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Second edition of Global Debt Sales of KPMG gives an actual overview about the NPL-market, securitization - RMBS & key banking markets across Europe, the Americas and Asia-Pacific

Second edition of Global Debt Sales of KPMG gives an actual overview about the NPL-market, securitization - RMBS & key banking markets across Europe, the Americas and Asia-Pacific

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    global-dept-sales-september-2011v2 global-dept-sales-september-2011v2 Document Transcript

    • LOAN PORTFOLIO ADVISORY Global Debt Sales Portfolio Solutions Group kpmg.com KPMG INTERNATIONAL© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • ForewordThe debt sales market has become positively exhilarating since our first edition ofGlobal Debt Sales just six months ago. The world is slowly but surely pulling itselfout of the deep recession that followed the global financial crisis. But while somecountries are faring reasonably well, others have seen their debt – both public andprivate – skyrocket to unmanageable levels.The result has been a series of government regulations and business strategiesthat have reshaped the debt sales markets in many jurisdictions. And as the specterof sovereign debt defaults continue to circle EU countries in particular (includingPortugal’s mid-summer debt downgrading to junk status by Moody’s), many punditsand industry observers are forecasting even greater levels of debt sales (particularlynon-performing portfolios) in the near future.In the midst of all of this, KPMG debt sales and portfolio services experts fromaround the world have come together to create the second edition of Global DebtSales. As part of this ongoing publication series, KPMG’s global Portfolio SolutionsGroup (PSG) will continue to examine recent debt portfolio activity in a number ofkey banking markets across Europe, the Americas and Asia-Pacific. We’ll look at alltypes of ‘non-core’ debt sales, including performing and non-performing loans fromaround the globe, and will strive to provide high-level insights into trends and newopportunities on the horizon.With extensive experience advising both sellers and buyers on hundreds ofmandates globally, our senior team of loan portfolio professionals work alongsidegovernment and financial institutions, private companies, strategic and financialinvestors, debt collection agencies, industry financiers and other professionalsto understand the specific issues facing each market. More and more, our clientslook to us to provide a combination of strategic options analyses of portfolios andplatforms, along with robust market sounding exercises with our extensive investornetwork to deliver quality solutions from both a country and global perspective.We hope to once again share some insight with our readers in order to help marketparticipants cut through the complexity of global debt sales and maximize the valueof their loan portfolio positions.We encourage you to contact the authors of this publication, or your local KPMGmember firm to discuss any of these issues or insights in more detail.Graham Martin Stuart KingPartner, London Partner, MadridM: +44 78 2519 6802 M: +34 914 56 82 69E: grahammartin@kpmg.com E: stuartking@kpmg.com© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate, Conact,conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portal solution, ICD,Kowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care, Institutsverwaltung, distressed,Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi, welltbuero, Immobilienkongress, Audis,compliance, Ardea, NPL-Forum2012, risorse per ROMA SPA, RpR , protocollo di qualitá, capitale Roma, Aareal, Immoconsulting,Teramo, workplace management, closing, interim,turnarond, tags kowo troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate, Conact, conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portal solution, ICD, Kowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care, Institutsverwaltung, distressed, Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi, welltbuero, Immobilienkongress, Audis, compliance, Ardea, NPL-Forum2012, risorse per ROMA SPA, RpR , protocollo di qualitá, capitale Roma, Aareal, Immoconsulting, Teramo, workplace management, closing, interim, turnarond, Treuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortress condominio amministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimo conto economico Fondo immobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGR Banca d`Italia Legge 106 cartoliarizzazione Reo Immobilie imueble Casa Recupero Credito Bad Bank SIP Sistema integrada protection Caja workout Credito fallido credits en détresse Troubelshooting incentive care ICD Pfandbriefbank Eurohypo Portfolio ; Exit - Strategia Immobilienfond Software Orgaplan CONact Unicredit CashflowSync RE-lifecycle Kowollik deuda morosa UEN Union Estates Network lucidi vendittelli UCCMB italfondiario Due Diligence Portal-Software Web-Solutions Property Property Management Amministrazione immobiliare Condominio ciclo di vita del Immobile fundos immobiliarios troubleshooting, abs, Due Diligence, workplace, credit, Property-Management, Immobilie, NPL, Rating, Real-Estate, Conact, conactor, Bad-Bank, Servicing, interim, turnaround, Cashflowsync, CCFS, Distressed Asset, CMBS, portal solution, ICD, Kowollik, recupero di credito, datawarehouse, cloud-solution, Workout, Incentive Care, Institutsverwaltung, distressed, Orgaplan Italien, Special Servicing, DocRating, DueDiligence, Draftcheck, Lucidi, welltbuero Treuhand Intesa Unicredit Immobilien Ubibanca ByYou Jerome Chapuis First Atlantic Ricucci EH-Estate Fortress condominio amministrazione immobiliare condominiale integrazione sincronizzazione ruoli immobiliare millesimo conto economico Fondo immobiliare IAS/IFRS commercialista KMPG Deloitte revisione MPS Unicredit SGR Banca d`Italia Legge 106 cartoliarizzazione Reo Immobilie imueble Casa Recupero Credito Bad Bank SIP Sistema integrada protection Caja workout Credito fallido credits en détresse Troubelshooting incentive care ICD Pfandbriefbank Eurohypo Portfolio ; Exit - Strategia Immobilienfond Software Orgaplan CONact Unicredit CashflowSync RE-lifecycle Kowollik deuda morosa UEN Union Estates Network lucidi vendittelli UCCMB italfondiario Due Diligence Portal-Software Web-Solutions Property Pr
