By Valentina Za

MILAN (Reuters) - Europe's debt collectors have gone from feast to famine amid a collapse in the number of bank loans turning sour.

Companies that recover unpaid bank debts, and which thrived in the aftermath of the euro zone sovereign debt crisis, are rethinking their business models and examining tie-ups with rivals after COVID-19, an energy crisis and two-decade-high interest rates failed to unleash a new wave of loan defaults.

Banks in Europe's south have largely completed the clean-ups that once fed the bad loan bonanza and pulled in overseas investment firms such as Apollo, Cerberus, PIMCO, Elliott and Lone Star, while government support measures have helped keep companies and households on their feet. Non-performing loans (NPLs) have held at 1.8% of total bank loans in Europe for six straight quarters, official data show.

In Italy, the continent's biggest market for bad debts, sales last year totalled 31 billion euros ($34 billion), a third of the 2018 peak. Back then, virtually all disposals came from banks, while more than half of the total in 2023 were re-sales.

Shares in some of the continent's main players including Sweden's Intrum - Europe's biggest debt collector - and Italian leader doValue hit record lows this month as investors weigh whether efforts to restructure their business can work. Both companies declined to comment.

"Several players are undergoing a metamorphosis," said Francesco Cataldo, a director at consultancy PwC Strategy& in Milan.

Keeping loan managers in activity is important because they can provide a new lease of life to assets - sometimes businesses or properties - that are tied up in insolvency or restructuring procedures, helping economic growth.

HIGHER DEBT COSTS, LOWER BAD LOAN FLOWS

Many collectors have not only stopped buying new impaired loans now that debt costs make that economically unviable, but are also shedding assets bought in the past.

Intrum, whose shares are down 78% this year, in January sold a nominal 33 billion euro loan portfolio to Cerberus, retaining management of the loans and using the cash to cut its recently downgraded debt. It is working with advisers to improve its debt position.

Similarly, Italy's Mediobanca in October quit the NPL investment business and sold its arm that held a nominal 6.5 billion euros in bad loans.

Intrum's 'capital light' model was embraced last week by Italian state-owned bad loan manager AMCO when it presented a new three-year strategy, saying it would reduce loans under management and cut its financial debt to zero.