NPLs: A New Asset Class?

The paper introduces a top‐down parsimonious model for simulating the recoveries of both secured and unsecured non‐performing loan (NPL) portfolios and a pricing approach to estimate the fair value of NPL securitization notes issues by ABS vehicles. The model can be used by market investors, who do not directly performed a detailed due diligence on the NPLs in the vehicle’s assets, but may view the summary information on the flow of expected recoveries. Alternatively, the model could also be used by the credit originating banks or by credit servicers, with a richer information set, when structuring a securitization deal. The proposed pricing approach should be considered as a first step toward the definition of a benchmark pricing model for the ABS securitization notes of non-performing loans and as a contribution for a higher degree of transparency in the NPL market.