may also need to exclude assets, which might be difficult to enforce against a borrower and/or to assign to a third party or which are specifically marked within the portfolio. A good example are exposures with third-party rights, or those that are otherwise encumbered, like guarantees. In such cases, it is often hard or unlikely to obtain the needed consent to transfer the asset from the beneficiary. This could lead to situations where, for example, some exposure of the borrower, like term loans, might be transferred to the Purchaser while the most labour-intensive exposures will remain with the bank. This also shows how important it is that the transaction team (if separate from the work-out team) maintains an open dialogue with the respective work-out officers.

It is worth noting that the portfolio may still undergo changes later in the process, i.a. reasonable ineligible claims will be excluded upon detection. During Phase 1 and Phase 2, the Seller continues to check the NPLs, verifying whether certain loans should be excluded from the final portfolio, in line with the Eligibility Criteria and Exclusion Criteria. The Preferred Bidder (which eventually/ideally is also the Purchaser in most cases) might equally ask to exclude some NPLs. On this basis, the portfolio is finalised. Chronologically, this approach entails the following steps:

Application of the main selection criteria (type, counterparty, status, size, geography, etc.);

Exclusion of non-transferrable loans; (7) and

Exclusion of loans according to the negotiation between the Seller and the Purchaser.

1.2.   Assess legal/tax/consumer protection restrictions

Before composing and selling an NPL portfolio, there are several legal checks to be clarified varying in different countries:

Is it allowed to sell the loans to a third party (e.g. banking secrecy, special loan conditions etc.) and what are the requirements to the third party (as prescribed by the local law implementing the Directive on credit servicers and credit purchasers (8))?

Is it allowed to share data with third parties and what data can be shared and which ones not or only with a Data Processing Agreement (9)?

Is it necessary to request authorisation from any regulatory bodies, taking into account the specifics of the envisioned transaction (as well as the stipulations of the local law implementing the Directive on credit servicers and credit purchasers)?

Are there any liabilities on the portfolio from a contract with a current loan servicer/lawyer (e.g. legal fees, penalties etc.) when selling it to a third party?

Are the loans subject to restrictions or do they include publicly traded companies with special restrictions (e.g. inside information, employees of the Seller, assignment restrictions stipulated by law)?

Is the consent of a public/state-owned development bank (e.g. Finnreva, KfW) necessary when selling to a third party?

What are the tax implications according to the Seller’s jurisdiction?

If the contracts underlying the NPLs have been terminated (‘denounced loans’), usually the whole exposure is on demand and fully due upfront, making direct sale possible. However, for the NPL sub-category of ‘unlikely to pay’ (UTP) exposures, the situation is more complicated because the underlying contracts are still valid, and both the receivables and contracts should be considered in order to perform the disposal (10).

In terms of ensuring appropriate consumer protection, where relevant, there are certain local/national legal information duties towards consumers that need to be verified and complied with.

1.3.   Objectives of the portfolio selection process

The selection of the portfolio plays a key role in reducing the execution risk. Mitigating this risk is key to an efficient and effective NPL portfolio sale and is one of the most important factors in transactions for Sellers as well as for Purchasers. The potential of failure of a transaction, especially when Seller and Purchaser have invested substantial time and resources, should not be underestimated, and might also lead to reputational issues for the Seller and/or the Purchaser. When a Seller is unable to execute a transaction, depending on the specific causes, investors might not participate again in future transactions organised by the same Seller. Sellers who cancelled transactions in the past might not be considered as attractive/dependable as others as they might be associated with more uncertainty and the risk of abandoning transactions once more. Investors prefer to allocate their limited resources, personnel and capital to transactions in the market where they expect to have the highest likelihood of execution and not to waste a potentially substantial amount of financial as well as other (internal) resources on Due Diligence. On the other hand, Phase 1 Investors that withdraw from the process after submitting unrealistic NBOs, might not be invited by the Seller in any future transactions.

It is crucial to use the portfolio selection as a means to balance the various and often conflicting interests of all interested parties. A portfolio disposal transaction often requires involvement of many different internal stakeholders, including, at a minimum, the NPL relationship management team as well as representatives from Finance, Risk, IT, Legal, and Compliance. Internal expectation management is therefore important to get the approvals needed to execute a trade. However, considering the various internal departments involved, even a well-designed and well-executed process can result in the consumption of large amounts of resources of the Seller organisation. In addition, it might be necessary to enhance internal IT systems, which generates additional costs. In cases where external support for data advisory and validation, indicative pricings, etc. is needed, total direct and indirect costs can become material. Therefore, the Seller should recognise that there may be substantial costs regardless of whether the transaction is successfully completed.

Examples of factors that may result in transactions not completing include:

Failure to obtain the necessary internal approval, (among other reasons) due to:

Submitted prices being well below price expectations;

Missing and/or inadequate involvement of senior management; and/or

Emergence of unexpected factors (for example, adverse press coverage, change of legislation, etc.)

Poor market timing due to a lack of interest by investors and/or no market for the portfolio offered.

Technical reasons, e.g. transfer restrictions materialising during the transaction process. Usually, such restrictions would be foreseeable and the chosen perimeter should not include NPLs where such risk exists.

Data gaps and/or data quality issues, adversely impacting pricing and/or transfer.

Legal/tax constraints for NPL sales in certain jurisdictions, e.g. specific license requirements for Purchasers (which should cease to exist once the Directive on credit servicers and credit purchasers has been implemented), pre-condition of legal recovery before any sale, taxation that makes the transaction commercially unviable, etc (11).

Most of these factors can be mitigated with a well-considered portfolio selection and a well-researched/planned sale process before launching a transaction. A portfolio selection based on a confirmed strategic decision by senior management will typically obtain relevant approvals as it is usually already aligned with management goals and the bank’s strategic NPL disposal plan. Reasons and possible goals for conducting a transaction are covered in Annex 2.

Even if there is no pre-defined or comprehensive strategy for an active NPL sales program, a portfolio selection should always be based on the overall internal goals and KPIs and comply with internal guidelines. It is important to note that internal strategic targets do not necessarily need to be met on a case-by-case basis. It is possible that adding exposures not meeting the criteria on a single-name basis might still add value to the overall marketability of the portfolio. For example, assets for which there is a clear interest in the market could be added to the portfolio, even if they would not fulfil all transaction goals. Such an addition might increase the offer’s attractiveness in absolute terms as well as widen the investor base, leading to a higher price.

Selecting a portfolio that meets the Seller’s expectation is certainly a prerequisite, albeit just one part of a successful transaction. The portfolio must also attract the investors’ interest and should allow them to achieve their expectations as well. Market intelligence and soundings are key to mitigating this risk factor. Evidently, selecting a portfolio that meets the requirements/considerations of the Seller, but would not find any demand in the market, is futile. The art of portfolio selection balances the market demand with internal Seller objectives in the selection process.

It is advised to compose a homogeneous portfolio targeting specific investor groups. Additionally, in the composition of the portfolio, although there are some mixed portfolios sales, it should be avoided to mix up too many different asset classes as investors are mostly specialized on specific asset classes. In most of the cases, investors are deciding between:

Consumers OR Corporates OR Public;

Secured with hard assets (e.g. real estates, airplanes, cars etc.) OR Unsecured; and

Bankrupted OR Not bankrupted.

It is further advised to compose a homogeneous NPL portfolio with regard to jurisdiction, i.e. selecting NPLs (and ideally, also real-estate collateral) from only one jurisdiction. The number of investors will decrease for portfolios that include NPLs from different jurisdictions and cross-country portfolios increase complexity regarding various parameters of the planned transaction for both Seller and Purchaser (legal, tax, servicing). When looking at jurisdiction, the Seller should take into account:

Where is the NPL effectively ‘booked’, i.e. in which jurisdiction is the seller located?

The laws of which country apply to the underlying loan contracts?

Where do the borrowers reside / have their seat or registered office (at the time when the loan was granted and currently)?

Where is the (real-estate) collateral located?

Another relevant criterion to consider is the size and potential purchase price of the portfolio. Investors need to invest time and resources in the Due Diligence process, which has to be included in the calculation of their potential return on investment. Moreover, such investment might not be recovered at all in the case that a different party wins the deal. If the portfolio is too small in terms of investable funds and the expected return too low, the potential Due Diligence cost might be higher than the expected return on the offered portfolio or, the Seller might have to consider to provide for comprehensive R&Ws in the LSPA to outweigh the risk of not enabling Due Diligence and/or to provide a chance to get familiar with a portfolio. In this case, there is a high risk that nobody would join the process or submit a bid. As Due Diligence cost is a significant sunk cost in the event of not being selected as the Preferred Bidder and a function of complexity, the right balance must be found between size, R&Ws and price/return of the portfolio to create interest in the market.

1.4.   Technical aspects of the portfolio selection process

It is important to take into account the more technical aspects of a portfolio selection process. IT systems in banks are often not specifically designed for portfolio divestment as such systems are usually designed to support the in-house work-out process and the work-out officer in their daily tasks. A bank offers various products to its clients and needs to disclose a material amount of accounting and regulatory information predominantly on an overall exposure level. However, the business model of a bank in the context of the banking book is usually not aimed at frequently buying and selling assets. The IT system of a bank is not designed for frequent transactions. It usually reflects the exposure view as this is important for the bank. They do not necessarily reflect a more legal or contract view, which can be critical from a transaction perspective. Providing information to potential investors in an adequate way might therefore be challenging for a bank, and the information used to prepare Loan Data Tapes usually requires validation (the preparation of a Loan Data Tape is highlighted in section 2).

For one-off transactions, the validation and, where applicable, the remediation of data might often be done manually. In cases where more regular transactions are planned, it makes sense to improve the IT system to enable a more efficient process. This may involve a review of the existing IT system and amending and/or creating a number of (additional) fields for transaction purposes. The improvements to the IT system should enable the Seller to provide relevant data on all of the positions in a timely manner throughout the transaction process. This would decrease Due Diligence costs for the investors and would reduce overall transaction costs, thereby improving pricing.

An innovative approach in support of efficient transactions is the implementation of a specific field in the front office system that allows the loan officer (or workout officer) to classify an exposure as suitable for transaction purposes. As the loan managers should have the best overview about the value of an exposure, they may be in a better position to recommend an in-house work-out strategy or a sale strategy. This field, therefore, allows loan managers to classify specific loans as disposable and enables them to focus on loans to which they might be able to add more value.

In addition, the transaction management team should be able to filter specific management targets and to include NPLs that meet the management targets. The inclusion of these NPLs usually requires the approval of the respective loan manager. Such approach also allows the transaction team to better steer the timing of a transaction, which might be useful in case too many other sellers are currently active in the market. It is a very simple and powerful tool to establish an internal warehousing function. Given that this field is actively used by the loan manager, it would also enable closer alignment between the responsible loan officer and the transaction team.

When the transaction team concludes that a sufficient size has been reached and the timing to go to market is considered attractive, relevant data from the front office system may be uploaded to a system used (and in certain cases specially developed) by the transaction team. The software allows for detailed analysis of the portfolio, displays stratification tables, fills the relevant fields, and eventually produces the Loan Data Tape. Based on the data, a first assessment of a possible purchase price will be provided to senior management. Following the latter’s approval, the transaction process could be initiated. In the context of a ‘plain’ portfolio, with full and complete datasets and LSPA, the process described above works well and could give swift insights into a potential portfolio and the relevant impact of a sale. In case of larger or specific transactions that do not follow a clear rationale (reason for sale) and portfolios assembled unstructured, mixing across asset classes, a detailed case-by-case analysis is inevitable. Additional efforts especially would be required, especially with respect to organisational issues.

1.5.   Reflecting upon the necessary use of internal resources and potential additional need for external support

Before preparing the portfolio composition and sale, the Seller should reflect upon the available internal resources for the planned sales activities and the potential need to engage an External Service Provider, such as a transaction platform (see also Annex 3).

The following questions would help in the decision process:

Does the Seller have internal experts that are experienced in executing a sales process?

Does the Seller have access to a wide investor database to select the most proper and competitive investors for the transaction?

Does the Seller know what investors expect in the Due Diligence Process?

Does the Seller need support in data preparation?

Does the Seller have a dedicated internal lawyer or is support needed in terms of legal/tax advice for the documentation (NDA, LSPA)

Does the Seller have its own technical capacities for sharing the data or is a VDR provider or transaction platform needed?

1.6.   Organisational issues

When planning a transaction, a dedicated internal team and/or an External Service Provider are resources worth considering. In this section, the main focus lies on internal aspects and considerations. Planning and executing a successful transaction cannot be left just to the Loan/Workout Manager, but rather, as previously mentioned, it requires a set of skills from many departments and might benefit from the facilitating role of an advisor. The amount of work involved should not be underestimated. Similarly, the value of an existing network of Purchasers and the experience of conducting multiple transactions is very important.