    • Contents Trend Watch 02 Basel III 02 The rebirth of the EU Securitizations Market 03 Introduction to Europe 06 United Kingdom 08 Ireland 12 Germany 16 Spain 20 Italy 25 Portugal 27 Poland 32 Russia 35 Spotlight on Africa 38 Introduction to Americas 42 The United States 44 Brazil 51 Mexico 53 Argentina 55 Introduction to Asia 57 China 58 Korea 61 Japan 64 Australia 67 Thailand 69 Taiwan 72 Indonesia 75 India 78 Malaysia 81 KPMG’s Portfolio Solutions Group’s Service Offering 84 Glossary of Acronyms 86 Global Debt Sales  |  1© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Trend WatchBasel III – the straw that breaks resources become trapped in national markets. Many institutions are nowthe camel’s back actively re-evaluating their balance “While Basel III hasn’tFor the better part of three years, sheets and deciding which portfolios yet sparked a flurry ofindustry commentators and marketpundits had been predicting a flood make sense to keep, and which they activity in the debt sales should sell.of debt sales from banks. Indeed, the market, there’s goodsigns all pointed to an imminent sell While most of Europe is keenly awaiting reason to believe that itoff as banks struggled to overcome the the transposition process of Basel IIIeffects of the economic downturn and into European Directive and Regulation is just a matter of time.”meet the increased regulatory capital (after which it will move on to nationaldemands now being put on them by legislation), the key elements of Basel IIIregulators. The deterioration in quality are already fairly clear. They include: timeframes will apply to many of theof some banks’ portfolios added more key elements. • increased capital ratios (with afuel to the fire as the combined impact particular focus on the need for good But the Basel III capital ratio alsoof increased capital requirements and quality, loss-absorbing equity capital); effectively amplifies the existing issuesimpairment charges seemed to pointto the need for capital constrained • increasing quality of capital in the current calculation of Basel IIorganizations to find some exit route. requirements with a focus on risk weighted assets. As a result, firms harmonization across borders; are increasingly looking to optimize their Basel II credit risk models andSo what has happened recently? • new leverage requirements calculations, and are analyzing theirProposed in December 2009 and agreed (effectively capping the absolute portfolios in light of the level of pricingby the G20 and the Basel Committee size of balance sheets in relation to and performance that can now bein December 2010, Basel III outlines capital, irrespective of risk); achieved in the market.the significantly increased capital andliquidity requirements for banks. Basel • new measures to improve Systemically important financialIII also differs from its predecessor counterparty risk management institutions (SIFIs) are under even more(Basel II) by taking a different regulatory (largely focused on collateral pressure, with further enhanced capitalapproach: where Basel II strove to management and stress testing); and ratios expected (some anticipate anincrease risk management standards • new liquidity requirements to both add-on of up to 3 percent, takingby offering the ‘carrot’ of reduced ensure firms hold sufficient high minimum common equity Tier 1 ratiosregulatory capital requirements, the quality liquid assets to meet short- up to 10 percent). This will result in evenapproach taken by policy makers in term shocks, and to encourage a greater pressure on balance sheets fromBasel III has been to focus much more restructuring of the balance sheet both a funding and capital perspective.on across-the-board increases in capital with a focus on matching off It should also be remembered thatand liquidity requirements. long-term funding sources against Basel III is only one element of theWhat’s more, regulators are increasingly longer-term assets. rapidly evolving regulatory framework,taking a more national approach, Much of the media focus has been and many firms are now dealing witheffectively pushing institutions centered upon the increased capital a raft of new or proposed regulationtowards creating subsidiaries rather ratios within Basel III and the extent on a wide variety of issues includingthan encouraging branches and home to which organizations will (or will not) the impacts of new proposals on crisisstate supervisors to act appropriately. meet these ratios. The market should management, regulatory reporting,The result is further pressure on keep in mind, however, that transitional and trade reporting (not to mention thealready-strained capital and liquidity, as implications of the UK’s Independent2  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Commission on Banking (ICB) final either directly or indirectly through some European RMBS issuance is recoveringreport that has now been issued). form of securitization-like structuring. Despite the financial crisis, Europe has seen an overall continuation of theSo where will it all end? The rebirth of the EU issuance of Asset Backed SecuritiesUndoubtedly, there is now significant securitizations market (ABS), albeit at lower levels than before,pressure on banks’ balance sheets. and often supported to a significant There is no doubt that investorsAcross the globe, bank executives are degree by public institutions (such as around the world have grown warynow