Q4 2015 Eurocastle Investment Ltd Earnings Call
Mar 10, 2016 AM EST
ECT.AS - Eurocastle Investment Ltd
Q4 2015 Eurocastle Investment Ltd Earnings Call
Mar 10, 2016 / 04:00PM GMT
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Corporate Participants
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* Olga Wilson
Eurocastle Investment Limited - Investor Relations
* Francesco Colasanti
Fortress Investment Group - Managing Director
* Oliver Goodrich
Eurocastle Investment Limited - CFO
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Conference Call Participants
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* Tom Mills
Credit Suisse - Analyst
* Hammad Khan
EJF Capital - Analyst
* Manny Friedman
EJF Capital - Analyst
* Nam Tran
EMS Capital - Analyst
* James Sheridan
- Private Investor
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Presentation
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Operator [1]
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Good morning. My name is Lori and I will be your conference operator today. At this time, I would like to welcome everyone to the Eurocastle fourth-quarter 2015 earnings call. (Operator Instructions). Thank you.
Olga Wilson of Investor Relations, you may begin your conference.
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Olga Wilson, Eurocastle Investment Limited - Investor Relations [2]
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Thank you, Lori, and good afternoon, everyone. I would like to welcome you to Eurocastle's fourth-quarter 2015 earnings call. Joining us today are Francesco Colasanti, Managing Director at Fortress; and Eurocastle's CFO, Oliver Goodrich.
For the duration of this call, we will be referencing the presentation that was posted on our website under the investor relations section, which we hope you will find helpful. We would like to remind everyone that this call is being recorded, and the replay number is on our website. This call is also available on our website via webcast.
I would also like to point out that statements, opinions and beliefs communicated today which are not certainly historical facts may, in fact, be forward-looking statements. We encourage you to read the forward-looking statement and the risk factors disclaimer in front of our presentation.
With that, let me hand off to Francesco.
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Francesco Colasanti, Fortress Investment Group - Managing Director [3]
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Thanks, Olga, and welcome, everyone, to the Eurocastle fourth-quarter 2015 earnings call. As always, we will be referencing the presentation that we posted on our website during this call.
I would like to start this call by highlighting our key achievements for the year that are on slide 2. As many of you know, about three years ago, we changed the path of Eurocastle and focused on new investment strategy in Italy. Since then, we put tremendous effort into making new investments and selling off our legacy business.
As you see on the slide, to date we have invested EUR337 million in Italy, of which EUR266 million was deployed in 2015. We closed on doBank, which I consider a very important investment for Eurocastle, and I will talk more about it in a second.
On the legacy portfolio front, we are almost done. We have EUR14 million left in that business, which represents only 3% of the total Company's NAV of EUR533 million. As we show on the pie chart, 97% of the total NAV is attributed to Italian investments and cash available for investments. The Italian investments NAV is [with] 78% in doBank that is made of a servicer bank, with banking license, and the NPL portfolio. About 9% are other NPL portfolios we bought in the past, and 13% are opportunistic investments we have made in the real estate fund space.
On the slide 3, we have summarized the key events and our achievements in more detail. As I always say, our key goals are to invest new capital in Italy, generate mid- to high-teens returns on our existing Italian investments, and sell off our legacy portfolio. And I am very pleased to report that in 2015, we were able to deliver on all fronts. And I think 2015 was a very productive and positive year for Eurocastle.
As you see on slide 3, in April we raised EUR312 million, primarily to acquire a 50% share in doBank. In September, we acquired a 27% share in a real estate fund, investing EUR11 million. At the end of October, we closed on doBank transaction, deploying EUR246 million. And at the end of the year, we invested an additional EUR6 million in four NPL portfolios.
Our existing Italian investments continue to show great performance. During the year, the NPL pools generated over EUR10 million. And if you look at the cash flow generated since inception, these investments have returned 75% of the invested capital, which is well ahead of our original projections. Real estate fund units also performed great, generated EUR12.6 million, or 26% of the invested capital. And in addition, we fully realized on a EUR4 million distressed bond investment. We collected EUR7 million; we made 2 times our money, and 69% IRR on these investments in just 18 months.
All the good results we achieved operationally, as well as from the investment standpoint, are not reflected in the current share price. I think our shares are deeply undervalued, and I will go through in more details, in a few minutes, what we think.