Another important consideration is whether the personal objectives of a loan/workout manager might (or appear to) conflict with the overall management target regarding the transaction. It can be complicated to align the individual aims of a loan/workout manager with the aims that would be achieved by selling the NPL in the market, thereby reducing his/her workload. It could also be the case that loan/workout managers face personal concerns that selling their exposures in the market could render their role redundant. One option to mitigate this issue could be, similar to the possibility of including a field for marketable assets in the IT system (see previous section), to adjust the annual goals for loan/workout managers to encourage the loan/workout officer to ‘tick the box’. This has demonstrated to be a successful method to incentivise the appropriate and effective identification of loans for a sales programme.

The establishment of a dedicated (and ideally independent) transaction team/department could be advised for many sellers (if economically efficient) and would further ameliorate the organisational set-up to facilitate and run effective NPL transactions. Such a specialised team could build knowledge about NPL markets and experience with market dynamics (in different countries/jurisdictions). This would enable the team to advise on NPL portfolio selection, possible market prices and the economic benefits of selling a specific portfolio. In turn, this facilitates the required (pre-) approval and support from the (senior) management to engage in NPL transactions.

For larger transactions, it could be advised to set up the transaction as a (separate) project. The project should be run by the internal transaction team (potentially supported by External Service Providers) for the reasons outlined above.

In the case of larger selling institutions, it could be advised for the transaction team to establish a project management office (PMO), which would coordinate the various work streams, set up shared folders to exchange information between the various work streams, and organise the communication with the steering committee. The steering committee should include all relevant senior managers to ensure that they are consistently informed about the progress on the transaction and to align them with the appropriate outcome. This helps in mitigating the risk that the approval for selling would be refused. As regards the set-up and implementation of different work streams, sellers generally have quite some flexibility. However, major workflows need to be able to fulfil their functions and should not be disrupted by an overly complex structure. Such processes include Loan Data Tape validation/remediation/enrichment; Data/Due Diligence (which should be led by the loan/workout manager), Finance, Marketing (led by transaction manager) and Legal.

Such a set-up, including a PMO, might not be viable for a smaller seller that wants to sell an NPL portfolio that is considered to be small by the market, yet is of a considerable size for the Seller. Internal analysis by the (smaller) Seller should reflect upon the most effective and cost-efficient organizational set-up, taking into account the size and complexity of the NPLs to be sold.

2.   Preparation phase

2.1.   Key activities

Building on the actions and reflections described above, the Seller should take care of the following key activities during the preparation phase:

Define the number of phases of the process (namely, 2-Phase-Process with NBOs and BOs, or 1-Phase-Process, directly with BOs).

Set the timeline – including internal steps and approach to the market (taking into account involvement of legal and consulting advisors as well as timing to take care of requests that investors can have).

Prepare the main marketing documents (mainly Teaser and Information Memorandum). A Management Presentation may be required during Due Diligence in Phase 2. Preparation of the main process documents (mainly investor NDAs, Process Letter (if required separately for Phase 1 and Phase 2), BO Guidelines and, if relevant, NBO Guidelines).

Prepare Loan Data Tape and retrieve documentation.

Set up VDR (12) (including a detailed VDR index).

Preparation of the LSPA.

2.2.   Number of phases of the process and timeline

First of all, a decision should be taken on whether to conduct a 2-Phase or a 1-Phase-Process according to the type of portfolio to be brought to the market and expected deadlines (e.g. if the asset type is well known with good understanding of expected prices, a 1-Phase-Process could be preferred to shorten the timeline). A timeline, including all of the relevant internal steps and milestones to approach the market should be defined, taking into consideration:


Consistency of approval path, stemming from Board of Directors’ delegation of powers and signatory powers (13);


Identification of list of possible investors to be invited. In case of disposal, all the internal compliance requirements (e.g. KYC) need to be addressed;


Identification of list of possible servicers to be invited for any investor potentially interested in the acquisition, but without currently having access to a servicer);


Set up of competitive tender context to achieve sufficient price tension, as appropriate; however, in case of a small NPL portfolio or single-name transaction, the seller should also weigh increased transaction costs and efforts against the possibility of a bilateral negotiation approach;


Definition of transaction documentation – the NDA, LSPA and potentially additional transaction documents have to be agreed upon by the relevant internal legal functions, eventually supported by external legal advisor; the LSPA should in addition be signed off by the tax department and by the auditors.


Consideration of the time needed to perform vendor Due Diligence / data remediation, to prepare Teaser and Information Memorandum and Loan Data Tape.

2.3.   Preparation of main documents

The institution should then prepare the documentation related to the NPLs and the commercial materials. A Teaser contains the key transaction background and summary data on the NPLs to be disposed, a Process Letter with all relevant transaction steps and timing (see also Section 3.4) and an Information Memorandum with further information on the transaction structure and the NPL portfolio. The Information Memorandum provides a detailed description of the target NPL portfolio/single exposure that serves as the primary marketing document in the tender process. It also contains an executive summary, investment considerations, sale structure, bidding method, estimated recoveries etc.

Within these documents, all the engagement rules of the process, including timeline, conditions, etc. should be clearly stated. The importance of clear and transparent communication in the initial phase should be stressed, to explain to potential investors why the transaction is taking place and what are the rules of engagement. This could otherwise lead to misunderstandings and ultimately jeopardise the deal. These soft facts should not be overlooked by sellers, as they can motivate an investor to consider a deal.

2.4.   Loan data tape preparation and documentation retrieving

During this phase, the selling institution should start collecting the data on the NPLs (and collaterals, if applicable) of the portfolio, in order to create the Loan Data Tapes that would be made available to investors. The Seller should prepare a Loan Data Tape covering, as a minimum, information in the following key main areas:

total outstanding amount and breakdown into principal claim, interest, fees and costs

date of origination

nature of borrowers

status of claim / borrower (e.g. insolvent)

date of default and information on actions taken to avoid statute-barring

historical payments, ideally on a loan-by-loan basis

status of recovery procedures and projected recoveries (business plan), if available

legal status of the debt (e.g. pre-legal, currently in-court proceedings, already titled and in enforcement actions (14))

if the loan is secured, additionally: key information on collateral, including rank of the lien, register facts (registered amounts), third-party rights, open market values available, personal guarantees, etc. For CRE loans, more disclosure may be needed on tenancy/occupancy status, yield, gross market rent. In case of corporate loans, it may be necessary to add financial statements of the borrowers, etc.

In order to obtain a more accurate pricing of credit portfolios, it is advised to strive to not only take a snapshot of the data, but also provide some historical performance data, especially on recovery rates. Historical performance data should include the actual gross collection cash flows (including detailed interim collection and cash in court information) on the portfolio at loan or borrower level plus procedural costs and legal expenses. The historical performance data might include aggregated recovery curves reflecting the general workout experience of the selling institution. Due to the disordered relationship with the borrower, information about the legal status is very helpful as well. It is advised to also perform an internal vendor Due Diligence to check completeness and correctness of stored information and eventually improve the data quality via ad hoc remediation. Vendor Due Diligence can be performed internally or with the support of a (specialised) External Service Provider, which may offer an additional neutral (and potentially clearer) view regarding the key relevant information to be disclosed, mainly affecting the prices.

It is important to note that the EBA standardised NPL data templates, which were first developed in 2017 to help facilitating financial Due Diligence and the valuation of NPL transactions, will play an increasingly important role in the future. At the request of the Commission and following the adoption of the Directive on credit servicers and credit purchasers, the EBA is currently carrying out a review of the data templates, streamlining them to help banks better prepare as part of their NPL management strategies in the aftermath of the COVID-19 pandemic. Use of the templates has been voluntary so far, yet the Directive on credit servicers and credit purchasers (15) mandates the EBA to further develop them into implementing technical standards for credit institutions. In line with the conditions as set out in the Directive, credit institutions will in future be required to use the templates for transfers of non-performing credit agreements (including transfers to other credit institutions). Taking into account the experience of market participants on the buyer and seller side, the revised templates should become simpler, more proportionate and more effective, which would enable price discovery in a consistent way across the single market.

The Seller can perform completeness, accuracy and other data quality checks and create a Loan Data Tape in the specific format required for transaction or regulatory purposes. In this respect, it is advised to employ the NPL data template of the European Banking Authority, which is to become mandatory in the future. An External Service Provider can also support the determination of an expected price for the specific portfolio.

Preparation of the documentation should include the actual loan files, or a sample thereof, as those will be required by the investors during the Due Diligence. In any case, availability of documentation will become a topic during the BO Phase as investors usually request R&Ws with respect to documentation being available. Documentation in a transferable form needs to be ready before signing / closing. Knowledge of what data and documentation can be provided in which form is a prerequisite when starting an NPL sales process.

The collection of physical documentation might not be a trivial formality. Lack of quality of documentation can pull down the price. Depending on the loan contract, it might include a variety of documents and records:

Loan documentation:

Contracts or deeds with debtors

Judicial documentation

Insolvency documentation

Addendums in longer term loans

Collateral documentation

Correspondence with the client or the courts

Correspondence with lawyers

Should the Seller decide to share a sample of documents with investors only, then the sample creation process should be well explained and all borrowers belonging to the sample should be clearly marked in the Loan Data Tape. The seller should prepare sample documentation for a (statistically) random sample. If the chosen NPLs do not (seem to) represent a random sample, analysts on investor level will point this out and investors are likely to request additional documentation, which can delay the overall process or, if the seller does not fulfil the request, can lead to lower prices offered as investors fear that data quality is not uniform for the NPLs in the portfolio.

2.5.   Decision on VDR set-up

In order to share information, for larger transactions with mostly digitally available information, it is advised to use a VDR (internal VDR solution and/or External Service Provider offering VDR solutions). This enables tracking downloads of documents and the activity of each potential investor in a manner that is easily auditable. In addition, VDR usually allows for Q&A sessions and might also enable sharing any request of additional information to every investor, which facilitates a fair and transparent process. A VDR can be set up internally by the Seller or in cooperation with an External Service Provider (see also Annex 3 for more details).

If the Seller chooses to make use of a VDR, then all (electronically available) data and documents are shared via the VDR. If the Seller does not make use of a VDR, the Seller chooses another secure medium of data transfer.

The decision to set up and use a VDR should be determined on a case-by-case basis to meet the interests of all participating parties. Especially for small portfolios or single-name transactions, a cost-benefit analysis should be conducted, which might deter using a VDR and may suggest using alternative solutions that could be more cost-efficient under such circumstances.

When using a VDR, guidelines in a specific document should set the rules to be followed by the investors in using the VDR (access to the VDR and use of the information disclosed therein). The document typically contains the list of persons to be given access to the VDR, data room rules and permission rights (e.g. permission levels of downloads, printing possibilities etc.). VDR rules should be balanced and should state that agreements in the NDA prevail in case of conflict. It can create a significant delay if VDR rules contain stricture stipulations than the NDA including potentially personal liability of persons entering the VDR. If investor analysts refuse to enter the VDR based on e.g. personal liability clauses, this is not in the interest of the seller or the process in general.

Documents uploaded in the VDR need to comply with the applicable personal data protection and banking secrecy legislation. Therefore, if applicable, personal data information (i.e. personal identification number, name/surname, etc.) and/or sensitive information must be black-lined following the advice of internal/external transactional counsel.

On the other side, during this phase, the Seller gives investors access to essential information in the form of the Loan Data Tapes to allow portfolio analysis. The more relevant the information, the more likely the Seller will obtain realistic non-binding price offers. Relevant information should at least include the following: total outstanding amount, segment of debtors (private individuals, small businesses, large corporates, etc.), date of default, historical payments, legal status of the debt, details regarding collateral (in case the loan is secured). In case of large portfolios, the VDR might not include full documentation during Phase 1. A sample of loan documentation may then be provided during Phase 2. Scope of the loan documentation disclosure could be provided to Phase 1 Investors during Phase 1, so that they factor this in for their NBOs. Sampling criteria may need to be properly disclosed to the investors as such could be included in the LSPA in the form of R&Ws. If External Service Providers are engaged, it is advised that they check and endorse the sampling criteria.

2.6.   Preparation of the Loan Sale and Purchase Agreement

Apart from data and documentation, the terms included in the LSPA will affect the price. The process around the LSPA should thus already be started in the preparation phase and be part of the documentation to be shared with investors via VDR before the BO is submitted and constitute a key element to be considered for the BO itself.

