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Some background to the Italian NPL marketThe Italian banking system has accumulated a large amount of gross non-performing exposures. These NPEs more than doubled from approximately €133 billion at the end of 2009 to €329 billion in September 2016, as HYPERLINK "$FILE/EY-Navigating-the-Italian-credit-opportunity.pdf"resumed in this chart by Ernst & Young, based on Bank of Italy’s HYPERLINK " Bulletin IV, published in December 2016:-15150321399Italian banks have been put under pressure by the ECB to manage more efficiently this large amount of deteriorated loans that weighs on their balance sheets.To give you just a quick visual idea of the size of this problem for the Italian banking system, here is another chart taken from the same Ernst & Young report, that HYPERLINK "$FILE/EY-Navigating-the-Italian-credit-opportunity.pdf"highlights both the NPE coverage ratio and the gross NPE Ratio, in percentage, for some of Italy’s largest banks. -128270209425On the right side of this chart, you will find some very well known names, like Monte dei Paschi (BMDPY), Banca Popolare di Vicenza and Veneto Banca (VENBF), that have been recently in the news for their rescues, as reported also here on SA ( HYPERLINK ", HYPERLINK "). A percentage of NPEs exceeding 30% of total lending brought these banks on their knees. Italy’s lack of progress in tackling its bad loan problem has had a negative impact on its overall economic climate. External, 3rd party NPL servicing group have emerged as essential tools, for most Italian banks, to address their NPE problem. doBank: Italy’s largest IPO in 2017, four times oversubscribed, makes its debut with a 14% price increasedoBank is Italy’s largest 3rd party NPL servicing group, with roughly €81 billion GBV of loans under management. UniCredit (UNCFY) and Intesa Sanpaolo (ISNPY), together with some Fortress-associated (FIG) funds, represent doBank’s largest customers, amounting to roughly 84% of revenues. All these customers have multiannual servicing agreement with doBank. doBank claims a 62% market share of today’s 3rd party NPL servicing market in Italy, as stated in their IPO filing. ( HYPERLINK "(1).pdf?download=1"link, in Italian). doBank’s share represents nearly one third of the total, gross NPLs present on the Italian market.Here are a few essential HYPERLINK " for the company: -6350166713PWC HYPERLINK " that “the share of bad loans managed by independent non-performing loan servicers will continue to rise in the near future, reaching around 200 billion euros by 2018”. In a press conference ( HYPERLINK ", in Italian) announcing the IPO, doBank’s CEO, Andrea Mangoni, underlined some of the strengths of his company: a Cet1 in excess of 20%;an EBITDA margin in excess of 30%; long term visibility into a very good cash flow generation; a commitment to returning at least 65% of profits to investors through dividends;a 44% increase of EBITDA in Q1 2017 (Y/Y)Here is some positive HYPERLINK " about doBank’s future prospectives: "We believe it to be an excellent investment given doBank’s market positioning and the fact that bad loan management is a top priority for Italian banks - and therefore for the country - at this juncture," said Gerardo Murano at ADB Corporate Advisory.Given its leading position is what is now perceived as a “sweet spot” in the NPL market, it is not surprising that the IPO was a great success. Shares surged 14% on their first trading day, making doBank Italy’s largest IPO in 2017. The company listed last week on Friday at €9 per share, and closed at €10.90 on Monday, a 21% increase from its IPO price in just two trading days.A striking success for Fortress: now doBank’s largest shareholder, basically for freeFortress HYPERLINK " UniCredit's debt collector unit UCCMB in October 2015. The company was soon renamed doBank. The price paid for this acquisition was € 530 million, but it did also include a € 2.4 billion GBV NPL portfolio. In September 2016 the € 2.4 billion NPL portfolio was part of a spin off into a SPV called Romeo. doBank now owns 5% only of this SPV, while the remaining 95% belongs to Fortress related entities. Between March 2016 and October 2016, doBank acquired Italfondiario from Intesa Sanpaolo and some Fortress associated companies. The price paid for this additional purchase was € 22.3 million in total. Italfondiario was then merged into doBank, creating Italy’s largest 3rd party NPL servicing group, holding long term contracts with Italy’s two largest banks, Unicredit and Intesa. In total, Fortress spent roughly € 552.5 million, to build Italy’s largest 3rd party NPL servicing group and acquire a € 2.4 billion GBV NPL portfolio. However, the total value of the Romeo SPV can be estimated in the € 200 million range, and should be almost completely deducted from Fortress total acquisition cost, to estimate the correct cost of doBank only. In May 2017, before its IPO, doBank HYPERLINK " a dividend of € 52.3 million to its existing shareholders, i.e. Fortress, and HYPERLINK " Gextra, a specialised player in small debt collection services, to Lindorff Italy. All these activities reduce Fortress total commitment to doBank “as it was listed" to less than € 300 million. Guess how much Fortress got for listing less than half of doBank? More than €300 million. Even you don't totally agree with our simplified calculations, it should be noted that, in less than 2 years, Fortress has been capable of reorganizing doBank, reducing its acquisition cost/maximizing its potential profit and bringing, with perfect timing, a leading NPL servicer to a very successful IPO. Eurocastle, a Fortress-managed entity, even a better way to play the Italian NPL game? Although most Italian investors ignore it, it was possible to “own” and invest in doBank long before the company made its IPO. Eurocastle, a Fortress-managed company, listed on Euronext Amsterdam Exchange under the symbol “ECT”, has historically been the Fortress vehicle owning 50% of doBank, in addition to non-performing loans and other real estate related assets in Italy.It should be noted that Eurocastle is relatively illiquid, and trades an average of 25,000 shares/day. The company has already achieved a very good performance in the last 12 months, as shown in this 1 year HYPERLINK " In addition to this performance, it should be noted that the company is also HYPERLINK " a decent dividend:-15150300190 We believe that the market is still discounting the positive effect of doBank’s listing on Eurocastle’s NAV. First, let’s have a look at Eurocastle’s main existing segments, using a HYPERLINK " from their Q1 2017 presentation:-15150300190 In a press release made on July 12th, Eurocastle gives HYPERLINK " hint of what doBank’s listing may mean for Eurocastle’s shareholders: The price of €9.00 per share equates to a market capitalisation of doBank of €704 million. Eurocastle’s most recently reported adjusted NAV for its 50% interest of doBank is €270 million. Some back of the envelope calculation: assuming Eurocastle sold half of its doBank interest, the company should receive roughly € 175 million, that may be invested into the acquisition of additional NPLs, hopefully generating the company’s targeted 15% to 20% returns; the value of its remaining share of doBank (25%) could now be directly linked to doBank’s price on the Milan stock exchange (a hot stock), to better estimate its real market value. Here is a closer look at Eurocastle’s segments, with their estimated NAV, and where we have added our estimates post doBank IPO:-15150301587 If doBank is trading in the €10 range (a conservative price, as we write), and our assumptions are right, we estimate a NAV of roughly € 10.79 for Eurocastle. Even if the company has traditionally traded below its NAV, we believe that there is still good room for Eurocastle shares to play “catch up” with the doBank euphoria in the next few weeks.

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