striving to understand the impact of the European Central Bank (ECB) and of securitized products, particularlyregulatory change: what will their firm’s the Bank of England). following the suboptimal performancefuture business model look like? What of U.S. Residential Mortgage-Backed Interestingly, while total ABS issuanceareas of the business will continue to Securities (RMBS) that had been was increasing in 2007 and reached abe profitable? And what strategy should backed mostly by subprime mortgages. record level in 2008, the volume thatthey follow for both the investment and With investor appetite for performing was actually placed with investorsdivestment of divisions, assets and EU RMBS also declining, this article was already in decline by 2007 andsubsidiaries? examines the resilient performance was nearly non-existent in 2008 andSo while Basel III has yet to spark of EU RMBS both during – and after – 2009 (see Figure 1). As a result, thethe flurry of activity that was widely the financial crisis. Indeed, EU RMBS demand for the remaining issuanceanticipated, a number of barriers remains a suitable funding instrument was primarily substituted by Europeanhave started to fall away. For one, the for financial institutions, as well as an credit operations, for which retainedoverall impact of Basel III is becoming appealing opportunity for investors. securitizations can be used as collateral.clearer. There are also signs that amore normalized loan portfolio marketis returning and that the economicsituation is working its way through Figure 1: Retained versus public issuanceto impairments. And once thesechallenges are sorted out, there is 100% 900 827good reason to believe that Basel III Public issuance as percentage of total 90% 800will eventually trigger further portfolio 287 80% 700rationalization and debt sales. Issuance EUR Billions 70% 308Of course, all of this leads to the obvious 612 77 600 510question of whether there are – or will 60% 450 500be – any buyers in the market for these 50% 815portfolios. One peculiarity of regulatory 400 40% 389driven change is that it applies the same 300pressures (in the same direction) to 30% 510 325 441the entire banking industry at once. 20% 200So while there may be pressure to sell 28 10% 81 100off those capital and liquidity hungry 12 9portfolios, there may be few banks lining 0% 0up to buy them. In this environment, it 2006 2007 2008 2009 2010 2011should not be a surprise if many of those Public (%) Retained (%) Issuanceless desirable portfolios are eventually Source: European ABS & CB Research, J.P. Morgantransferred out of the banking industry, Global Debt Sales  |  3© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • In Focus: Comparing European RMBS performance to the U.S.The knock-on effect from the weak rates did not rise above 3 percent their U.S. counterparts: the first is thatperformance of U.S. RMBS is not through the global financial crisis. European households tend to have aonly unfortunate, but undeserved. In contrast, U.S. delinquency rates lower average level of indebtednessPerformance of RMBS in Europe was started to rise at the end of 2008, hitting (as measured by lower debt-to-incomesolid during and after the crisis with recorded delinquency rates of above and higher wealth-to-income levels),EU RMBS outperforming their U.S. 10 percent in 2010. which made euro area householdscounterparts in both delinquency levels less sensitive to income or interest The downgrade rate shows similarand downgrade rates (see Figure 2). rate volatility. The second is related to trends, with European prime RMBSLooking at delinquency levels in averaging just 4.3 percent over the stronger personal bankruptcy and dutyparticular, evidence shows that the 2007–2010 period, where U.S. RMBS of care laws in the euro area, whichunderlying assets of EU RMBS have averaged an astounding 40.1 percent. provide less incentive for borrowers toperformed better than those of U.S. default on mortgages.RMBS, and – with the exception of Irish There are two main reasons why EUprime RMBS – European delinquency RMBS perform better compared toFigure 2: RMBS Prime 60+ Delinquency is worth noting that these issues have occurred in countries with limited 12 sovereign risk and relatively robust economic conditions. What’s more,Delinquency 60+ [% of CB] 10 these collateral types are generally 8 perceived as bearing low risk when compared to other products such 6 as Commercial Mortgage-Backed Securities (CMBS). And according to 4 the ECB, investors seem to look for transparent and simple structures, low 2 collateral risk and a good reputation of the originators. 0 Jan-07 Apr-07 Oct-07 Jan-08 Apr-08 Oct-08 Jan-09 Apr-09 Oct-09 Jan-10 Apr-10 Oct-10 Jul-07 Jul-08 Jul-09 Jul-10 RMBS will inevitably remain one of the most important funding sources Dutch Prime Greek Prime Irish Prime Italian Prime Over the past decade, the market has Portuguese Prime Spanish Prime UK Prime U.S. Prime seen European financial institutions slowly shift from traditional depositSource: Moody’s Investors Service funding of mortgage lending towards more capital market-based funding.But in 2010, securitizations came back Investor appetite primarily focused Indeed, by the end of 2007 around 21in favor, when about 21 percent was on high quality collateral percent of housing loans were financedpublicly placed. Year-to-date figures Investor interest in these assets has through RMBS and covered bonds2.