The Seller should decide on the process regarding the LSPA:

In which language is the LSPA to be provided to investors? It is considered standard market practice that English is the preferred language, provided that specific legal terms should also reference the respective legal term in the local language. However, where targeted investors are (solely) local, the local language is likely to be acceptable.

Will it be drafted by in-house lawyers or would external legal counsel be mandated?

Are LSPA templates available from industry associations or transaction platforms?

What information do the lawyers need to be able to customise the LSPA to the portfolio?

Which R&Ws can the Seller give? Input from the work-out team is imperative here.

Who needs to sign off on the LSPA internally before it is provided to the investors (16)?

Define a reasonable timeline for investors to prepare a mark-up and thereby taking into account additional time that might be needed if the LSPA language is not English, but international corporations / funds are among the investors.

Set internal timelines: what needs to be done and when, to be able to meet the delivery timeline?

When would the draft LSPA be delivered to investors?

The draft LSPA should be further developed during the next phase (see also section 3.4).

3.   Pre-marketing phase

3.1.   Key activities

The Pre-Marketing Phase entails the preliminary assessment of the market appetite to receive feedback on a transaction. The output of this phase is the final selection of the transaction structure and perimeter, the Process Letter describing the transaction’s rules and timeline, and a Due Diligence Material Inventory detailing at what point in the process key material will be released to potential investors.

The key activities are the following:

Market sounding

Definition of the best marketing strategy

Continue preparation of the process and marketing materials for the NBO and BO Phase.

The scope and depth of pre-marketing is defined by often-conflicting requirements within which the Seller is operating. The Seller must balance:

its need for transaction transparency as demanded by its stakeholders (e.g. regulators, shareholders, etc.); and

the general objective (e.g. maximizing recoveries/value, speed and costs, minimizing disruption, discretion, deliver towards customers in distressed situation etc.)

3.2.   Market sounding

During this phase, the Seller may perform a ‘market sounding’, based on the features of the projected transaction and prepare a long list of potential investors to assess their interest in the transaction. External restrictions on the process may not allow an open invitation to as many investors as possible and/or the Seller may not have knowledge of the most likely investors. Therefore, it is important to have access to and maintain the widest possible investor pool with no limitation. In this regard, for certain sellers, in a number of jurisdictions, External Service Providers can help addressing the right investors through their investor databases.

As part of the Market Sounding, the Seller may issue the Teaser presenting the envisaged process (with a general timeline), the rules to access information, and the bidding procedure. It is important to clarify the expectations and to outline the process as detailed as possible. It is therefore key to provide a concrete timeline, to indicate when the Seller deliverables will be provided, when the bids are expected and on which basis, etc.

The Teaser is an anonymous marketing document, which summarises the main elements of the proposed NPL sale. It can be provided to potential investors before the signing of an NDA (and provides a first indication on when the NDA has to be signed/executed). Particularly for NPL sales involving real estate collateral, it is important that such Teaser be prepared with a set of visuals, maps, etc. that is as comprehensive as possible. To the extent possible without disclosing confidential material, the Teaser, at a minimum, should address key property facts, property location, investments highlights, borrower overview, current stage within the legal process of the loan, key financial indicators, picture (17), and contact information (18).

The Teaser is distributed to target investors to introduce them to the key characteristics of the envisaged transaction. The Seller collects expressions of interest from potential investors. Following the receipt of the written expressions of interest, the Seller may consider inviting further investors to the sales process.

The Seller’s internal/external legal advisor needs to negotiate NDAs with the potential investors and their respective legal counsels. At the end of this phase, potential investors are required to sign these NDAs. Following execution of the NDA, the Seller will be able to distribute an initial Process Letter and Information Memorandum to Phase 1 Investors.

As NDAs present a complex topic of their own, it might take a long time to negotiate an NDA with experienced investors that have their own internal rules and guidelines to adhere to. This needs to be reflected in the timeline. It is possible that an investor is ready to sign swiftly and that the process is still held up for weeks because the NDA needs to be negotiated with another investor. It is advised to centralise the on-boarding of interested investors, using strict team responsibilities and modern technologies (via internal systems or via e.g. transaction platforms).

Elements to consider when marketing/advertising a sale:

The selection of the investors’ residence and the language of the marketing material is very important. As a rule of thumb, transactions with a possible cash price (net proceeds) below EUR 5 to 20 million (depending on the country and the specificities of the NPL portfolio) may only be attractive to local investors; larger transactions should be marketed to both local and international investors. International investors will typically expect that the transaction incorporates generally accepted market documents and processes (e.g. LMA NDA) and need an English documentation for the transaction process. Also for smaller transactions, English documentation should be considered, as ‘local investors’ may be affiliated to bigger corporations with their seat abroad and where committee approval needs to be obtained.

It is also important to elaborate on the selection of investors based on the preference in the specific asset category. Investors in the NPL market mostly divide their interest according to a number of factors (see also section 1.3). Willingness to buy might also be demonstrated via a financial commitment (e.g. refundable deposit). With respect to the latter option, the Seller should weigh the level of security a deposit offers, against the additional efforts arising from the necessity to negotiate another document and to handle the financial deposits from various investors, which in the end will have to be reimbursed (except for the Purchaser for which the deposited amount could be deducted from the purchase price payment).

3.3.   Definition of the best marketing strategy

As noted above, a choice needs to be made between a 1-Phase-Process and a 2-Phase-Process. The latter is characterised by two levels of disclosure: first, bidders are provided with high-level disclosure during the NBO phase. Subsequently selected investors are provided access to a second level of disclosure during the BO phase, which generally includes more detailed Due Diligence materials (AUP Report, re-valuations, servicing review etc.). Conversely, in a 1-Phase-Process all bidders are provided with the same level of disclosure at once.

There are a number of advantages in having an NBO Phase:


Increases competition as the initial pool of bidders is larger;


Investors are selected for the following phase based on their NBO letters so that the more work-intensive binding phase and Due Diligence is only conducted with a restricted group of investors, making the overall process more efficient and easier to manage;


Investors have the chance to ask for additional data during the NBO phase, which the Seller can prepare and then provide in the binding phase. Necessary disclosures regarding the quality of the portfolio can increase the pricing of the portfolio (leading to more accurate pricing) and make discussions on the LSPA easier;


Price discovery may be more important for unlikely-to-pay portfolios, which could become more common in the aftermath of the COVID-19 crisis than it was for the legacy NPLs transacted in the last 10 years;


More sensitive data/information (such as private contractual and judicial information related with the borrower itself, property revaluations, full servicer review etc.) is only provided to shortlisted bidders in Phase 2.

On the other hand, the disadvantages of an NBO phase include:


Transaction may take longer given the 2-Phase nature of the process;


Two sets of data must be prepared. Nevertheless, the second Loan Data Tape should benefit from the partial work done in the first one adding a higher degree of completion; and


Wider investor outreach may reduce transaction confidentiality.

In general, a 2-Phase-Process could be advised in case the number of potential investors has not yet been reduced to e.g. 5 or less. In case a Seller already knows that the number of investors would be limited and competition might even be counterproductive, the Seller could certainly consider a faster (and probably more profitable) short-list process.

Length of the disclosure phases: on average, Phase 1 lasts up to ca. 4 weeks and the second phase 4 to 12 weeks (depending on whether the portfolio is secured or not and depending on whether the Seller will comply with its own delivery deadlines). However, given the heterogeneity of portfolios and bespoke nature of these transactions, the exact duration depends on each portfolio and investor base.

Once the decision to opt for either a 1-Phase-Process or 2-Phase-Process has been taken, based on market practices, the three standard strategies for setting up a competitive process are a Broad Auction, a Targeted Auction and a Negotiated Sale. Below is an overview of these three options and indications on what constitutes the best marketing strategy in different scenarios.

Broad Auction

A Broad Auction is a typical 2-Phase-Process, whereby a large list of investors is invited to submit an indicative NBO. Following this first auction stage, a Due Diligence process is run with a restricted short list of investors which is invited to submit a final BO. Following this second auction stage, a single Preferred Bidder is selected, with whom the Seller enters into the negotiation of the LSPA and potentially additional transaction agreements.

Building on the advantages mentioned above, the main benefit of this process lies in the bigger base of potential investors:

More competition leading to higher sales results;

Investors will be treated in a more transparent selection process based on the price and not on personal relationships; and

From compliance perspective, a more representative market price and pricing comparable are available.

The main disadvantages are additional resources required to manage the transaction, sharing confidential information with more participants, sellers’ reputational risks and possible risk of failed execution with new investors. Regarding longlists of investors, the risk of having an excessively long list is that those investors that have a real interest in the transaction could be more reluctant to spend time and resources on Due Diligence in such a situation, due to the very high competition and the perception of the process being less focused.

For transactions attempting to reach a broad audience, for certain sellers in a number of jurisdictions, transaction platforms could offer an efficient manner to minimise the disadvantage of dealing with a large number of investors. Transaction platforms are designed to shift the complexity of interacting with multiple possible investors from the Seller to a purpose-built platform.

Targeted Auction

A Targeted Auction is a competitive process similar to the Broad Auction, but involves a shorter list of potential investors (approximately 2 to 8). This option typically allows the Seller to have better control over the process whilst benefitting from a still competitive environment. It is usually a 2-Phase-Process, although under specific circumstances and especially in high time-pressure situations, the first phase may be omitted.

The main advantages are linked to the narrower base of potential investors:

Less complexity (fewer interactions, less Due Diligence efforts needed at this stage);

Participants are well known, which fastens the timeline and the rate of success. It also allows to get a better commitment from every participant, as they believe they stand a better chance to be selected as the Preferred Bidder, spurring them to spend more resources, focus more efforts on Due Diligence, which can have a positive impact on price and the LSPA;

Q&A Process with investors is more manageable by the bank’s team; and

Containment of potential issues with confidentiality of information and limited reputation risks.

The main disadvantages of a narrow marketing disclosure are limited competition, in particular the possible exclusion of newcomers that could have been interested in the transaction. This could lead to lower sale proceeds and, in a worst case, regulatory review later on.

Negotiated Sale

The Negotiated Sale is a bilateral process involving a single potential investor. Due to the lack of competition, the main steps (with relevant documentation shared) and the outcome of the marketing process vary significantly from the Broad Auction. The strategy is more likely to be adopted in scenarios where speed and confidentiality related to the transaction are critical for the Seller, or in the following cases:

In the preliminary market assessment, only a limited number of investors (one or two) showed interests in the transaction.

Negotiation between the Seller and the potential Purchaser have been made beforehand or this is a repeat/follow-up transaction, therefore there may be no need to start a competitive process.

The main advantages would be linked to special knowledge/interest on the Debtor/Creditor:

Investors that are already invested in a specific Debtor (Corporate) would be able to pay a premium due to reduced Due Diligence effort and risk.

Investors/servicers that already perform servicing for the Creditor have developed specific know-how/procedures over time to pay a Premium and give Execution certainty.

The effort on sharing Due Diligence documents is very low.

The main disadvantages are the possible collection of limited reference prices and narrow market feedback.

Depending on the choice among the three options above, the following timelines could be envisioned:


Preparatory Phases

Non-Binding Offer Phase

(Phase 1)

Binding Offer Phase

(Phase 2)

Negotiation and Signing

Broad Auction – 2-Phase-Process

8-12 weeks

4-6 weeks

6-10 weeks

2-4 weeks

Targeted Auction – 2-Phase-Process

6-10 weeks

4-6 weeks

6-10 weeks

2-4 weeks

Targeted Auction – 1-Phase-Process

6-8 weeks


6-10 weeks

2-4 weeks

Negotiated Sale – 1-Phase-Process

4-8 weeks


6-8 weeks

2-4 weeks (19)

3.4.   Preparation of the process and marketing materials for the Non-Binding and Binding Phase

Preparation of the process and marketing materials for the NBO Phase

The final objective of the pre-marketing phase is to prepare the process and marketing materials that are appropriate to the marketing strategy chosen (e.g., Broad, Targeted, Negotiated). The output is a Process Letter (20), which is shared with investors who have signed an NDA. The Process Letter document defines:


the procedure and rules to which participants in the sale will adhere; and


the Due Diligence Material Inventory, which will detail what material prepared in the previous stages (e.g. Teaser, Loan Data Tapes, loan documents, appraisals, AUP Report, legal Due Diligence report, LSPAs, etc.) will be included in the NBO and the BO phase (if a decision has been made to have a split process).