On the legacy business front, as I mentioned earlier, we have very little left, and I expect to close the platform completely by the end of the year. I think we have done a great job in Germany. We have a very good team there. We maximized the potential assets that we have left, and in 2015 we generated EUR78 million of cash. That is in line with our plan. We agreed to sell, after the end of the year, the Zama portfolio, which is expected to generate another EUR3.6 million in Q1 of 2016.
So, if you turn to slide 4, let's now talk about Eurocastle financial performance in the fourth quarter. We finished the year very strongly, recording an adjusted NAV of EUR533 million, or EUR7.35 per share, which is EUR0.05 per share higher compared to our Q3 results. Normalized FFO for the fourth quarter was EUR8.1 million, or EUR0.11 per share, which is up 3.5 times compared to the previous quarter.
Before costs, new investments alone generated EUR9.7 million of normalized FFO, which implies a yield on average invested capital of 17%. If you look at the bar chart on the right, you can see that an illustrative pro forma for a full quarter's ownership of doBank, after adjusting for one-off movements in the quarter, would increase our quarterly normalized FFO to EUR9.3 million or EUR0.13 per share. So, once again, a very good quarter for Eurocastle.
So, if you turn to the next slide, we talk about what our business looks like today. As I said before, Eurocastle is focused on generating mid- to high-teens returns. New investments in Italy are realizing value from the legacy assets. Including the doBank acquisition, the NAV of Italian investments as of Q4 is EUR327 million, or EUR4.51 per share, which is EUR0.24 per share higher than Q3. We have EUR192 million of investable cash, and only EUR14 million of NAV in the remaining legacy business, with a projected recovery in the range between EUR5 million and EUR15 million.
If you go to slide 6, we provide a little more color on the valuation of the Italian investments. As you can see, we apply a market discount rate to both doBank and NPLs, and value the Italian real estate fund units at a discount to NAV. Currently, on doBank and its NPLs, the discount rates range between 12% and 14% on the future unlevered cash flow. We've always valued these NPLs at market yield.
So, look at the sum of the parts at the current valuation. You can see that compared to the current share price, Eurocastle is trading at a very significant discount there. And the market does not apply any value to basically our -- the other NPLs and real estate fund units. In fact, if you combine the doBank investment and the cash available, you get the value of over EUR6 per share -- EUR6.18, to be accurate -- versus the current share price of EUR5.95 per share. Basically, no value is attributed to the other NPLs, the real estate fund units, and the legacy business.
Again, we are not happy with this. We are working to get coverage for the Company soon, to help investors to better understand the real value of the assets and the Company as a whole. The Board also constantly reviews ways to improve the share price.
With that, let's spend a few minutes on doBank and the progress we made so far, which is presented on slide 7. So, what is doBank? doBank is the largest independent special servicer with banking license in Italy. It is the highest-rated Italian servicer by Fitch and S&P, and has EUR45 billion of gross book value of assets under management.
Prior to closing the transaction, the Company was downsized -- I would say rightsized -- to 15 branches, and 589 full-time employees were left in the Company. In addition, it has a network of over 2,000 lawyers, consultants, and external collectors. doBank's established platform is focused on servicing loans for UniCredit -- that was the former parent bank -- and doBank has a contract to manage EUR45 billion total NPLs, and has a 10-year servicing flow agreement with UniCredit on future sub-performing and non-performing loans with balance below EUR1 million, as well as a select pool with balance above EUR1 million face value.
The fees generated by doBank are very balanced and are split between base fees and collection fees that are based on the collections that the Company generates every year.
Since we closed the transaction at the end of October, we put a lot of effort into fine-tuning the organizational structure of the Company. We implemented a new asset management model, and restructured all departments. We also employed a new, customized resolution process and incentive-based model for asset managers. We established a new process for selecting external lawyers and collectors, as well as renegotiated contracts with vendors to generate significant cost savings.
We have identified a potential CEO, and have started the process to seek Bank of Italy approval for this appointment. And, in addition, we constantly stay focused on maximizing the potential value of the banking license of doBank. For example, we are now exploring and developing infrastructure and a new network of brokers in order to grow our auction financing initiatives. We already have 10 or 15 loans we made in this area in the past two months. We are also close to finalizing the appointment of the CEO, and there is a lot more to do. But, we are very excited and optimistic about this investment. I think the CEO should be on board by the end of the month.