(27 percent publicly placed)1 seem not been universal, however, with the With RMBS playing such a significantto indicate that investor demand will largest share of the placed issuance role in the current funding structurescontinue to recover. coming from prime RMBS from the of financial institutions, we believe Netherlands, the United Kingdom and that their use is critical in restoring Italy, along with German auto ABS. It the funding to markets. In fact,1. European ABS & CB Research, J.P Morgan .2. “Housing finance in the euro area” European Central Bank, March 2009 ,4  |  Global Debt Sales © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 3: Downgrade rates this, the upcoming Solvency II regulations will also restrict EU insurance companies 80% 74.7% from investing in securitizations unless 70% the originator complies with the new 5 percent retention requirement. In effect,12 month downgrade rate 60% this is expected to lead to renewed focus 54.3% from originators on the longer-term 50% 47.4% 43.9% performance of the created securities. If 40% 37.3% successful, these new requirements will ultimately contribute to mitigating the 30.3% 30% incentive of risk-taking and the easing of 24.2% lending standards. 20% 15.6% 14.2% Other regulatory factors are also 9.4% 9.7% 10% influencing ABS in the EU. For example, 4.5% 3.1% 4.2% 1.1% the ECB intends to introduce loan-level 0% 2007 2008 2009 2010 data requirements as a condition of eligibility in its central bank funding EU Prime EU Non-Conforming U.S. HEL U.S. RMBS operations, and the Bank of EnglandSource: Moody’s Investors Service has published new transparency requirements which issuers must comply with if their asset-backed securities areaccording to the IMF the restarting , What is currently preventing to remain eligible as collateral in fundingof securitization markets is critical to investors from putting more focus operations in that jurisdiction.limiting the fallout from the economic on RMBS?crisis and to eventually enabling While the performance of European Furthermore, credit rating agencies arethe withdrawal of central bank and RMBS is recovering, investor appetite in changing their rating methodologies. Ingovernment support3. 2010 was still only around 15 percent of January 2011, for example, Standard & 2006 levels, largely due to a lack of trust Poors updated its counterparty ratingThe ECB4 goes further still, suggesting in the market and overall volatility. At criteria to establish a more precise linkthat securitizations will become the same time, having been confronted between the rating of an issue and bothincreasingly necessary due to a with losses on investments that were the counterparty’s rating and type oflack of alternative funding available initially rated with an AAA rating, support provided.to repurchase the repo-ed retainedissuances, the continued phasing out of investors have also lost some of theirgovernment guarantees and the need to confidence in credit ratings assigned by Conclusionrefinance a large part of long-term debt rating agencies. Even though the performance of EUover the next few years. This seems RMBS has remained resilient, theborne out by the fact that by late August Changes in regulations and policy market is actively working on restoring2010, European banks had EUR1.6 initiatives add to a better functioning trust in EU securitizations, not leasttrillion of longer-term debt outstanding of the RMBS market as a vital funding source for thethat was due to mature between August A number of initiatives have been future. And while investor appetite for2010 and December 2012, of which the undertaken by regulators and market European RMBS is certainly pickingEuro area accounted for EUR1.2 trillion. participants in an attempt to align up, it is still far from pre-crisis levels,As a result, most banks will likely need the interests of all stakeholders due to a number of factors suchto issue new securities to redeem in securitizations. For one, the as the changing use of Structuredtheir maturing debt, particularly in incorporation of Article 122a in the Investment Vehicles (SIVs) by banks,the Netherlands. Capital Requirements Directive aims to evolving regulations, ongoing distrust address potential conflicts in the existing with respect to structures, and last ‘originate to distribute’ model by requiring but certainly not least, upcoming originators and sponsors to retain at least Basel III requirements that will result 5 percent of the exposure. In line with in banks facing higher costs when investing in future securitizations.3. Global Financial Stability Report of September 20094. “EU banking sector stability” European Central Bank, September 2010 , Global Debt Sales  |  5 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Introduction to EuropeSince the end of 2010, activity has To a large extent, this focus on CREstarted to gather pace in the Europeandebt sale market. An increasing has been driven by the considerable defaults already acknowledged (if “Spain has beennumber of banks have been sounding not reported) by many banks, and one of the hottestout market interest for their portfoliosand – most pleasingly from buyers’ the knowledge that many of these portfolios will require significant markets in Europeperspectives – several headline- hands-on, expert asset management so far this year, butgrabbing portfolio sale processes havebegun, continued and closed. Thanks to avoid further deterioration. clearly questions oflargely to the diversity of European This notwithstanding, one of the key issues facing many of the European sovereign debt anddebt sale markets, activity still remainsmost prevalent in the non- and sub- banks is their exposure to very thinly national defaults areperforming markets. priced, late pre-crisis originated lending. And while the vast majority of these popping up acrossOver the past few months, we have loans are classified as performing, they the EU and have thenoticed a growing interest in Europeanbanks seeking to exit non-core markets will present considerable challenges for capital allocations going forward and potential to drive aand products with a particular focus on may see a lack of wholesale funding as significant level ofCommercial Real Estate (CRE) lending. LIBOR and EUROBOR rates increase.  