The importance of this phase cannot be underestimated. Investors build confidence in a process based on the professional spirit of the ‘rules of the game’ as defined by the Seller in the Process Letter. Investors typically prefer to invest Due Diligence costs in processes where they have high confidence in the timeline and goals of the Seller. Conversely, sales processes that appear to have sliding timelines, changing rules, etc. damage not only the prospects for that individual sale process, but also the Seller’s prospects at conducting further sales. Sellers should take this into account when launching an NPL sales process and consider that investors are less likely to take part in processes again if they observed either of the following:

the Seller seems to be merely interested in cross-checking the book value of its NPLs;

the Seller launches a transaction process for the same (or similar) portfolio on a regular basis, yet does not sell on account of its price expectations not being met, while never revealing its reserve price.

Similarly, investment in this phase reduces the risk of legal costs, regulatory scrutiny, and liability later. The Process Letter determines investors’ expectations as to the process, timeline, and format of the bidding process. It allows them to allocate resources and sets their strategy.

The Process Letter, at a minimum, should address:

Restrictions on what type of entities can bid: Based on advice from in-house or external legal (regulatory) counsel, the Seller should specify license or other requirements applying to the Purchaser. Even if legally it is predominantly a Purchaser obligation to ensure such compliance, the seller does not want to risk a process delay or admitting investors who cannot fulfil the requirements to Phase 2.

Means by which a bidder acknowledges and agrees to the Process Letter: For example, written acknowledgement prior to bid, through the action of submitting a bid, etc.

All deadlines applicable to the relevant transaction phase, including seller deliverables such as data, sample loan documentation and LSPA.

KYC: At what stage a prospective bidder will have to provide KYC material.

Bid Procedure:

How will Due Diligence be performed, and at what stages different levels of material will be released. For example, an anonymized Loan Data Tape will be made available during the NBO phase; a detailed Loan Data Tape will be made available during the BO phase.

How will questions related to Due Diligence be addressed? Submission process, targeted turnaround time, etc.

Deposit: Will a deposit be required to submit a bid and what are the instructions for submitting the deposit, if required?

How bids should be submitted: For example, email, electronic platform, phone, physical, etc.

Bidding type: Whether the sale will be conducted as a sealed bid, English auction, Dutch auction, or some hybrid model (see also Annex 4 for more information).

What a valid bid will constitute: For example, whether partial bids will be considered, whether bids contingent on changes to the LSPA will be considered, etc.

For what timespan bids have to be binding (e.g. during 72 hours), if during Phase 2.

Cut-Off Date: For loans where interest is being accrued, what will be the calculation date? How will payments of principal and interest received after this date be addressed.

Bid Deadline: When do bids have to be submitted by and whether late bids are considered.

Bid Nomenclature: Should bids be submitted as a percentage of outstanding principal balance or gross book value or as an amount in the bid currency, etc.?

Bid Confirmation: How the Seller will confirm the receipt of the bid and what the bidder should do if they fail to receive a confirmation

How Bids will be Assessed: For example, what will the process be if identical bids are received, is the Seller committed to selling regardless of the value of the highest bid, is the Seller constrained to selling to the highest bidder, etc.

Bid Award: How will the winning and losing bidders be informed?

Closing Process: For the winning bidder, process and timeline to closing, e.g.:

Good faith deposit. If a deposit is required, how is it calculated, what is the deadline, and under what circumstances will it be returned.

Execution of the LSPA. When is signing intended?

Other: Other factors that the Seller envisages. Examples of this include will the Seller offer finance, is regulatory approval required, etc.

Previous stages of the preparation process have created all the documents and material that will be made available to the investor. The Due Diligence Material Inventory will set out for the Seller team and potential investors at what stage material will be released. The release of the data is driven by:

Data Protection Laws: The Seller wants to safeguard and minimise the risk of violating data protection laws.

Competition Issues: Sellers may want to restrict data being seen by competitors that might give their competitors an advantage over them.

Maximizing Proceeds and Transparency: As a general rule, the sooner potential investors have access to the full Due Diligence material (good or bad), the higher the participation and the bids.

Preparation of the process and marketing materials for the BO Phase

In a 2-Phase-Process, the BO phase will make use of the documentation prepared in the previous NBO phase, in particular the Process Letter with the terms of sale therein. The VDR may give greater permission levels for downloading detailed information within the limits of data protection and bank secrecy.

The draft LSPA is the final main documentation to be prepared and to be released at the beginning of the BO Phase. Main topics to be covered in the LSPA are listed in Annex 6.

4.   Non-binding Offer Phase (Phase 1)

4.1.   Key activities

The overall objective for the Seller is to receive NBOs from all Phase 1 Investors on the NBO Date in the form requested by the Seller.

When the decision has been made to follow a 2-Phase-Process, the Seller first asks for NBOs and then for BOs. As a critical part of the preparation phase, the Seller has selected an appropriate group of prospective investors and compiled corresponding contact information. The Seller (potentially supported by External Service Providers) identifies and puts together a list of appropriate Phase 1 Investors.

At the beginning of Phase 1, the Seller is to provide each Phase 1 Investor with (i) the information that such investor was admitted to Phase 1; and (ii) a specific/detailed timeline setting out each major step, including any data, documents or information to be provided by the Seller.

The key activities are as follows:

If a VDR is employed: Management of the Phase 1 Investor VDR (incl. opening, user and access management, VDR reporting, etc.)

(Continued) preparation of the Phase 2 Investor VDR

Disclosure of the process and marketing materials for the Phase 1

Disclosure of (meaningful) data tapes to Phase 1 Investors

Management of a (limited) Q&A Process if applicable due to the complexity of the perimeter and/or the number of bidders

Selection of an Auction Type for Phase 2

Optional: provision of an LSPA Term Sheet to Phase 1 Investors

Analysis of the NBOs that have been submitted

Selection of a short list of bidders to admit to Phase 2

Finalisation of the portfolio potentially excluding certain ineligible NPLs from the portfolio (i) if they do not match the original selection criteria (anymore) or (ii) based on the reasonable request of investors.

4.2.   Launch of the bidding process and distribution of the Information pack

Marketing materials represent the first formal introduction of the NPL portfolio/single exposure to investors. They are essential for sparking investor interest and creating a favourable first impression. Together with the Teaser, the main additional marketing documents for a first-round NBO phase are the Information Memorandum, a (meaningful) Loan Data Tape (21) and the Process Letter.

The Phase 1 Process Letter sets out the rules of the NBO phase. The Seller can already share the LSPA draft in Phase 1, but it is not customary to ask investors to prepare an Investor LSPA Mark-up in Phase 1 as (i) investors might be reluctant to spend money (external legal counsel) and resources on this in Phase 1 and (ii) the Seller does not want to review Investor LSPA Mark-ups of all Phase 1 Investors. However, if the Seller wants to use comments on contractual topics as selection criterion, the Seller can choose to distribute a (concise) LSPA Term Sheet stipulating the main parameters that will be contained in the LSPA. On this basis, Phase 1 Investors can be asked to submit a statement on these parameters, together with their NBO. This enables the Seller to take into account the preferences of Phase 1 Investors before moving on to Phase 2, supporting the Seller to further develop and finalise the LSPA draft. In addition, the seller would be made aware if the LSPA Term Sheet contains contractual arrangements which all or the majority of investors reject.

If a professionally prepared LSPA is not released for comment as early as possible in the process, the Seller exposes itself to the risk of ‘re-trading’ (the Purchaser’s negotiating strategy of using the negotiating of the LSPA as an opportunity to claw back economic value after committing to a purchase price during the bidding process). It is therefore advised that:

an LSPA Term Sheet is shared with investors during Phase 1,

the LSPA be prepared in the preparation phase and finalised in Phase 1, to be released latest at the beginning of Phase 2, and

investors should be required to submit Investor LSPA Mark-ups to the as part of their BOs.

Together with the Process Letter, the materials to be received by the Phase 1 Investors will also contain detailed portfolio data on a line-by-line basis, and where applicable further detailed information regarding all or the largest loans. The Process Letter or another part of the Phase 1 materials shared by the Seller sets out, inter alia:

the detailed timeline for Phase 1 and ideally already the rough timeline for Phase 2. In case of any delay on the Seller’s side, the Seller actively communicates this immediately to all Phase 1 Investors including information about postponement of deadlines which were originally communicated by the Seller. The timeline initially communicated to the Phase 1 Investors should be realistic and changes should be made transparent for the Seller to retain a reputation of reliability;

the information on the Seller’s requirements for format and contents of the NBO. It is advisable for the Seller to request from Phase 1 Investors to specify e.g. any information and Due Diligence requests they would have for Phase 2, as well as the assumptions their NBO is based on, to enable the Seller to take this into account for Phase 2 planning and to determine a realistic Phase 2 timeline.

To the extent that the Seller has undergone any Vendor Due Diligence work (e.g. real estate revaluation, loan data tape consistency checks, legal documentation review), it might be helpful to disclose the scope of such Vendor Due Diligence in Phase 1. This would enable investors to scope the potential Due Diligence work required in Phase 2 and factor this in as part of their NBO.

4.3.   Bidders undertaking initial Due Diligence

After receiving the Phase 1 materials from the Seller, the Phase 1 Investors carry out an initial Due Diligence based on the available information. They might also submit a limited number of questions to clarify certain aspects regarding the NPLs (and their underlying collateral, if applicable) to the Seller. There would also be the option to allow for limited Q&A with Phase 1 Investors, which might already pose (limited) questions to the Seller. This could be due to the potential complexity of the sale perimeter and/or the number of bidders. Furthermore, the Seller could develop guidelines for the more detailed Q&A Process in Phase 2. During this first round, the Seller (potentially supported by External Service Providers) will manage investors’ questions in a centralised file and subsequently prepare answers to these questions or provide supporting material to address investors’ initial concerns. In parallel, the Seller will continue the preparation of the relevant (additional) material for the second round.

4.4.   Submission of Non-Binding Offers by bidders and selection of shortlisted bidders to be advanced to second round

Depending on the type of transaction or portfolio structure, the Seller (potentially supported by External Service Providers) will request from the Phase 1 Investors an NBO within the time period as set out by the Seller in the Process Letter or other materials. Once the NBOs are received, the Seller will compare and analyse them, which results in an Analysis Report of NBOs. If necessary, brief follow-up discussions may be conducted with individual investors to clarify some aspects of their respective NBOs.

The outcome of Phase 1 is to allow the Seller to shortlist the chosen Phase 1 Investors and to continue the sales process by providing access to more detailed confidential data and information about the NPL portfolio to the chosen Phase 2 Investors. Finally, investors that are not selected to proceed to Phase 2 are to be notified as soon as possible to strengthen the Seller’s reputation as a reliable and transparent market participant.

5.   Binding Offer Phase (Phase 2)

5.1.   Key activities

The objective for the Seller is to receive BOs from all Phase 2 Investors on the BO Date in the form requested by the Seller in the BO Guidelines.

Key activities include the following:

Provision of Process Letter to Phase 2 Investors

Provision of BO Guidelines to Phase 2 Investors

Provision of Phase 2 Data and Documents to Phase 2 Investors

Provision of draft LSPA to Phase 2 Investors

Management of Q&A Process

Optional: Organisation of Management Meeting(s) and summarising / providing outcome to all Phase 2 Investors

Organisation of the auction

Analysis of submitted BO Letters and Investor LSPA Mark-Ups

Selection of Preferred Bidder / Purchaser

Optional: KYC Process

Finalisation of the portfolio (continuation from non-binding phase)

5.2.   Seller Deliverables

Process Information

At the beginning of Phase 2, the Seller provides each Phase 2 Investor with:


the information that such investor was admitted to Phase 2;


a specific/detailed timeline setting out each major step, including any data, document or information to be provided by the Seller. This timeline should be realistic and any changes that were made should be as transparent as possible, in order to preserve the Seller’s reputation of reliability; and


information on the Seller’s requirements for format and contents of the BO. It is advisable for the Seller to request from Phase 2 Investors to specify e.g. the assumptions their BO is based on.

The information on process can be given by an electronically signed Process Letter.

BO Guidelines

At the beginning of Phase 2 (and often as part of the process information): the Seller provides each Phase 2 Investor with the BO Guidelines setting out the Seller’s requirements in respect of the format and contents of the BO.

Phase 2 Data and Documents

At the beginning of Phase 2: Phase 2 Data and Documents are provided to all Phase 2 Investors. Any costs, which, based on the draft LSPA are borne by the Purchaser, are communicated as part of this.

Due Diligence (Documentation)

At the beginning of Phase 2: communication of physical Due Diligence time slots or provision of virtual Due Diligence Documentation to all Phase 2 Investors.

LSPA Draft

At the beginning or Phase 2 or shortly thereafter: draft LSPA to be provided to the Phase 2 Investors.

Additional Phase 2 Data and Documents

Ongoing: potentially, at the request of one or more Phase 2 Investor(s), or as updated information becomes available, the Seller to provide additional / updated information to all Phase 2 Investors.