On slide 8, we provided some details on the EUR3.3 billion NPL portfolio which we bought together with doBank. It is a pretty good quality portfolio, with 42% of the loans secured by real estate. The portfolios were seasoned, with an average default date of 2003. And the loans are mainly located in the north and the center parts of Italy that, just economically speaking, are the best locations in Italy.
In terms of pace of actual collections, we are 88% above our original forecast, and profitability on fully resolved loans is 20% higher compared to our original underwriting.
So next, I would like to give you a little more color on the performance of our Italian investments, on the slide 9. As of Q4, we invested EUR91 million in 15 loan pools, three real estate funds, and a distressed bond. These investments have collected EUR49 million or 54% of their original investments. With respect to the resolutions on the Italian loans, we are once again ahead of our underwriting with both, in terms of pace and profitability.
And with that, let's look on slide 10, where we made an attempt to summarize the key events that took place in Italy in 2015. So 2015 has been a very dynamic year for the banking sector. The Italian government made a major push on reforms and key initiatives to solve the NPL problem that is perceived as one of the main problems of the country right now.
One of the first reforms passed at the beginning of last year was the judicial reform, which was aimed as shortening the judicial proceedings and the timing of loan resolutions. The reform mainly applies to loans on which bankruptcy and foreclosure proceedings had not previously begun. And, due to the huge backlog of the loans already in the court system, the reform has had little impact so far. The government is now working on the second round of judicial reforms that are expected to materialize very soon.
Mid-2015, the Italian government proposed the adoption of a bad bank to absorb impaired loans from the banking system. The bad bank failed to materialize due to the European Union's opposition to what was viewed as a form of government aid to Italian banks. As a consequence, the Italian government kept trying to find a solution. And on January 27, 2016, the Italian government announced that it had reached an agreement with the European Union on a new NPL measure in the form of the government guarantee. It is called GACS, allowing the Italian government to provide a state guarantee for the nonperforming loans. GACS envisions a state guarantee covering only the senior tranches that have investment-grade ratings on a securitization structure contain the NPLs of the Italian banks.
The pricing of the guarantee will be at market rates to ensure the [age free] nature of this key. For the recent announcement, the Italian government expects the first GACS deal to trade in the second quarter; but more realistically, I believe the second half of 2016 is a realistic timeline.
There's two conditions for GACS to be applied. First thing is the servicer should be -- that service the loans of this securitization -- should be a third-party servicing. And the second thing is, of the junior notes, the originator has to sell at least 51%. So they have to reach the deconsolidation threshold.
So, in November 2015, another event happened, and four medium-sized banks were taken over by the Bank of Italy, and split into a good bank and a bad bank. The bad bank is called resolution vehicle, or REV. The REV has received all the nonperforming loans of the four banks, with a gross book value of EUR8.5 billion, and is expected to trade in the second half of 2016. The NPLs were transferred to REV vehicle at EUR0.175 per share [on face].
So what does it all mean for Eurocastle? We expect that the reforms and the recent activities of the government will result in significant servicing opportunities for doBank, as well as speed up the NPL sales, allowing us to deploy more capital in the next two years.
So on slide 11, I would like to give you a little more color on the current loan pipeline. As you can see on the graph here, currently underwriting approximately EUR8 billion gross book value of potential near-term acquisitions, of which approximately EUR3 billion of gross book value are portfolios who are either exclusive or were acting as sole bidders.
In addition, we see a lot of potential for the servicing business for doBank, as well as an opportunity to acquire portfolios in combination with their servicing platforms -- similar to what we did to acquire the doBank transaction from UniCredit -- which is potential servicing opportunities for approximately EUR48 billion of gross book value coming to the market in the next 12 to 18 months.
So, in conclusion, I would like to repeat that we are very pleased with the results we delivered in Q4 and for the full-year 2015. We have a very strong finish for Eurocastle and we are off to a great start in 2016. Having said that, we are disappointed not to have invested all the capital we have. As I said in the previous calls, we are very cautious and disciplined investors.
Last year, we were largely outbid on a few transactions -- actually a dozen transactions. And we think that the deals we lost were not the right deals for us. For some of them specifically, at the price paid by our competitors, the portfolios would generate low-single-digit IRR, in our opinion, and these will not be accretive to our investments.
I strongly believe that between the judicial reforms and the GACS, approximately EUR80 billion to EUR100 billion of nonperforming loans can trade in the next two, three years with no significant losses for the bank. I continue to be very positive and optimistic that we will be able to deploy the capital in a reasonable timeline, but in the right investments, so we can generate our target 15% to 20% IRR.