portfolio sales.”6  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Given the relative absence of foreign and local strategic buyers, the emergence of these ‘new’ buyers will be critical if European banks are to successfully deleverage over the next five years.In this regard, many of the larger focus on searching for the ‘pools of to shed non-core and non-performingportfolios of residential mortgage, liquidity’ that have, to this point, focused loans, and the impact of the Caja sectorproject finance and infrastructure loans elsewhere. And while many of these restructuring is now starting to yield(where pricing was particularly tight) investors have historically been active portfolio disposals and equity raisings. Asmay be challenged. With many strategic in the RMBS/CMBS markets, or as LP such, opportunities for investors preparedbuyers now absent (or constrained) investors into specialized private equity to engage with financial institutions arefrom the market, more creative funds, they are slowly changing their considerable. In the last few monthsalternative solutions are often being investment mandates for such funds. alone, the market has seen an increaseconsidered. At the same time, strategic But increasingly, their attention is turning in the number of successful sales of realbuyers are becoming increasingly towards direct and indirect investments estate assets to buyers such as Cerberusfocused and can increasingly afford to in loan portfolios at palatable returns for and Fortress, and the progression of thebe more selective as higher volumes of both themselves and the vendors. Given current CAM loan process which involvesnon-core assets hit the market. the relative absence of foreign and local the disposal of over EUR13 billion in non- strategic buyers, the emergence of these core lending and real estate to a coterieNo ‘silver bullet’ ‘new’ buyers will be critical if European of financial investors. We expect that,In all but a few markets and banks are to successfully deleverage over the coming months, this activity willtransactions, banks seeking to exit over the next five years. likely continue as sales in both big-ticketnon-core loan portfolios have yet ‘non-core’ portfolios and non-performingto see the emergence of any real Eurozone debt crisis loans continue.‘strategic’ buyers. But strategic and Recent discussions around Europeanwell capitalized banks do exist and – bailouts have become ever more Poland is ‘very hot’for the right opportunities – seem sensitive and market destabilizing, While many consumer non-performingwilling to expand (as was the case with the resulting lack of liquidity loan (NPL) markets have struggledwith Santander, which purchased combined with ongoing regulatory to (re)gain momentum following theBank BZK’s business in Poland and the reforms ensuring that the sovereign financial crisis, the Polish market hasWilliams Glynn business from RBS debt issues currently being experienced gone from strength to strength. Ain the UK). will continue to provide negative number of existing and new foreign repercussions for global growth and buyers remain in the market, but itBut the market must remember that – the entire banking system for quite is the strength of local buyers (andin many cases – CRE loans, thinly priced some time to come. As deadlines their desire to grow volumes underresidential mortgages and PFI debt is approach for the repayment of support management) that is providing localoften no more ‘core’ to potential buyers loans, accelerated disposals of non- banks with an extremely attractiveas it is to potential vendors. That said, performing and non-core assets will alternative to in-house collectionthere have been a few instances of local become ever more necessary and teams. This has led to pricing for non-or foreign banks precipitating strategic prevalent in the market. performing consumer loans in the mid-portfolio acquisitions in order to expand to-high twenties, driven by both cheapin certain markets (such as Citibank Spain is ‘hot’ local funding, and the comparativeto Barclays in the UK), but these have Certainly the ‘hottest’ topic over the past advantage of investing in local currencygenerally been the exception rather six months has been Spain. Opportunity (the Polish zloty). That said, new foreignthan the norm. funds are currently negotiating potential entrants remain interested in both debtAs frequent advisors to financial transactions across the Spanish debt and portfolio and collection opportunities ininstitutions, we have seen an increasing equity space, local banks are seeking the Polish market. Global Debt Sales  |  7© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • United KingdomIn comparison to the sluggish activity below), it is easy to see the potentialof the past three years, the UK debtsale market has recently become opportunity in this space. “The UK consumera hive of activity. We have seen Macroeconomic environment NPL market can goa number of banks and financialinstitutions begin formal sale Interest rate rises will have a significant one of two ways;processes for their loan portfolios, impact on UK debt sales. Whilst short term expectations are that interest rates either a return towhile others have undertaken informalmarket soundings in order to inform will not increase, they likely to have the old marketstheir boards in advance of potential upward movement in the medium term. But how will this economic environment characterized byfuture sales. To date, a considerablechunk of this activity has related to impact the valuation of a portfolio of small sales to local(ostensibly) performing UK CRE loan loans? buyers, or into a newportfolios, including a number of highprofile sales such as the formal CRE Current low interest rates tend to incentivize the voluntary prepayment market dominatedprocesses by Bradford and Bingley of floating interest rate loans, with by large global(discontinued), and RBS in Spain contractual clauses on prepayment penalties and lock-out periods partially investors.”