Are NPL-backed securities an investment opportunity?

This paper focuses on the risk-return profile of the asset-backed securities deriving from the securitization of non-performing loans (NPLs). We test several hypotheses concerning the portfolio sell price, tranche note size and use of a public guarantee supporting the senior notes. We observe the return distribution of junior notes as a function of the portfolio recovery rate, assuming a lognormal distribution. Moreover, we focus on the probability of achieving selected target returns using a value-at-risk approach. Our results provide evidence that securitization is the most valuable deleveraging strategy from the perspective of both investors and banks.