Lenders could begin to sell bad debt to investors: The Kingdom’s banks, led by the Saudi National Bank, are looking to begin selling non-performing loans (NPLs) through a number of securitization agreements, with the first major sale potentially coming as early as this year, Bloomberg reports, citing sources it says are familiar with the matter. The move aims to free up room for financing the Kingdom’s gigaprojects.

IN CONTEXT- The government continues to double down on diversification plans and gigaprojects while staying clear of “overheating” the national economy. Officials have also said that they’re willing to accept modest fiscal deficits as the price of pursuing long-term diversification.

How it would work: Banks can package up NPLs into securitized notes and sell them — often at a discount — to investors. This allows banks to cut legal costs and balance their portfolios by offloading underperforming assets.

REMEMBER- Credit rating agency Moody's revised its outlook last month for Saudi Arabia's banking sector from positive to stable due to tightening funding conditions. The agency cited reliance on confidence-sensitive capital market funding as one of the main reasons for the downgrade, which is expected to rise as credit demand outpaces deposit growth, pushing the loan-to-deposit ratio further above 100% in the next 12 to 18 months.

“Banks in the region are very keen to release capital from exposures that have turned sour, and sophisticated investors are looking to pick up those,” A&O Shearman’s Haris Meyer Hanif told Bloomberg. While the Kingdom has yet to see a major NPL portfolio agreement being traded, Hanif — whose firm helps structure such transactions — expects the market to begin to “see it very soon.”

Easier said than done: NPL sales were not prevalent in the Kingdom due to Saudi banks having low non-performing loan rations, as well as unfavorable debt market regulations, according to Bloomberg. While financing needs might fuel the trend, a number of hurdles could prevent the NPL market from picking up, such as failing to price transactions fairly due to a lack of comparable data.

The UAE has recently been taking similar measures: First Abu Dhabi Bank (FAB) was set to sell soured loans worth USD 800 mn to Deutsche Bank in Januaryas the German lender outbid other international entities including US hedge funds.

“We anticipate further NPL sales from banks in the UAE, and we also find the growing opportunity set in [Saudi] exciting,” said Naveen Sabharwal, a managing director at Davidson Kempner which acquired some USD 1.1 bn of bad debt from Abu Dhabi Commercial Bank in 2023. “We would expect to see the first [Saudi] NPL sale in 2025,” Sabharwal added.

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