(now closed) and the UK (pre-closing).But behind these headliners, there offsetting losses incurred by the lender.are several other institutions already As a result, any rise in interest rates will prevalent in the riskier parts of a bank’sengaged with external investors reduce this incentive, and likely trigger loan portfolio. As a knock-on effect, anto gauge pricing and potential deal an increased number of defaults. This increased number of defaults couldstructuring. Looking at the amount will be especially true if the increase further suppress market prices, thusof NPLs, loans 90 days past due and in interest rates is coupled with a slow lowering the cash flows to the lender atallowance for credit losses/NPLs recovery in the real estate market or liquidation, and increasing the pressurefor four of the UK banks (see chart the wider economy; and it will be more on a bank’s loan recovery rates.8  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • To account for these higher than expected Figure 4: NPLs, loans 90 days past due and allowance for credit losses/NPLslosses, lenders will need to set aside a for some UK bankslarger proportion of capital to meet therisk provisioning requirements of their Allowance for credit losses/non-performing loansexpected defaults. When coupled with 51.1% 71.0% 26.7% 46.0%higher portfolio management costs, 6,000 70,000 Loans 90 days past due and accruingthis can further adversely impact the 5,317 (a) 62,875profitability to the lender. And while 60,000 Non performing loans (£m) 5,000this will largely be factored into the 50,000eventual transaction price, disposing 4,000 interest (£m) (b)of loan portfolios may still be the 3,446 39,231 40,000most profitable approach to releasing 3,000 2,897resources within a constrained capital 30,000 24,322environment. 2,000 17,656 20,000Vendors 1,000 10,000From a vendor perspective, many of 401the transaction drivers that existed six 0 0 Barclays HSBC Lloyds Royal Bank ofmonths ago remain valid (covered in (as of Sep 2010) (as of Dec 2010) Banking Group Scotland Groupmore depth in the previous edition of (as of Jun 2010) (as of Dec 2010)Global Debt Sales, January 2011). These Loans 90 days past due and accruing interest £m (a) As of Jun 2009, Sep 2010 n/ainclude the onset of Basel III capital Non-performing loans £m (b) As of Sep 2009, June 2010 n/arequirements (see page 2), the need to Source: Capital IQcomply with European Commission StateAid requirements, and the ongoing focusof UK banks on deleveraging, exiting non- Figure 5: Composition of total loan books for some UK bankscore markets/products and aligning loan 1,000maturities with available funding. 900In general, nearly all UK banks and 800 741.6building societies are still focused onconsolidation rather than expansion. But 700 660.3with muted market pricing feedback, 584.7 600 £bn 525.9relative transaction inexperience and 500a notable dearth of strategic buyers in 619.3the market, there have been very few 400 535.4 483.7successful ‘quick exits’. Indeed, banks 300 458.6that have recently conducted transactions 200 17.7 152.9(particularly those with larger performing 100 140.5 2.5portfolios) have often felt significant 104.6 62.9 9.9 35.7 67.3 62.0 65.3P&L pain as a result of a transaction or 0in advance of a sale. An examination of Barclays HSBC Lloyds Nationwide Royal Bank of (as of Sep 2010) (as of Dec 2010) Banking Group Building Society Scotland Groupthe composition of loan portfolios for five (as of Jun 2010) (as of Sep 2010) (as of Dec 2010)large UK financial institutions reveals that Book value of total loans less capital and impairment £bnthe book value represents approximately Impaired loans £bn84 percent of the total loan portfolio on a Total capital £bnweighted average basis. Source: Capital IQ Global Debt Sales  |  9© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Selected dealsThe table below details several selected recent transactions in the UK debt portfolio market.Table 6 Face value Seller Buyer Asset type Completion date (in local currency) Barclays CreXus Investment Corp U.S. Commercial real estate £586m March 2011 RBS Blackstone UK Commercial real estate c.£1.6bn July 2011 Citi Barclays Egg’s Consumer PLs c.£2.3bn March 2011 Bradford and Bingley Discontinued Commercial PLs c.£435m Pending MBNA Barclays Consumer PLs £130m April 2011 RBS Pending Commercial Infrastructure PLs c.£3bn In progress LBG Arrow Global, Cabot Consumer NPLs £276m June 2011 Financial and Lowell Irish Life and Permanent Pending Capital Home Loans c.£6.4bn In progress (Residential BTL PLs) LBG Pending Shipping PLs c.£6bn In progress Confidential TPG Credit Residential Mortgage NPLs £50m March 2010 Bank of Ireland Pending UK RE loans > £1.5bn In progress Citi Yorkshire Building Society Savings and mortgage c.£3bn July 2011 businessSource: Press articles and market feedbackBuyers wealth funds. The appeal of these new increasingly moving up the learningThe buyer space has been much more buyers to vendor banks is obvious: deep curve and expanding their capabilitiesinteresting recently. Barclays acquisition pockets, lower return requirements in this space. But questions still remainof Citi’s Egg portfolio in March 2011 and higher levels of experience in the as to whether many of these largermarked the first strategic purchase of a credit investment space. And while pension and sovereign wealth fundsmajor portfolio transaction in many years this burgeoning group of buyers will will continue to function as passiveand was widely cheered by vendors and not be a replacement for strategic investors through private equitypundits alike. bank purchasers, they do represent a and investment banking vehicles, or credible and viable option for many of whether they will step forwardOutside of this notable transaction, the non-core performing assets that are to become