We are very well-positioned in the country. We are the market leaders. We have the dominant position in the NPL sector. We will use it, and we will try to do our best to make the right investments for you.
With that, I will turn it to our CFO, Oliver Goodrich, who will take you through the financials in more detail.
Oliver?
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Oliver Goodrich, Eurocastle Investment Limited - CFO [4]
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Thanks, Francesco. So, turning back to the financial highlights set out in slide 3 of the presentation, this quarter's results have been extremely positive. The adjusted NAV for the quarter was EUR533 million, or EUR7.35 per share compared to EUR528 million, or EUR7.30 per share from the second quarter. This increase of EUR0.05 per share is after having paid our fourth-quarter dividend of EUR0.125 per share, and is mainly being driven by positive valuation movements on our NPLs and doBank, a transaction that was originally committed to in February 2015.
Turning to normalized FFO, this amounted to EUR8.1 million or EUR0.11 per share. That is EUR0.08 per share higher than the previous quarter, reflecting the healthy returns we have started to generate following the closing of the doBank transaction at the end of October. And as Francesco mentioned earlier, if we adjust these results to reflect a full quarter's ownership of the investment, and remove certain one-off impacts in the period, the normalized FFO would be EUR0.13 per share, which supports our quarterly dividend of EUR0.125 per share.
We anticipate the strategic initiatives that Francesco and team are working hard to implement at doBank will filter through in future quarters, together with the benefit of additional investments, and help us in our goal of growing the dividend.
With regard to the legacy business, we feel we have achieved a lot in 2015. We started out the year projecting EUR80 million to EUR120 million and we have returned approximately EUR80 million. But we further expect to generate EUR5 million to EUR15 million as we look to sell down the few remaining portfolios in 2016. I look forward to updating you on our progress in future quarters.
With that, I would like to hand over to the operator for the Q&A session.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Tom Mills, Credit Suisse.
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Tom Mills, Credit Suisse - Analyst [2]
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I'm quite intrigued by the servicing pipeline of EUR48 billion that you state there, which looks a very interesting opportunity. Just wondering sort of how much of that opportunity is driven by GACS coming through, and therefore -- yes, how much of that is going to be kind of almost free of competition, in a way, given the rating status of doBank and [Ital], I guess, as well.
And also, how much capacity do you think doBank has to actually manage additional NPL flows over the next two years? Do you need to ramp up a bit to be able to take on that much more business? Or have you got spare capacity? That would be great, thank you.
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Francesco Colasanti, Fortress Investment Group - Managing Director [3]
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So we think that the GACS will play a pretty important role in the near future. The gap between the bid and ask price specifically is not closed yet. So I think EUR80 billion to EUR100 billion [worth] is sellable to the market, as I said before, without generating significant losses.
I think that some of the deals that we are looking at right now don't imply GACS. Also for the servicing business, don't imply GACS; but, the majority imply the GACS will be put in place. I would say if I had to split, it is 75 with GACS, 25 without GACS.
In terms of ratings, yes, we expect our servicer to be really on the front lines of this new season. As you know, to get -- as I said before, the tranches of the securitization that can be assisted by the government guarantee is only the investment-grade tranche. But the investment-grade tranche will also depend on the quality of the servicer. So, we think that doBank, having -- being the largest independent servicer in the country, and having the highest rating in the country, could really help the Italian banks to get the best conditions for these investment-grade bonds by increasing the size -- basically increasing the size, at this point.
In terms of capacity, the Company manages right now EUR45 billion. It will increase naturally between EUR3 billion and EUR4 billion per year, its assets under management. I think without a big problem, we can increase by EUR10 billion to EUR20 billion, given all the investments that we are making in the systems, in the organization. For us is EUR10 billion is less than 25% of what we manage, if we had to increase the size. I don't think any of our competitors can increase this amount, because they will need at least to double [their size]. So I think we have -- we are in a pretty good position right now.
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Tom Mills, Credit Suisse - Analyst [4]
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That's very helpful, thank you.
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Operator [5]
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Hammad Khan, EJF Capital.
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Hammad Khan, EJF Capital - Analyst [6]
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You've got Hammad from EJF, and Manny Friedman. Couple of questions for you guys, please. Just looking at the NPL pipeline and the deals portfolio that you guys are exclusive on, or shortlisted, you guys talk about a total of EUR8 billion GBV of portfolios you guys are underwriting. Can you give us a better understanding of how we should think of timings, when can those be executed, and how much capital or equity those EUR8 billion face value portfolios will require?
