Global debt funding gap. Europe struggles despite positive trends

16 Noiembrie 2011

DTZ ECHINOX CONSULTING S.R.L.

The global debt funding gap has been cut by 27% over the past six months. It is now estimated at US$142bn down from US$196bn six months ago (Figure 1). More detailed data from our recent bank survey has triggered a 74% reduction of theJapanese debt funding gap in the last 6 months.

Unfortunately, Europe continues to struggle, as downgrades to our capital value forecasts have led to a 4% increase in the funding gap. The UK, Spain and Ireland have all seen an increase in their gap on both an absolute and relative basis.

Sufficient equity remains available to bridge the debt funding gap. Globally, there is nearly $400bn of equity available – nearly three times the current gap. Significant regional differences remain. The European ratio is less favourable as US$156bn ofequity is available to bridge a US$122bn debt funding gap.

Banks are taking steps to shrink and deleverage their balance sheets with a growing number of loan sales being brought to the market. Loan sales are likely to increase as regulatory authorities require banks to further bolster their capital reserve positions. We view the recent interest from SWF and other institutional buyers of such loan portfolios as a very positive sign. Discounts might come in, as return requirements become more realistic.

Increased lending from insurers, institutions and other niche lenders has started to provide new capacity. Based on this, we have raised our estimate of new non-bank lending for the next three years by over 80%, from $80bn to $150bn.

 

Introduction

This is the third edition of our Global Debt Funding Gap report, which provides an update to our previous reports⁽¹⁾.

In this report we provide an update to our previous analysis incorporating new evidence previously unavailable. We have also undertaken a more detailed analysis of the lending market in Japan. Compared to our previous May 2011 report, the amount of debt outstanding in each market remains unchanged, based upon data reported by Central Banks at the end of 2010. The majority of debt is secured by properties located in North America and Europe (Figure 2).

In this update, we have also incorporated our latest forecasts for capital value growth. Also, we quantify the impact of a European downside scenario, which welaunched in another research report last week.

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⁽¹⁾Global Debt Funding Gap – smaller but pressure remain, DTZ Research, 5 May 2011Global Debt Funding Gap – new equity to plug into messy workout, DTZ Research, 24 November 2010;European Debt Funding Gap – resolutions underway, DTZ Research, 29 March 2010

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Our methodology for estimating the debt funding gap remains unchanged. As before, it involves a detailed analysis which takes into account:

• Vintage of outstanding loans
• Duration of loans by vintage
• Loan to value ratios by vintage
• Historic and future changes in collateral values, and
• Impact of loan extensions

Where data permits, inputs vary for each individual country. A detailed step-by-step methodology is available in the appendix of our May 2011 report.

This report is divided into three key sections. In the first section we update our debt funding gap analysis and highlight those countries and regions most exposed. Insection 2 we outline some of the solutions underway. Finally in section 3 we present our outlook in which we examine in more detail how some of these solutions andavailable equity will reduce the debt funding gap.

 

Global debt funding gap

Global debt funding gap more than halves over year

Over the next three years (2012-2014) we estimate the global debt funding gap totals US$142bn, a 27% reduction on May 2011, and less than half the level a year ago (Figure 3). The dramatic fall reflects refinements to our methodology based on new information and highlights how the passing of time helps to heal some of the problems.

Asia Pacific’s gap has improved significantly. This is in contrast with Europe where the debt funding gap remains elevated and has shown little improvement on six monthsago. However, compared to our analysis in November 2010, Europe’s debt funding gap has reduced by 27% from US$167bn.

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