outright purchasers ofhowever, the market has seen very little currently tapped for future sales. non-core banking assets (at suitablestrategic interest from UK banks and prices for vendors).building societies in buying their peer’s While traditionally focused on RMBSassets. Where strategic interest does and CMBS notes, the combination of depressed activity in the securitization The UK consumer NPL sale market:exist, it is largely confined to those very market and the nature of many Standing at the crossroadshigh quality consumer loans that arecomplementary to the buyer’s existing longer dated and better quality loans The UK consumer NPL market is at acustomer profiles and are capable of have meant that these investors are crossroads. Down one path is a returnexternal financing. increasingly looking at the outright to the ‘old market’ of 2007/08 where acquisition of certain loan portfolios. regular, small portfolio sales were theWith few strategic banking purchasers norm. But the other path may veryfor non-core loan portfolios, the sector Although many of these investors have well lead to the birth of a ‘new market’has seen the rise of longer term been very selective and somewhat dynamic in which large overseasfinancial buyers such as pension funds, less proactive than traditional debt investors look to secure large portfolios.insurance companies and sovereign purchasers in the past, they are10  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Return of the ‘old market’: Followinga period of relative stagnation, the UK As a result, there is a growing opportunity for vendors to meet this At the same time,unsecured debt purchase sector has new investor demand by selling larger most buyers arebeen enjoying a clear increase in loansale activity since Q4 2010. In part, this portfolios of consumer NPLs and other loan types, which could not be achieved only able to purchaseupsurge has been driven by vendor through the traditional ‘panel sales’ relatively smallbanks choosing to market smallerportfolios that had – until recently – of the past. The growing use of ‘back books’ that had been created through portfolios and oftenrelied on additional collection cycles. reduced sales volumes in 2008-2010, lack either the fundingThese portfolio sales are generally beingconducted via auction processes to a further enhances the opportunity to conduct larger sales with the option of or capability to acquirepanel of debt purchasers. With high forward flow agreements. larger portfolios (in theparticipation from many of the samebuyers that have been in the market A number of DPs are also exploring the range of GBP300since 2003/4, there has been a strong potential of specific deal structures with vendors (such as profit sharing, stapled million) which – in turn –focus on targeting those buyers thathave been able to withstand the recent financing, and joint ventures) that may would help vendor reduce the bid-ask gap.challenges experienced in the Debt banks clear theirCollection Agency (DCAs) and Debt It remains to be seen, however, whetherPurchaser (DPs) markets. the market will return to the status quo warehoused loans,From the vendor bank’s perspective, with vendors looking to dispose of their decrease their capitalthe purchaser panel must be carefully accumulated back books; or if they will leverage the size of their current and increase theirselected and structured to ensure thatbuyers are credible and that prices warehouse portfolio, access to other liquidity. debt types, or dynamic deal structuringcan be maximized. At the same time, in order to widen the appeal of theirmost buyers are only able to purchase and the management team.) That deal portfolios, tension current buyers, andrelatively small portfolios and often then led to the merger with competitor drive forward flow arrangements.lack either the funding or capability to Apex Credit Management to form theacquire larger portfolios (in the range new Cabot Financial Group. It is alsoof GBP300 million) which – in turn – Return of debt finance and market consolidation reported that Exponent Private Equitywould help vendor banks clear their has sold its stake in the debt collectorwarehoused loans, decrease their Since the peak of the market in Lowell Group, to TDR Capital for a sumcapital and increase their liquidity. 2008, there has also been significant which was rumored to be in the region consolidation in the sector, primarilyBirth of a ‘new market’: At the same of GBP400 million; a pleasing sign to led by private equity backers lookingtime, a number of large global investors other businesses in the sector. to either exit or enter the market. Indeed,are increasingly looking to access the the rapidly changing environment, where Finally, in recent months we have alsoUK unsecured debt purchase market by vendor banks are returning to the seen debt providers return to the sector,structuring partnerships with existing debt sale market, has added a level of and a number of investments haveDPs/DCAs or through investments in complexity which can often be attractive been completed such as the three-year,start-up servicing platforms. Part of the to new entrants to the market. GBP180 million funding line providedlure for these investors has been the to the new Cabot Financial Group bypotential to secure larger investments For example, more recently, there Citigroup, Barclays and Royal Bank of(in the range of GBP40 million) and have been a number of well-publicized Scotland in April 2011, and the GBP120different loan types (such as first/ sales of DCAs / DPs, one of which million funding line secured by Thesecond lien mortgages, unsecured being the purchase of Cabot Financial Lowell Group through a consortium ofpersonal loans, and IVAs) which have from Citigroup for a reported GBP90 five banks, which was secured at thegenerally not been available in the million by AnaCap Financial Partners end of 2010.market