Answers in Q&A Process

Ongoing: Seller to provide timely answers to questions posed in the Q&A Process.

Optional: Presentation for and Findings from Management Meeting

After Management Meeting: If the Seller organizes one or more Management Meetings where a presentation is shared, such presentation and relevant findings from the Management Meeting(s) are to be shared with all Phase 2 Investors.

Optional: Snapshot of Final VDR

If the Seller uses a VDR and wishes to link certain R&Ws to a Disclosure Qualifier, the Seller could save a ‘snapshot’ of all information included in the VDR, which can be provided electronically to the Purchaser upon Signing.

5.3.   Best practices

Process Information and Timing

The process information that the Seller provides to the Phase 2 Investors should at least include:


dates on which certain data, documents or information is expected to be made available to the Phase 2 Investors (including the Phase 2 Data and Documents as well as the draft LSPA),


dates on which Phase 2 Investors are expected to provide certain deliverables (including the BO Date and the date on which the Investor LSPA Mark-up would be submitted by Phase 2 Investors);


further information: e.g. language(s) of the draft LSPA, specific contents the BO should include and form in which the BO is to be submitted, (if applicable) specific format which questions in a Q&A Process should have, etc.


if, when and in which form (a) Management Meeting(s) is / are planned, e.g. would there be one meeting for all Phase 2 Investors or individual meetings for the Phase 2 Investors, would the Management Meeting(s) take place physically or virtually, who would take part from the Seller and what are the persons’ roles and expertise, etc.

To lead an efficient, transparent and reliable process, the Seller should:


carefully plan and set an overall reasonable Phase 2 timeline;


determine the timing communicated to Phase 2 Investors in a way which allows a certain ‘buffer’ for unexpected delays;


actively inform Phase 2 Investors in case any Seller deliverables would be delayed;


adapt the deadlines for Phase 2 Investor deliverables (mainly BO and Investor LSPA Mark-Up) in case of a delay of Seller deliverables;


extend deadlines for all Phase 2 Investors and not for single Phase 2 Investors.

Note that NPL investors are customarily experienced investors who can adapt to different processes. A very important or even the most important feature of the bidding process for the investors would be that the process is led in an efficient, transparent and reliable manner where all investors are treated fairly.

Phase 2 Data and Documents / Due Diligence Documentation

General: All Phase 2 Data and Documents should have been prepared either in the preparation phase or latest during Phase 1. In a 2-Phase-Process, the Seller might have received data / information / documentation requests during Phase 1 and if the Seller can and wants to provide such data / information / documentation, these should be prepared before Phase 2 starts. Especially in a 1-Phase-Process, (an unexperienced) Seller must be prepared that data / information / documentation requests come up during the Binding Offer Phase and the Seller must determine how to deal with these, e.g. plan for relevant in-house persons to be available to prepare additional data and information during all of the Binding Offer Phase.

Due Diligence Documentation: The Seller should provide information on the selection criteria or reasons as per data and documents to be provided in the Due Diligence as well as potential inclusions or exclusions with respect to the object of sale in the process. The Seller should be prepared for the possibility that Phase 2 Investors additionally request Due Diligence Documentation for cases they have chosen if the selection of the Seller does not seem to cover a random statistical sample of relevant size. Additional Vendor Due Diligence that could be provided to Phase 2 Investors includes property revaluations, AUP Report, Legal Due Diligence, etc.

Due Diligence Timing: Access to physical Due Diligence should be arranged at the appropriate time in Phase 2 – ‘neither too early, nor too late’: The Phase 2 Investors should have a chance to get an overview of the NPLs and respective data before conducting the Due Diligence. Access to physical Due Diligence should be provided in the first half of Phase 2. If Due Diligence Documentation is provided virtually to the Phase 2 Investors, it should be provided as early as possible during Phase 2.

LSPA Draft

Apart from Phase 2 Data and Documents also the stipulations of the LSPA (e.g. R&Ws) could influence the prices at which Phase 2 Investors will bid. The Seller should plan the process around the LSPA already in the preparation phase. A draft should be provided to Phase 2 Investors no later than 3 weeks before the deadline (customarily the BO Date) which the Seller wishes to set for the Investor LSPA Mark-Up. Ideally, especially if the Seller has not shared an LSPA Term Sheet in Phase 1, the draft LSPA should be provided to Phase 2 Investors at the very beginning of Phase 2.

Q&A Process

In order to organize a Q&A Process in an efficient, reliable and transparent manner, the Seller can take the following steps:


determine the format in which questions are to be posed;


set deadlines for both questions and answers, e.g. questions always to be posed until Friday and answers to be given by the following Wednesday during Phase 2;


set a reasonable maximum number of questions to be posed by each Phase 2 Investor;


share answers (and maybe corresponding questions) with all Phase 2 Investors. Inform Phase 2 Investors about this before starting the Q&A Process so that Phase 2 Investors will not include own confidential information in their questions.

Optional: Organisation of Management Meeting(s)

Both timing and contents of (a) Management Meeting(s) should be prepared either in the preparation phase or during Phase 1. Important features of a Management Meeting can be:


a presentation providing background on the NPLs to be sold, underlying securities, workout / pre-processing activities, etc.;


access to one or more employees of the Seller who have profound knowledge of the NPLs to be sold including loan granting requirements at the time of origination of the NPLs, underlying securities as well as prior workout actions, etc.

From a timing perspective, for the Management Meeting(s) to be most effective, they should take place ‘neither too early, nor too late’:


The Management Meeting(s) should be scheduled at a time when the Phase 2 Investors already had the chance to familiarize themselves with the data and documents including the securities in case of real-estate secured NPLs;


The Management Meeting(s) should take place no less than two weeks before the BO Date to give Phase 2 Investors the opportunity to include information gathered during the Management Meeting into their valuation of the NPLs.

In order to lead an efficient and transparent process, the Seller should summarise main results and information from the Management Meeting(s) and distribute them to all Phase 2 Investors. As a practical example: if in one Management Meeting with a Phase 2 Investor it comes to light that a security, which was flagged as ‘1st rank mortgage’, is in reality a ‘2nd rank mortgage’, the Seller should disclose this information to all Phase 2 Investors.

BO Guidelines and Format

The Seller needs to determine ideally before the beginning of Phase 2 specifications regarding the BO that the Seller wishes Phase 2 Investors to comply with. The BO Guidelines are ideally provided at the beginning of Phase 2 together with other information on process and timing. Specifications regarding the BO can refer to:


format, e.g. signed pdf format;


delivery, e.g. to be delivered by e-mail on the BO Date to person(s) XYZ;


contents, e.g. Phase 2 Investor to name purchasing entity, intended servicing entity; whether the BO is subject to funding, any conditions or any internal approvals; which assumptions the BO is based on; for how long the BO will be valid, etc.;


pricing, e.g. if an NPL portfolio is divided into sub-portfolios: if Phase 2 Investors are to provide prices on the overall portfolio as well as on sub-portfolios;


gross / net pricing , e.g. the BO specifies if the offered purchase price is the final amount which would be payable to the Seller (‘net’) or if it is the gross price, i.e. in case a Cut-Off Date in the past has been determined by the Seller, such gross price would be decreased by the proceeds received in respect of the NPLs since the Cut-Off Date; to mention the net price in respect of NPLs to which a Cut-Off Date has been assigned is in practice not possible as neither the Phase 2 Investor nor the Seller can know the proceeds which will be received between the BO Date and the Signing / closing of the transaction;


bidding rounds and Auction Type, e.g. Seller can request a qualifying sealed-bid BO, timed auction or a combination.

Note that not all Phase 2 Investors may fulfil all specifications requested by the Seller, e.g. if a Phase 2 Investor would only be interested in purchasing the entire portfolio, they might not be willing to specify pricing per sub-portfolio. Also, especially for secured NPLs, Phase 2 Investors may be reluctant to provide per-item pricing as this would disclose the value which they allocate to each NPL (and / or the corresponding collateral) and since the Phase 2 Investor cannot be certain to become the Preferred Bidder, they might not disclose this information which they see as being a very specific result of their (costly) Due Diligence.

Optional: Auction Types

The ‘default auction type’ that the Seller can employ easily is the so-called sealed-bid approach whereby the Seller requests all Phase 2 Investors to provide their BO on the BO Date to the Seller. The latter then reviews and decides on the Preferred Bidder. There are other auction types like English, Dutch or Japanese auctions offered by auction or transaction platforms. An overview of main auction types can be found in Annex 4.

It might be easier for sellers with little or no track record in NPL sales to choose the sealed-bid approach which gives the Seller the opportunity to review in detail all BOs before committing to a Preferred Bidder. In general, a sealed-bid is advisable when the terms of the BOs can differ between Phase 2 Investors other than by price (e.g. terms in the LSPA and R&Ws, financing conditions, or perceived execution certainty). However, in the sealed-bid the Phase 2 Investors have no information about the other Phase 2 Investor’s prices and may be afraid they bid too much.

An English auction might achieve optimal results for smaller homogeneous pools of unsecured consumer NPL where the cost of Due Diligence is modest and many investors are ready to participate.

Optional: Partial Bid

For larger heterogeneous NPL portfolios, which can be divided into more homogeneous sub-portfolios, an auction structure may be optimal where Phase 2 Investors price the sub-portfolios individually. The Seller (potentially with the support of External Service Providers) can then match each NPL sub-portfolio with the highest price. This so-called partial bid can increase the total sale price and may lower the barriers for investors to participate. However, dealing with more than one Preferred Bidder and Purchaser increases the complexity for the Seller in closing and settling the transaction and might thus increase the Seller’s cost and internal resources necessary to complete the transaction. Sellers should be aware that not all Phase 2 Investors might be willing to make bids on NPL sub-portfolios: Phase 2 Investors looking to acquire a potentially big NPL portfolio might drop out of the process when asked to bid on smaller sub-portfolios. Phase 2 Investors take into account Due Diligence and other transaction costs (e.g., external legal counsel, purchasing structure set-up) when deciding which NPL portfolio size to invest in.

Some sellers request per-item prices (PIP) as part of the BO with the intention to allocate the loans to the respective highest bidder. A PIP BO is common for sales of large syndicated loans and less common in granular portfolios where the Seller intends to select one Preferred Bidder only. External Service Providers can help finding the optimal portfolio allocation in a PIP BO while respecting investor conditions such as minimum allocation amounts and target portfolio compositions. Sellers should be aware that Phase 2 Investors may be reluctant to provide per-item pricing as this would disclose the value which they allocate to each NPL (and / or the corresponding collateral in case of secured NPLs) and since the Phase 2 Investor cannot be certain to become the Preferred Bidder, they might not disclose this information which they see as being a very specific result of their (costly) Due Diligence. Furthermore, since investors are cost-sensitive, a split into smaller units can discourage investors as they will incur the same or similar costs for transaction closing (e.g. external legal counsel) as they would for the whole NPL portfolio.

Optional: KYC Process

The Seller can start the KYC process of all Phase 2 Investors during Phase 2 with the objective of having finalised KYC checks by the BO Date. The Seller can alternatively decide to conduct a KYC check only of the Preferred Bidder (22).

Pro KYC of all Phase 2 Investors before the BO Date: When analysing the BOs, the Seller will have certainty that all Phase 2 Investors fulfil the Seller’s KYC requirements. This can be helpful if the Seller has a fixed date (e.g. business year-end) until which the transaction must be finalized insofar that there would be insufficient time to review the Preferred Bidder’s KYC documentation after the Preferred Bidder has been selected.

Contra KYC of all Phase 2 Investors before the BO Date: Seller’s compliance department will have to review KYC documentation provided by several investors. If the Seller only starts the KYC check once the Preferred Bidder has been chosen, only one set of KYC documentation needs to be reviewed. If Phase 2 Investors are known and assumedly reputable market participants, the Seller can decide to postpone the KYC check to start once the Preferred Bidder has been selected. This also benefits the unselected Phase 2 Investors, as they do not spend resources on a fruitless KYC process.

Analysis of submitted BO Letters

Before receiving the BOs, the Seller should determine the decisive factor(s) for the decision on the Preferred Bidder, e.g.:


will the focus be mainly / purely on the best price?


if and how will other factors be taken into account, such as track-record regarding closing of similar transactions, (internal or external) servicing capabilities, reputation of Phase 2 Investor as well as intended NPL servicer, availability of funding, etc.