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Francesco Colasanti, Fortress Investment Group - Managing Director [7]
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Sure. So this EUR8 billion pipeline is made of several investments. We are going through the due diligence on the assets. I think that if we close all EUR8 billion, that we need to -- that we are underwriting right now, the equity that Eurocastle would deploy it would be around EUR120 million, or something like that, assuming a shedding of these deals between 25% and 50%.
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Hammad Khan, EJF Capital - Analyst [8]
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And timings, how should we think of that?
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Francesco Colasanti, Fortress Investment Group - Managing Director [9]
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Well, the timing, as we experienced in the past, is the most unpredictable thing when you talk about non-performing loans. So, I normally -- what I try to do is underpromise and overdeliver. This transaction (multiple speakers) when you do this due diligence, you have a really -- we can predict very carefully what is the timing to complete the diligence. But after you complete the diligence, the banks enter into their internal work to make decision process that is difficult to predict. I think that the majority of the deals will happen between June and November.
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Hammad Khan, EJF Capital - Analyst [10]
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Okay. I have got Manny Friedman also here.
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Manny Friedman, EJF Capital - Analyst [11]
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Thank you. So I am completely confused, because we all invested a year ago, and we lost 22% of our money. All that has happened is you closed the transactions you said you were going to do in the prospectus. Last quarter, you bought [$6 billion]. You have built up cash more and more every quarter. You're up to [EUR200 million]. That is 44% of the entire market cap is cash now -- which you pay a fee on, we pay a fee on. And so, if we cannot deploy the money, period, then buy back the stock. We will sell you 10 million shares at 6, and you make 25%. I mean, the cash keeps going up, and the -- nothing happens. I am completely confused.
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Francesco Colasanti, Fortress Investment Group - Managing Director [12]
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Well, let me answer that. First of all, we raised the capital, the EUR312 million. And we deployed approximately 85% of that capital to close the transaction that we said we were going to close. I think the results on our investments you have seen our IRRs, are mid-to high teens in certain assets; certain investments made 69% IRR. So I think we are doing the right thing with the money you paid us. And we are very disciplined. I don't want to feel the pressure, because I want to do the right investment for you.
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Manny Friedman, EJF Capital - Analyst [13]
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It's not pressure. You have 44% of the whole Company is cash. That is not pressure.
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Francesco Colasanti, Fortress Investment Group - Managing Director [14]
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No, but what I think is that -- well (multiple speakers)
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Manny Friedman, EJF Capital - Analyst [15]
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If you want no pressure, take it to 90%.
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Francesco Colasanti, Fortress Investment Group - Managing Director [16]
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No, but we need to make the right investments and --.
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Manny Friedman, EJF Capital - Analyst [17]
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(technical difficulty)
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Francesco Colasanti, Fortress Investment Group - Managing Director [18]
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So we need to make the right investments. I think the pipeline is there. I think that is although the timing for this investment is not always predictable, we think that the market is opening. We think that there will be fantastic opportunities to make investments and to deploy your capital at a very attractive rate.
Having said that, as I said before, the Board will explore -- is constantly monitoring what happens in the market, what happens to our shares. And I want to reassure you that we will do our best to make sure that your interests are correctly preserved.
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Hammad Khan, EJF Capital - Analyst [19]
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Great. Thanks Francesco.
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Operator [20]
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Nam Tran, EMS Capital.
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Nam Tran, EMS Capital - Analyst [21]
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I was calling on behalf of Edmond Safra. I wanted to get a little bit more clarity on the profitability of the servicing business. So, the pipeline of EUR48 billion that you guys had mentioned, what sort of profitability would you expect on that?
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Francesco Colasanti, Fortress Investment Group - Managing Director [22]
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So the profitability on the servicing business is -- it depends on the type of contract you sign with a counterparty. A normal contract we're in, the profitability ranges between 15% and 20%. That is the profitability. But sometimes, what you do is, you buy going concerns. So, you buy from the banks, like going concerns, similar to what we did for doBank. We had the portfolio, as well, in that circumstance. But you normally -- when you buy going concerns, you have to consider also the return of the capital you invested. And so, the profitability will go up to between 30% and 40%, to include the -- a return you have to make on the capital, you pay to the bank to acquire the going concern.
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Nam Tran, EMS Capital - Analyst [23]
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Okay. Is there any way of thinking of that in terms of basis points, or dollars on every kind of EUR1 billion that's serviced, or --?
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Francesco Colasanti, Fortress Investment Group - Managing Director [24]
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What I will do is, I don't want to do it on top of my mind. It would be too complicated. What I will do is next time, we will put some math on the supplement.
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Nam Tran, EMS Capital - Analyst [25]
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Okay, that sounds good. (multiple speakers) Sure, that's fine. Of the current doBank profitability, on the segment kind of normalized FFO, they had doBank at roughly EUR5.7 million. Do you have any breakdown with that between the servicing P&L versus the NPL?
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Francesco Colasanti, Fortress Investment Group - Managing Director [26]
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I would assume that that -- we are very early stage, and we are closing -- we are reorganizing the Company. I mean, in the next quarters, we will be much more accurate on the doBank, and the performance of the servicer at the bank and the portfolio. For now, I would assume that is 50/50 between the portfolio and the servicer, something like that.
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Nam Tran, EMS Capital - Analyst [27]
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Right. Okay, thank you.
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Operator [28]
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[James Sheridan], Private Investor.
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James Sheridan, - Private Investor [29]
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Congratulations on the pace and profitability of the existing loans you have. Just to go back to the frustration that the previous investor referenced, when you talk about EUR8 billion of pipeline, that is down from the EUR11 billion you had used in the third quarter. And at that time, you had said that there was a high likelihood that it would be completed by the end of calendar 2015. And that EUR11 billion turned into [EUR6 million] of invested capital.
Can you tell us, of the EUR8 billion that exists today, is there something different about its construct, its size; it's likely to lead to a better performance than what happened at the end of last year?
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Francesco Colasanti, Fortress Investment Group - Managing Director [30]
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(technical difficulty) I think so. The banks are more motivated to sell the assets right now. If I look at the different deals we are working on, really, the likelihood for these deals to be completed is pretty significant. We think that the size of the deals that we are working on right now is senior to what was in the previous pipeline, although the composition of the portfolios is different.
We are looking at more secured portfolios, while before we were looking at more unsecured portfolios. That is quite normal in the cycle. Because when the cycle starts, the banks start selling the unsecured, more provisioned assets, while the -- in the following phases, they start selling more secured portfolios. Those are not portfolios that are 100% secured; in capital circumstances, they are 100% secured. But the percentage of secured portfolios, the secured components versus the unsecured, is that we our experience that these increasing in the pools that we are underwriting right now.
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James Sheridan, - Private Investor [31]
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That's it? Just because they are more secured, you think your prospects are better?
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Francesco Colasanti, Fortress Investment Group - Managing Director [32]
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Well, it's more secure -- the prospects are better because the banks have had the time to make more provisions in the balance sheet. And so that is what -- why I think that we have a better prospect. What is happening is also the better prospect is because a number of these deals are foreign banks that want to exit the Italian market, and they are more motivated than Italian banks to sell non-performing loans.
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James Sheridan, - Private Investor [33]
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Can we talk for a minute about the GACS process? Last time we spoke, you said you wanted to get some time to see whether or not the market would be able to understand how to price this product. And today, you're saying it is more likely to happen now in the second half of 2016. I find that disappointing, given all of the focus that took place around this variation of a bad bank, that we have to wait another six months for any transactions to take place. I thought the impression you left with us is that the first quarter has been a disaster for the Italian banks, and they have a sense of urgency to take advantage of this new vehicle. But second half of 2016 does not sound like a sense of urgency.
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Francesco Colasanti, Fortress Investment Group - Managing Director [34]
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Well, the GACS program, the government really wants to start in the second quarter of 2016. I am more conservative, because what we need to do is having the rating agencies to provide ratings for the notes of the securitization. The last time that was done, a public securitization of NPLs, it was probably 2006, between 2006 and 2007 in Italy. So, the rating agencies will have to go through building basically their model to assign the investment grade to the bonds.
So, that is why I am more conscious, because I think with the rating agencies, it will take some time to build a model, talk to the servicer, and talking to us, and estimate the -- how to estimate the cash flow -- what is the assumption on the real estate, underlying real estate? What is the assumption on the economy? What is the assumption on timing, how the timing is impacted by the judicial reform? So, that is why I am more conscious and I think the timing is more second half of this year, rather than first or second quarter this year.