The Seller then compares and analyses the different bids of Phase 2 Investors, resulting in the Analysis Report of the BOs. Should the Seller need any clarification in respect of any BO, it is customary for the Seller to reach out to the specific Phase 2 Investor. However, in the interest of confidentiality, reliability and transparency, the Seller should not share any information regarding BOs of other Phase 2 Investors and the Seller should only use such direct contact for clarifications (e.g., no asking for a price increase to give only one Phase 2 Investor the chance to surpass the prices of the other Phase 2 Investors).

Decision on Preferred Bidder / Purchaser

As soon as the Seller has decided upon a Preferred Bidder, such Phase 2 Investor will be informed customarily in writing and final negotiations start on the LSPA, including practical topics to be handled (e.g., format and timing regarding provision of data and documents both electronically and in paper format, sending of notification letters to borrowers after sale, etc.). Unless major hurdles occur, which were not foreseen by the Seller, the Preferred Bidder becomes the Purchaser.

Sellers customarily inform unsuccessful Phase 2 Investors soon after the Preferred Bidder is chosen. The other Phase 2 Investors will realise eventually that they were not chosen as Preferred Bidder. However, in the interest of transparency and not to alienate Phase 2 Investors for future transactions, the Seller should consider a direct communication. In addition, in the unlikely event that the transaction with the Preferred Bidder falls through, the Seller might want to contact the Phase 2 Investor who submitted the second-best BO.

6.   Signing of the transaction and closing

6.1.   Key activities

The key activities for this phase are as follows:

Deliver a clean exit from the portfolio once the NPL sale is completed

Execute the LSPA and, if applicable, further transaction documentation

Financial closing

Finalise preparation of transfer of data and documents

Negotiate and agree on transition of the NPL servicing from the currently acting servicer to the Purchaser or its servicer

Accounting of the transaction

Upon Closing: Migration process: transfer of NPLs and relevant information and documentation to the Purchaser to ensure a smooth on-boarding

More concretely, the following steps need to be taken care of, divided by area:


Communicate with the Preferred Bidder(s) on all matters including receiving confirmation that the purchasing vehicle(s) are established and that the required funds are available

Negotiation of the Investor LSPA Mark-Ups with the Preferred Bidder

Finalisation and signing of the LSPA

Commence/finalise reconciliation on practical topics and requirements with the credit servicer (to be mandated by the Preferred Bidder), if necessary, for post-Closing period

Financial close

Refresh portfolio information and/or provide updated collection data as required

Financial closing: ensure that responsibility and timing is shared among the parties

Implement closing arrangements (for instance, in case of deferred purchase price)

Seller to invoice the Preferred Bidder with the cost of the servicing and/or recovery costs supported since Cut-Off-Date (if so agreed in the LSPA)


If applicable: Continued management of the VDR (incl. removal of non-preferred bidders), closing and preparation of VDR archives

Commence making the necessary internal arrangements for how the Seller will deliver on its obligations under the LSPA to the Purchaser post-Closing

Envisage the electronic and physical transfer of information and loan documentation (based on the final perimeter)

Continued management of the Q&A Process (if necessary) and/or direct communication, including resolution of open issues and transmission of any information supporting the transition of the servicing of the NPLs to the Purchaser or a servicer acting on behalf of the Purchaser.

If needed in accordance with each national law to get the transfer publicised, provide contact information of (i) borrowers and (ii) lawyers/bailiffs for each loan to make sure the Preferred Bidder has all necessary information to notify them about the disposal if such notifications are conducted by the Purchaser as, either set out under statutory law or in the LSPA (hello/goodbye letter for borrowers and notification letter for the lawyers/bailiffs) and reconcile the hello/goodbye letter and notification letter with the Preferred Bidder

Continued servicing of the NPLs until the agreed Servicing Transition Date

If applicable: Finalise interim servicing arrangements of the portfolio up and until an agreed Servicing Transition Date

Set up and prepare guidelines for the support to be provided by the Seller post-Closing (if applicable), incoming documents received by the Seller and interim collections received by the Seller in accordance with the stipulations of the LSPA

Accounting and internal

Ensure that the sale of the portfolio is correctly represented according to the Seller applicable accounting rules: termination of customer account, cancellation of provisions, set the accounting loss/profit with allocation of the purchase price

Obtain necessary internal approvals and consents including KYC checks, regulatory treatment (including CRR as the case may be), validation of the acquisition structure

6.2.   Key risk considerations

This critical phase requires strategic and commercial focus, as value may be eroded during the negotiation phase to financial close. It is important to design an efficient execution process for the transaction to limit the period between signing and closing of the transaction, considering that potential complexities and delays – pre agreement / negotiation – could be critical. During this phase, the Preferred Bidder and Seller have significant steps to take and this may be managed through agreed transition plan structures with an agreed timeline in place. Assistance and involvement of internal and/or external financial and legal advisors is key.

6.3.   LSPA Considerations

Once the transaction has been internally approved and the terms of the transaction have been finalised, the Seller and the Purchaser (selected Preferred Bidder) will sign the LSPA to achieve a proper settlement and post-Closing agreements. The Signing and Closing often occur at two different dates; however, they may occur at the same time. An appropriate period between Signing Date and Closing of the transaction should be agreed in the LSPA having regard to the complexities of the transaction, the steps needed to be completed in advance of Closing and the risk of delays.

In advance of signing of the LSPA, it is important to ensure that the LSPA appropriately reflects the legal and economic understanding as agreed between Purchaser and Seller. The LSPA should be drafted by the appointed legal advisors and be clear as to the obligations of both the Seller and the Purchaser (23). As part of LSPA, all post-Closing commitments should be agreed upon, including which party will send notification letters to the borrowers (if applicable), in which form this will be done and which party will bear the costs. The notification should also encompass the involved legal advisors servicing NPLs pertaining to the portfolio and institutions (lawyers, bailiffs, courts, etc.) to ensure an efficient transition of NPL servicing. This is usually stipulated in the LSPA. The specificities of how the borrower is notified of the sale depend on the requirements set out by national law.

6.4.   Other considerations

It is important to align all necessary internal departments with the Closing procedures in the LSPA. This will include agreeing the interim servicing of the NPL portfolio between Signing and Closing with the Preferred Bidder. The agreed interim servicing arrangements are customarily part of the LSPA, but may alternatively be documented in a transitional service agreement (TSA) where the Seller agrees to provide certain services for a certain period to the Purchaser at an agreed price. In general, interim servicing of the NPL portfolio should be carried out by the Seller with the same degree of diligence and care that was applied pre-signing of the LSPA.

Another area to consider relates to a specific risk in terms of compliance with anti-money laundering (AML) legislation. EU Member States have implemented the AML Directives differently within the EU, resulting in that only in a few Member States, Credit Servicers are defined as obliged entities and subject to local AML laws. Hence, the obligation to share and subsequently hand over AML-related customer information to a purchaser/credit servicer is only relevant if local AML laws require that KYC requirements are applicable for consumers managed by the purchaser/credit servicer. If such AML obligation does not exist, the legal ground is lacking to share such personal data according to GDPR. The KYC data can be both confidential and sensitive (above all the suspicious transactions) and cannot be publicly shared (24). It could hence prove beneficial to define an agreement between the compliance departments of the Seller and the Purchaser to transfer such information, while respecting the perimeter allowed by regulation and guaranteeing appropriate confidentiality measures. In particular, it could be interesting to highlight the elements classified as:

‘high risk’, as per reference through dedicated databases (i.e. World-check).

‘high risk’, reporting ongoing payments by third persons.

suspicious transactions, already evaluated by the relevant regulator’s relevant division and not to be considered as such.

politically exposed persons.

6.5.   Price allocation

There are jurisdictions that, for legal safety, may require a specific allocation of the price against each exposure included in the NPL portfolio or this might be advisable based on the R&Ws and damages compensation structures as agreed in the LSPA:

for a – rather homogeneous – unsecured consumer NPL portfolio, the allocated purchase price is usually determined to equal [‘purchase price’ divided by ‘sum of outstanding amounts’] multiplied with ‘outstanding amount of the specific NPLs’, or in other words: purchase price quota multiplied with the outstanding amount of the specific NPLs.

in case of more heterogeneous NPL portfolios, e.g. real-estate consumer secured (RRE) or even corporate secured (CRE) NPLs, a statistical approach is not suitable and hence investors often allocate prices to the single NPLs (based on the underlying collaterals), which the seller can request to receive. However, investors are often not willing to share this breakdown of the purchase price for different reasons, including the possibility of the Seller asking to exclude at the last minute certain NPLs, for which Seller and Purchaser have allocated a different value. The solution can be that the Purchaser provides the allocation sheet per loan to a third-party depository (e.g. a notary), which may only disclose single purchase prices based on certain reasons, pre-agreed in the LSPA, like a claim of the Purchaser regarding a Defective NPL.

7.   Post-closing

7.1.   Key activities

Once a sale has taken place, the post-Closing phase includes a series of activities that require the cooperation of and coordination between Seller and Purchaser. A successful post-closing phase will strengthen the Seller’s reputation in the market, avoid conflicts and attract further investors resulting in an efficient relation with investors and better conditions in potential future deals. The success of a sale process is therefore determined not only by the closing price, but also by the way the post-Closing activities are conducted. A strained post-Closing phase would certainly create a precedent and might decrease the chances of successful NPL sales in the future.

The key activities are as follows:

Conduct and implement post-Closing obligations according to the LSPA.

Cooperation between Seller and Purchaser as foreseen in the LSPA and, if applicable, on an ad-hoc basis if problems occur or non-foreseen actions become necessary.

7.2.   Migration process

During this phase of the process, the Seller transfers the NPLs (as well as the related guarantees, if any) and the related information as well as documentation to the Purchaser or an NPL servicer designated by the Purchaser. This phase should be carefully planned since it is key for the successful on-boarding of the NPL portfolio for the Purchaser and involves many different and sizeable sources of information and documentation, both information from the Seller’s IT system as well as scanned and (sometimes) large volumes in hardcopies. The Purchaser should be able to start the IT on-boarding with full cooperation from the Seller in order to properly register the relevant credit files within its own IT system.

1.    Communication to the borrowers

Subject to the compliance with the local laws (25), Seller and/or Purchaser are expected to communicate the sale, the identity and contact details of the new creditor and the NPL servicer that may act on the Purchaser’s behalf and that the personal information will be passed on within the legitimacy of the sale. It is advisable for Seller and Purchaser to agree in the LSPA on who would send the notification(s), what the contents would be (insofar as this is not already regulated by statutory law) and how the costs would be allocated between the parties. In the interest of efficiency and partly also based on statutory law, the notification letter to the borrower can/should additionally contain the exact amount of outstanding debt (split into principal amount, interest and fees, as determined by applicable law) as well as the bank account to which the borrower should pay in the future, i.e. provide the bank account information of the Purchaser or its designated NPL servicer.

2.    Information handover

After the sale has been executed, the Seller hands over all of the relevant information regarding the NPLs. In addition to the Loan Data Tape, this transfer could include the following sets of information:

Personal data of borrowers;

Management information, including contacts, tracing activity and previous conversations and potential payment agreements with the borrowers from the past, as well as ongoing conversations;

Payment information specifying date of payment, amount and currency, source of payment (e.g. received from borrower or third party, cash-in-court, etc.) for each NPL (specified by a unique identifier like loan number) from the Cut-Off-Date until Closing;

Legal claims, including information of courts, lawyers, amounts, dates and history of legal milestones (as this resides on the management platform of the Seller); and

Any information on collateral securing any of the sold NPLs that is not included in the Loan Data Tape or the above.

All information provided and used for the Due Diligence process.

3.    Documentation

Documentation is key to the Purchaser’s capacity to immediately start managing the NPLs in the most efficient manner. The quality and speed of delivery of the information is key to a successful post-closing process.

In NPL portfolios with a limited number of loans, full documentation is typically available and is usually handed over to the Purchaser or its designated credit servicer directly on Closing. However, in more granular portfolios, where large numbers of NPLs (often thousands) are being transmitted, the LSPA can contain a clause with guidelines for the submission of documentation related to NPLs. In particular, the following aspects should be taken into consideration:

Given the volume of documentation and information generated in the NPLs and the cost incurred by the Seller in its preparation, the Seller could opt to restrict its commitment to submit documentation, although this is crucial to the successful on-boarding by the Purchaser. The Seller should clearly communicate during Phase 2 what documentation it is able and willing to deliver to the Purchaser. Missing documentation can negatively affect pricing of investors, so the Seller should weigh the ‘cost’ for the different scenarios. One option can be to determine ‘crucial or core’ documentation (e.g. any documentation the Purchaser needs in order to comply with applicable laws, documentation necessary under local law to prove the existence and amount of the outstanding claim, necessary documentation for the Purchaser to obtain a legal title before a court or start enforcement proceedings, etc.) for which the Seller gives a clear representation in the LSPA and ‘other’ documentation for which the Seller merely promises to provide documentation on a best efforts basis.