It is just because the banks would like to do it, but there is a process to be done with the rating agencies, and I think it will take time.
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James Sheridan, - Private Investor [35]
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Since you have looked now more detailed at the GACS process, is there anything that you've discovered that makes you less optimistic about this working as a mechanism?
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Francesco Colasanti, Fortress Investment Group - Managing Director [36]
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Well, the mechanism is -- I think the way has been done, it works. The only one thing that is still uncertain is the cost of the guarantee, because they say it is a market cost for similar products. So, if it has a duration with its average life for 60% of 3 years -- 2.5, 3 years -- you should take like the Italian government bonds and estimate what the cost is for a similar duration for those bonds. But, it is estimated to be between 90 and 100 basis points. Really, the cost of the guarantee is not articulated enough right now, and I would like to get more clarity.
We are in discussions with -- we are discussing with various people, at various levels, also part of the people that implemented the GACS and decided about the GACS, to understand how we can figure out what is the price of the guarantee. Because this will impact the weighted average cost of capital, and this will impact the price of the loans at which they will be sold to the securitization.
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James Sheridan, - Private Investor [37]
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Just one last question, and I will get back in the queue. Can you just discuss a bit more about the bank and the opportunities, once the CEO is on board, to drive new revenue streams? You said you had made 15 loans in the last couple of months. Can you talk a little bit more about the sustainability of earnings from the bank?
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Francesco Colasanti, Fortress Investment Group - Managing Director [38]
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Yes. What we see is all the markets that we are exploring with the doBank banking license are contiguous to the NPL sector. The banking license allows us to expand the business in the specialized sectors, and to be seen and valued over time as a specialized bank.
As I said, we started lending money to buyers of assets at foreclosure and bankruptcy auctions. They -- this is a market that is not a focus of the Italian commercial banks, and allows us to generate, I think, outstanding results, taking a very limited risk, given the limited loan-to-value at which we lend the money. We are fast; we know the business; we know how to evaluate properties that are in the foreclosure auctions. And we lend the lower between 60% of the value and 70% of the price.
And if you look at similar loans made by the banks, the banks will make like a 10-year loan at probably 200 basis points over Euribor. Given the fact that are foreclosure auctions and we need to be fast and we now have competition, we lend this money at 350 basis points over Euribor. So, if you back in the results, you have between 12% and 14% ROE on this asset.
We are also focusing the Company to provide financing for bankruptcy compositions and receiverships. And the bank is entitled to receive deposits, and we are talking to receivers to deposit the money to us. Because once they sell the assets, they are selling the receiverships, it takes years to get the money distributed to creditors.
And many times, the money is ours, so that is to be distributed to us, so we are talking to the receivers; and while is not distributing the cash, because there are lawsuits or something like that, we are asking them to deposit the money with us. And another important thing is that our bank is one of the few banks in Italy that can transfer legal payments electronically to the courts.
So, this is -- those are the areas that we are expanding. Those are the areas that we are very focused. We don't want to become a commercial bank in Italy. We want to be a specialized bank. Our CEO will have this target. And the other target is -- are the ancillary services that we can provide to our clients. So -- we can offer to our clients. So, we manage the NPLs, but we also -- we recently created a banking group with dual real estate that is our real estate Company fully owned by doBank to provide valuations, real estate collateral valuations, to provide auction advertising and auction facilitation.
We have a product called We Bring You to Auctions. So people -- we have a free number people can call, and we assist them to bring them to the auctions. Once they go to the auctions, we give them a facility to acquire the property. So, those are the areas that, again, we want to develop to increase our revenues and increase the EBITDA of the Company.
We did not price that in our models. We did not pay for it. We think we can generate more revenues. This will be seen over time at doBank. But I think we are in a great place to generate -- increase our revenue base in the ancillary services and the banking sectors.
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James Sheridan, - Private Investor [39]
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Thanks, Francisco.
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Operator [40]
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(Operator Instructions). You have no further questions at this time.
I will turn the call back over to the managers.
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Francesco Colasanti, Fortress Investment Group - Managing Director [41]
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Great. Thank you for your time. We really appreciate the fact that you are our investors. You give us money; we respect your money. We will be very diligent. We will try to make the right investments for you. And on behalf of everyone at Eurocastle, thanks again for your support. I look forward to updating you again in May. Thanks a lot.
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Operator [42]
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Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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