If relevant costs are associated with delivery of files from seller to Purchaser: a mechanism to regulate delivery of files and cost-bearing in this respect should be agreed with the Purchaser. The envisaged mechanism should be communicated to the Phase 2 Investors via the LSPA (or otherwise, if no LSPA is provided in Phase 2 by the Seller) to facilitate a smooth signing/closing process. Any costs the Seller expects to be borne by the Purchaser should not come as a surprise after the BO has been submitted.

A reasonable timeframe after the execution of the sale should be established for the delivery of certain documentation (e.g. in some countries, for granting the public deed to proceed with the delivery of information on the updated balance due date of each loan).

Based on availability and cost associated with making documentation available to the Purchaser, the Seller can consider limiting its liability regarding quality and completeness of documentation. This is relevant commercial information for the Phase 2 Investors and would be part of the draft LSPA so that Phase 2 Investors are aware of this before submitting their BOs.

7.3.   Seller’s responsibilities

In case the Seller breaches any of the Seller’s R&Ws or obligations under the LSPA, the Seller would be required to compensate the Purchaser in accordance with the LSPA. The Purchaser is entitled to customary remedies if the Seller fails to comply with the R&Ws relating to the NPLs, one of which can be the Seller’s obligation to repurchase or replace Defective NPLs. Where the repurchase of NPLs is generally legally forbidden, based on relevant legal advice potentially a monetary compensation to the Purchaser can be agreed upon.

7.4.   After-sale activities

Once the Purchaser or its designated credit servicer has all the information/documentation and can start managing the NPL portfolio, there are still several coordination tasks and other duties that have to be taken into account. This includes:

The Seller should forward to the Purchaser or its designated credit servicer:

payments received in regard to the sold NPLs.

communication received from borrowers or borrower representatives in regard to the sold NPLs.

Supplementing documentation and records on exposures.

Reconciliation of data and specific information on a case-by-case basis.

Cooperation on the transition of court cases from Seller to Purchaser. For legal claims that have already been initiated, procedural succession needs to be conducted according to the procedural rules of the jurisdiction in question. It may be useful to agree on a specific writing model to be followed when submitting to the courts. Seller and Purchaser should also agree in the LSPA if the Seller terminates all mandates given to any third parties (e.g. external counsel in currently ongoing legal proceedings) in respect of the sold NPLs or if the Seller expects the Purchaser to take over any such mandates and from which moment onwards fees and costs incurred by such third parties would be borne by the Purchaser. Fee schemes, lump sum cost amounts, etc. should have been disclosed to the Phase 2 Investors in Phase 2 so that they can take this into account before they submit their BOs.

In addition, the LSPA should describe which party will bear the costs, fees and expenses of counsel and solicitor, as well as those arising from the withdrawal of the Purchaser, in case the Purchaser decides that proceedings will not continue. If the Seller plans for the Purchaser to assume costs which are or will be incurred by counsel mandated by the Seller, the latter should inform the Purchaser about agreed fees, amounts of costs/fees already incurred and which should be assumed by the Purchaser etc. Again, costs, fees etc. to be borne by the Purchaser must be communicated before the BO Date to all Phase 2 Investors to avoid the risk of being unable to execute the transaction based on omitted cost information.

Communication with regulatory bodies: in every transaction, it should be confirmed whether it is necessary to carry out communication or request authorisation from any regulatory bodies.

Coordination with legal consulting and other involved areas: the Seller’s internal legal department’s work should be coordinated with the tax department in each jurisdiction.

Rectifying misleading or false official records by Seller providing history of official documents.

In some cases, there could be additional services that may be provided post-Closing either by the Seller or via a specialised entity. If Seller and Purchaser agree that the Seller would provide post-Closing servicing, then such service delivered to a third party may require specific fees being charged by the Seller. The level of such servicing fees could be determined based on cost allocation of the relevant work-out unit for the sold NPLs against the portfolio volume or the expected recovery level (26).

It is advised that sellers provide a certain (minimum) level of service to Purchasers even if they are legally not obliged to this, for the duration of the ‘full lifespan’ of the sold NPLs. This would prevent problems with borrowers and courts and would ensure efficient operations for both Seller and Purchaser.

(1)  The use of VDR is advised in general. In some cases, a VDR might not be entirely necessary, such as bilateral negotiations for single-name transactions (depending on the specificities of the deal).

(2)  Off-loading NPL exposures may be the most suitable solution, especially when the work-out of NPLs exceeds the capacity of a bank. On the other hand, restructuring and work-out are also core activities of banks and need to be maintained when this would be the most fitting approach, depending on the situation of the bank and the borrower.

(3)  When it comes to companies in particular, banks should have the capacity to assess changes in their debt servicing abilities and differentiate between liquidity and solvency needs.

(4)  ‘Large’ in this context refers to the magnitude of the portfolio in terms of overall (gross) value.

(5)  Note that leasing NPLs include VAT and that the Seller must previously clarify (if needed, in cooperation with external tax consultants) what the implications of the NPL sale are in respect of the ‘VAT portion’ of the NPL claim.

(6)  In particular, the Seller should foresee one main contact person who communicates with the External Service Provider and who is responsible for the NPL transaction within the Seller’s organisation.

(7)  Such NPLs should have been filtered out when preparing the NPL Portfolio, but if this only becomes obvious later in the process, such NPLs should then be excluded with a relevant explanation towards the investors.

(8)  Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and Directive 2014/17/EU.

(9)  General data protection stipulations are usually contained in the NDA.

(10)  Specific information on UTP NPLs can be found in Annex 5 to these Guidelines.

(11)  The Seller’s internal Legal department’s work should be coordinated with the Tax department in each jurisdiction as relevant. A general understanding of which taxes would occur on both Seller and Purchaser side, is relevant to a successful transaction.

(12)  The use of VDR is advised in general. In some cases, a VDR might not be entirely necessary, such as bilateral negotiations for single-name transactions (depending on the specificities of the deal).

(13)  Delegation of powers is intended as a subdivision and sub-allocation of powers to subordinates in order to achieve effective results.

(14)  If enforcement actions have been taken, it would ideally be clarified which measures.

(15)  Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and Directive 2014/17/EU.

(16)  The LSPA should inter alia be reviewed by the seller’s auditors under an accounting perspective to verify compliance with IFRS requirements in order to assess the derecognition of the portfolio.

(17)  It is not always possible to provide pictures of e.g. property. This is especially the case for RRE.

(18)  In general, compliance with the requirements of the EU General Data Protection Regulation (GDPR – Regulation (EU) 2016/679) needs to be ensured.

(19)  Depending on the level of preparation on the side of the seller, the complexity of the sale, etc., this could also take longer (possibly over 2 months).

(20)  Terms of sale.

(21)  The full set of Loan Data Tapes should be prepared and ready by the end of Phase 1.

(22)  As KYC processes can be time-consuming, the Seller might opt for initiating a KYC process only for the Preferred Bidder / Purchaser and to execute the transaction subject to KYC approval.

(23)  More details on the main content of an LSPA can be found in Annex 6.

(24)  It is not possible to share all kinds of data, i.e. in particular suspicious transactions under investigation by relevant authorities.

(25)  I.e. the jurisdiction of the borrower.

(26)  The cost attributable to the sold NPL portfolio, which in this scenario would still be serviced by the Seller (for a certain period), could be determined on the basis of: (i) the outstanding amount of the overall sum of NPLs serviced by the recovery unit; or (ii) the recoveries generated for the NPLs serviced by the recovery unit. The recovery level is based on expected cash flows calculated at individual or portfolio level over agreed period of time and determines the performance of the after sale servicing as basis for charging a servicing fee percentage.


Contributors to the Guidelines

The Guidelines were developed by the Commission, in close cooperation with the Commission’s NPL Advisory Panel, which consists of the following Members and Observers:




ASUFIN (Asociación Usuarios Financieros)

Banco Santander


BEUC (Bureau européen des unions de consommateurs)



Alpine Tremont

DECO (Associação Portuguesa para a Defesa do Consumidor)

EACB (European Association of Co-operative Banks)

EBF (European Banking Federation)


Erste Group Bank

European DataWarehouse

Fédération Bancaire Française

Guber Banca

Hoist Finance



Morgan Stanley


NPL Markets


Raiffeisen Bank International




European Banking Authority (EBA)

European Central Bank (ECB)


Considerations and steps before the start of the sales process

Is it worth selling?

When dealing with the resolution of bad debts, it is common to think that the organic approach is the most cost-effective way of resolution. However, the organic approach, albeit effective, can lead to an accumulation of judicial processes and real estate assets. At a certain point, this could become difficult to manage organically.

In markets where a secondary market for NPLs has sufficiently developed, a significant specialisation in the recovery has likely taken place, which could lead to the conclusion that specialised (third-party) market players are more capable and efficient than the Seller/bank that owns the assets in question. In such markets, sellers usually sell the forward flow on a recurring basis, especially in certain asset classes.

The cost-benefit analysis facilitates the comparison between a retention strategy (keep the asset and perform the work-out, or carry out a restructuring) and an exit strategy. Such analysis is key to a well-designed long-term sales vision. However, it should be noted that the strategic perspective, including the cost-benefit analysis of holding positions versus selling them, is extremely complex to carry out. Its complexity derives from the extraordinary difficulty of monitoring the performance related to the organic approach. The time and costs involved in such a process are not negligible and neither are the tail cases that are never resolved.

It is also possible that sellers need to adhere to reaching specific target NPL ratios within a defined timeline (as negotiated with competent authorities). This could increase the attractiveness of offloading NPLs vs the organic approach of managing them internally.

The following presents an indicative overview of the potential reasons for selling, as well as the caveats and considerations to be taken into account before entering into any portfolio transaction.

Potential reasons to sell

To not exceed the internal workout capacity and to speed up the disposal of non-performing assets vs the organic approach. Banks usually take longer to achieve resolution, compared with a highly specialised investor and a narrower range of possible solutions mostly aimed at judicial recovery. Considering this, together with the rapid deterioration of the recovery curve from default over time, an early sell decision in mature markets is usually the right one.

To optimise the NPE management process and workloads. Internal capacity (which can be scarce resource) and efforts are thereby focused on positions that render an organic approach worthwhile.

To meet an NPL reduction plan and avoid surpassing a certain level of the NPL ratio (e.g. 5 %) or to meet an NPL reduction plan as agreed with the supervisor.

To generate economic value, when the price exceeds the bank’s internal economic valuation. The Seller then seeks a better price compared to the expected recoveries that would be achievable via internal workout. This means that the loss upfront should be lower than the overall costs to be paid in a hold scenario. It is important to note that a certain budget for losses would be required to conduct NPL transfers.

For capital optimisation: better use of capital, avoid future regulatory burdens, etc. By selling, the high weighted risk affecting NPL positions could be cleared, thereby releasing allocated capital allocated to better uses. The deadlines of supervisory commitments and certain regulatory constraints can have an influence on when to sell (e.g. the NPL prudential backstop’s provisioning calendars, the rules of forbearance classification).

Other reasons could be the closure of activity in a company or country.

Warnings and considerations

Selecting the portfolio

This is a crucial phase of the process in order to maximize the target goal (e.g. NPL ratio target, optimisation of the internal capacity, etc.) and to minimize the impact on P&L and capital.

Defining the Loan Data Tape

The information and documentation gathering and cleansing is absolutely critical and it is without any doubt one of the most important phases of a portfolio selling. Portfolios require a very high depth of very detailed and accurate information on each individual position in the portfolio. The same applies to documentation. It is absolutely fundamental (and not straightforward) to gather the contractual documentation and appraisals and registry excerpts for all of the collateralised positions before launching the Teaser.

Typical difficulties with this are

Gathering the documentation that is not yet stored in an electronic way. It is sometimes necessary to rely on branch searches, causing considerable lag times or even making the operation unfeasible.

Loan and client remunerations that occur because of branch closings and/or mergers.

Different repositories that exist as a result of mergers or substitution of IT systems, migrations, etc. In such cases, the original information and documentation may have been lost or be inaccurate.

Data, while already stored in IT systems, is only available in various formats and individual data field definitions may differ from system to system.

Unlocalised or inexistent collaterals.

Charges written off economically, but not registered or updated in the bank’s systems. In this respect, the bank’s supervisory policy on updating with external recovery agencies is very relevant. It is absolutely mandatory to have a previous review of each guarantee position in the portfolio to ensure that the guarantee still exists.

The process of data quality, remediation and sorting of documentation is necessary and intensive and is the main reason for hiring an advisor, which could help with a dedicated back-office and a project PMO.

Restrictions on transferability. When reviewing documentation, it cannot be ruled out finding transferability restrictions in some form, like some policies, syndicate loans, or loans involving elements of State aid. Such cases need to be identified and removed from the portfolio. Thus, a legal Due Diligence on the contracts has to be performed to verify if transferability constraints are present and to comply with the defined notification process.

Assessing the economic impact of the transaction

The risks of ‘guessing’ the final price: it is important to assess how the Seller could best be protected from undesirable impacts. Before engaging in a sale, it is therefore important, for a specific portfolio, to have an idea of:


Whether there is investor interest in that particular asset class;


The indicative price at which that portfolio could be traded; and


The potential cost for the Seller to keep the portfolio.

This can be achieved either by creating an internal intelligence or by mandating an External Service Provider that is actively involved in such transactions. In most cases, a combination of both options is most common. There is a wide variety of available advisors offering their services, but it is important to distinguish between advisors who are actually involved in transactions on a regular basis and those who have only been involved in some small parts of the Due Diligence.

Based on this knowledge, the following aspects of internal analysis are highly advised:

P&L impact based on the estimated price +/-15 % (deeper analysis can involve APR release and future burdens -provisions and capital- savings).

Economic-value-added analysis: how well does the internal economic valuation compare with the estimated selling price.

In any case, the best way to protect the Seller from undesirable variations in the final price is often a 2-Phase-Process in which the Seller may reserve the right to stop the process if NBOs do not meet the expectations. It is important to manage this (with maximum transparency) before entering the BO phase. At this stage, investors tend to spend more resources on Due Diligence.

Defining the contracts and assessing the derecognition test according to IFRS9 principle

In order to derecognise the transferred portfolio, sellers have to demonstrate that they have substantially transferred all risks and rewards arising from the transferred portfolio. To this end, any clauses in the contracts that give back risks/rewards to the Seller must be avoided.


External Service Providers

Before defining the transaction structure and perimeter, it is necessary to determine whether External Service Providers would need to support the process. Still, a number of tasks should in any case be fulfilled by in-house experts as they require knowledge of: (i) in-house processes, (ii) the NPLs to be sold, (iii) the potentially underlying securities, (iv) the work-out of the NPLs, and (v) decision on which Seller R&Ws can factually be given, etc.

External Service Providers could support the Seller throughout the process of a standard market transaction. The main function of the External Service Providers is to help the Seller with the preparation phase and provide guidance along the entire selling process. They can also liaise with bidders, mediate the interaction between Seller and bidders, assist with modelling/pricing of the portfolio to set the ‘reserve’ price, strategise different financing options, etc. Such services can be particularly helpful in non-mature markets.

The following main categories can be identified:


Financial advisors (1) (2):

Deal structuring and identification of best marketing approach as well as target investors list

Preparation of marketing materials

Management of the marketing process (including advertising and Purchaser vetting), management of the bidding process and the Q&A with bidders, support in the modelling/pricing of the portfolio to set a ‘reserve’ price

Evaluation of NBOs and evaluation of non-binding proposals

Due Diligence and completion of transaction

Strategise on different financing structures (i.e. securitisation vs outright sale)


Legal and tax advisors:

Legal advice including regulatory

Deal structuring

Preparation of the legal documentation

Tax advice on overall transaction (structure, taxes on sale, servicing fee, etc.)


Technical advisors:

Project management and assist in negotiations with bidders

VDR and Q&A management

Preparation of loan data tapes

Impact analysis

IFRS9 test


VDR providers:

Technical set-up and administration of the VDR

Technical support


Transaction platforms:

Deal structuring, portfolio selection, and indicative pricing

Loan data tape preparation, standardization and validation

Preparation of marketing materials

Management of the marketing process (including advertising and Purchaser vetting)

VDR and Q&A management

Online management of transaction process and document management

Online management of bids and Due Diligence process

Facilitate NPL auction processes with different Auction Types

Conduct the NPL auction based on the instructions of the Seller.

(1)  Investment banks can play the role of financial advisors and technical advisors.

(2)  Financial advisors are predominantly providers of services related to the marketing process.


Major auction types

English debt auction (ascending)

Is probably the most popular auction. This is an auction with the classical system, when the Seller sets the initial price for the NPLs and the Phase 2 Investors bid, thereby raising this price. The highest bid wins. Sometimes, the Phase 2 Investors are not very active and the closing price does not differ significantly from the initial one. In this case, the Seller can cancel the auction or move it to another day. Usually, the English auction lasts no more than an hour, which is enough time for everyone who is interested in the NPLs to bid.

Dutch debt auction (descending)

The English auction is very prevalent, yet there are other types, such as the Dutch auction, in which everything works the other way around. At the beginning of the bidding, the Seller sets the desired price for which he is willing to sell the NPLs. As a rule, this is a fairly high price. During the course of the auction, the price begins to go down until one of the Phase 2 Investors makes a bid. At this point, the auction can be considered to be over. Generally, this type of auction is used when the Seller assumes that the NPLs are in high demand. The duration of such auction can be anything from a few seconds to several days.

Sealed-bid NPL auction (hidden bids)

The third type of auction that is used when selling NPLs is called a sealed-bid auction. In this type of auction, all bidders simultaneously submit sealed bids so that no bidder knows the bid of any other participant. The highest bidder pays the price that was submitted. Sealed-bid auction is based on the English auction, the only difference being that the bids are not public.

Hybrid NPL auction

This is an advanced version of the classic auction. In most cases, the English auction is used. However, there are situations in which other types of auction work better. Sometimes, an NPL portfolio is sold in two rounds. For example, the first round is a sealed-bid auction and the second round is the English auction. It is also possible to use a combination of Dutch and English auction for NPL portfolio sales.

Japanese auction

In a Japanese auction, the Phase 2 Investors do not see their position, but they will need to either accept or decline the ‘current bid’ within a given time limit. After which, if a Phase 2 Investor has accepted the ‘current bid’, it will proceed to the next round where it will be asked the same question. The auction continues until only one Phase 2 Investor remains in the auction room. This auction is typically used when there are only limited number of possible Purchasers and the Seller wants to make the most of the Seller’s offer.


Subcategory of ‘unlikely to pay’ (UTP) NPLs

If the loan falls under the category ‘unlikely to pay’ and the underlying loan contract has not been terminated at the envisaged time of sale, the loan contracts might still include valid Seller obligations, so that a direct sale may not be possible and/or faces strict limitations.

The Seller has two options: a) only sell the receivable; or b) sell the receivable and the contract liabilities:


If only the receivable can be disposed of, then the liabilities linked to the continuously existing contract remain with the Seller.


Regarding contractual liabilities, there are some options, depending on local legislation and vehicle possibilities:

Transferring the contracts: this is often the preferred option, as it would be suboptimal to keep a contract with a borrower against whom the institution does not have a monetary claim anymore. In determining the transferability of the contracts, it needs to be duly analysed:


whether the Purchaser can legally purchase the contract: in some jurisdictions, securitisation vehicles are typically the Purchasers and are sometimes legally not able to purchase the contracts. Hence, another bank/financial intermediary would have to enter into the scheme (1);


how to deal with potentially required borrower consent: in many legislations, a creditor substitution is not possible without the debtor’s consent.

The Seller remains the lender of record and keeps the duties arising from the contractual position.

The Seller remains the lender of record and a more complicated structure must be put in place to dispose of the receivables and to entrust a third party with the obligations arising from the contractual position (2).

(1)  Note that such a structure will be costly to set up and the portfolio must be of a big enough size to still make the transaction commercially viable for all parties involved.

(2)  Note that such a structure will be costly to set up and the portfolio must be of a big enough size to still make the transaction commercially viable for all parties involved.


LSPA – main contents

An LSPA suitable to sell a specific NPL portfolio usually requires customisation to reflect inter alia the particularities of the NPLs, the data quality and the existence and availability of electronic / paper documentation.

The following topics are customarily dealt with in LSPAs provided that the specification of relevant clauses depends on the particularities of the transaction itself (1), the NPLs (2), national law as well as on the desired level of balancing rights and obligations of seller and Purchaser.


Identification of the Seller and the Purchaser .


Specification of the NPLs as the object of purchase and assignment, e.g.


in the main body of the LSPA: nature of the NPLs, number of NPLs, total outstanding amount under the NPLs, sum of purchase price,


in an (MS Excel) annex: list of single NPLs to be sold.


Statement that the NPLs are sold and assigned to the Purchaser by way of the LSPA (including a transfer of the collateral and including corresponding registration for mortgages, if applicable); if applicable depending on the jurisdiction: additionally so-called short form transfer agreements will be signed for each (secured) NPL.


Timeline for the transaction, e.g. specification of Cut-Off Date, Signing Date, Closing, payment of purchase price, handing over of data and documentation; optional: Servicing Transition Date, optional: interim servicing of the NPLs by the seller after Closing.


If a Cut-Off Date is determined,


customarily the specification of the NPLs refers to the Cut-Off Date,


a specification is needed if all monies received in respect of the NPLs from the Cut-Off Date onwards are due to the Purchaser or if any costs or fees should be deducted.


Purchase price and terms of payment including


How is the purchase price determined and what is the exact payable amount in which currency (e.g. are collections between Cut-Off Date and Signing Date deducted when the Purchaser makes the payment?)


On which date is the purchase price payable?


To which bank account is the purchase price payable?


If applicable: specify costs / fees arising due to the sale (e.g. stamp duty, taxes, notification/registration costs) and which party will bear them.


Optional (depending on national law): conclusion of a written payment protocol recommended?


Optional: if a deposit was paid, is the amount deducted from the purchase price?


Regarding the notification letters to the borrowers, the LSPA should regulate:


Which party is responsible for sending out the notification letters?


Is there a deadline for sending the letters?


How are the costs allocated between the parties?


Would the wording of the letter need to be agreed between the parties?


Seller R&Ws


institutional R&Ws relating to the seller as an entity,


R&Ws relating to the NPLs including the data / (electronic and paper) documentation, origination and prior handling of the NPLs, seller being the owner of the NPLs; if applicable: R&Ws relating to underlying collateral, the legal status, etc.


Seller obligations, e.g. Purchaser compensation in case of breach of seller R forwarding monies and communication; optional: further post-Closing support obligations of seller as agreed with the Purchaser.


Purchaser R&Ws


institutional R&Ws relating to the Purchaser as an entity,


additional Purchaser R&Ws if required by the seller.


Purchaser obligations, e.g. future servicing of the NPLs in accordance with applicable laws; mandate of an authorised NPL servicer, if applicable under national law (3).


Post-Closing cooperation between seller and Purchaser, e.g.


Handling of NPLs which are in in legal / enforcement stage at Closing.


Process for repurchase / replacement of Defective NPLs.


Handling of any necessary actions post-Closing, e.g. regarding provision of evidence, regarding re-registration of mortgages, if applicable.


Handling of severe disputes / litigation brought forward by borrowers after Closing.


Liability Regime, e.g.


What would be the remedy / compensation mechanism for Defective NPLs, e.g. repurchase / replacement of Defective NPLs, monetary compensation?


Would the liability of one or both parties be limited? If so, would the limitation cover the breach of all R&Ws or would certain R&Ws not be covered?


Limitation of liability can include: (i) de minimis amount, (ii) (tipping / spilling) liability basket (4), (iii) liability cap amount, (iv) liability period.


If applicable: Conditions Precedent to Closing , e.g. necessary approvals, check of documentation by Purchaser.


Transfer of Data and Documentation


The extent and format of data and documentation.


The practical process of transferring data and documentation (including the recipient(s), e.g. Purchaser and / or credit servicer) should be clearly stipulated.


Notices Section including bank account details of the parties.


Law and Jurisdiction.


Confidentiality, taking into account that a credit servicer needs to obtain data and information and that communication with the borrowers, courts, potentially subcontractors should be covered.

(1)  Note that the sale of NPLs on a forward flow basis (where future NPLs are sold) would require additional stipulations compared to the sale of an existing stock of NPLs. It is advised that inexperienced sellers start with an NPL stock sale.

(2)  Note that secured NPLs usually require additional stipulations which are only generally mentioned, but not covered in detail in the following list.

(3)  After national implementation of the Directive on credit servicers and credit purchasers: Unless the Purchaser is authorised as credit servicer itself or an exception applies, the Purchaser needs to mandate an authorised credit servicer.

(4)  A liability basket means that a liability claim below a certain threshold will not be compensated by the liable party. Under a ‘spilling basket’ only liability claims exceeding the threshold will be compensated whereas a ‘tipping basket’ means that, once the threshold is reached, also the amount up to the threshold amount will be compensated.