in the past. (alongside Morgan Stanley Alternative Investment Partners, Partners Group Global Debt Sales  |  11© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • IrelandIntroduction (NAMA) following the financial crisisIreland shares many of the same debt of 2008. "Expect to see Irishsale market characteristics as the UK:debt sale activity has picked up, banks Recently, however, new guidance and direction has been provided by the Irish banks selling assetsand financial institutions have begun Central Bank, Department of Finance and in the UK, Europeformal sales processes for their loanportfolios, and others are undertaking the Troika (EU, IMF ECB) to conduct an , orderly run down of their loan portfolios and America as theyinformal market soundings. On both over the next three years, with a total work to run downsides of the Irish Sea, banks and financialinstitutions are actively engaged in testing earmarked decrease in excess of EUR70 billion and a target loan to deposit ratio portfolios to meetpricing and potential deal structuring. (LDR) of 122.5 percent. As can be the Irish GovernmentIndeed, Irish banks are likely to be themain driver of debt sale activity in 2011. seen from Figure 7 that is a signficant , difference from the current average and Treasury   180 percent. requirements."The influence of NAMA This deleveraging process will have aFor some time now, many market significant effect on the future shape ofparticipants have anticipated the the Irish banking market, with two keyeventual deleveraging of the ‘bad pillar Irish banks replacing the previousdebt’ that was nationalized by Ireland’s six pillar Irish banks. This effectivelyNational Asset Management AgencyFigure 7: European LDRs benchmarking as at December 2010In comparison to their European peers, Irish banks currently have significantly higher loan to deposit ratios 300 7% 1% 27 27 8% 24 250 Irish 2010 Average of 180% 5% 21 Non-Irish 2010 Average of 139% 200 8% 6% 4% 17 17 6% 5% 17 2% 8% 7% 16 16 16 2013 Target LDR of 122.5% 1% 15 15 15 1% 150 4% 14 7% 6% 5% 13 3% 2% 1% 9% 12 12 8% 7% 12 12 12 12 11 8% 11 11 5% 10 10 % 99 100 % % 84 % % 78 77 76 50 0 H exia . D P N ke a I S Es IB M rito Ba Llo . a s PS ni B ba t Ba ell Ba ays m to z. em VA Po 13 c. ar . nt P r S BG eu BC d. e Ag tr. H e C ls BO nn en Sa edi de de yd St ch ol IL EB Sa BN RB SE SB er So pul C. Ch Co s A 20 de d s st BB M K ric ille ne G N pi an l an ts or m Cr rc D an nc U D SyNote: Irish average relates to AIB, BOI, EBS and ILPSource: SNL Financial (most recent data available presented in chart) & CBI12  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • For some time now, many market participants have anticipated the eventual deleveraging of the ‘bad debt’ that was nationalized by Ireland’s National Asset Management Agency (NAMA) following the financial crisis of 2008. Global Debt Sales  |  13© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 8: The two key pillar Irish banks and those in run-off Bol Bol AIB AIB Anglo INBS Core Non-Core Core Non-Core EBS was acquired by AIB In run-off with effect from 1 July 2011.Source: Public information and KPMG analysismeans that, similar to the recent non-core elements of their loan portfolios under the recent capital injectionssituation with RBS in the UK, two new (all related to foreign assets) all point to provided by the Central Bank.non-core banks will be created and the continued deleveraging of Irish banks For European buyers, therefore, thethen run-down over time, while both and financial institutions. key question is which Irish bankingAnglo and INBS will remain in run-off, However, the ability of these institutions assets will be sold and where. Andas illustrated in Figure 8. to find buyers at suitable prices will – in while the obvious answer is the UK, itWith an increasing degree of large part – be driven by the quality of is clear from the reported steps takentransparency in terms of deleveraging, the assets being sold and the ability by the Bank of Ireland (in relation to itsmany Irish institutions are now mobilizing of the vendor to absorb the losses on European commercial loan portfolio),to meet these objectives in an orderly the sale. Many vendors are now asking and Anglo (in relation to its Americanfashion. Indeed, recent activity by the themselves if their sale price equates commercial loan portfolio) that severalBank of Ireland, Irish Life and Permanent, to a capital loss and – if so – whether it of the Irish banks have non-core assetsand AIB to undertake sales processes for is within the tolerance levels prescribed in other markets outside of the UK.Selected dealsThe table below details several selected transactions in the Irish debt portfolio market.Table 9 Face value Seller Buyer Asset  type Completion date (in local currency) Bank of Ireland Pending U.S. RE loans €1.26bn In progress Bank of Ireland Pending Project finance loans €2.7bn In progress Burdale, Bank of Ireland Pending Asset-based lending €800m In progress Allied Irish Bank Blackstone and Wells Fargo U.S. Commercial Real Estate €690m (USD 1bn) May 2011 Anglo Irish Bank Lone Star, Wells Fargo and JP Morgan U.S. Commercial Real Estate €6.9bn (USD 10bn) August 2011Source: Press articles and market feedbackNAMA facing significant challenges has now effectively dealt with the top business plans with NAMA by the endHaving foreclosed on nearly 900 30 borrowers. The organization will now of April 2011.loans with a nominal value of EUR4.5 move its focus to the second tier (some And while NAMA currently holdsbillion (or EUR1.3 billion at its own 145 borrowers with loans representing approximately EUR10 billion in UKvaluation) throughout 2010, NAMA some EUR34 billion) who lodged assets and EUR17.5 billion in Irish14  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • assets (at their own values), the Figure 10: Irish residential property price indexorganization is seeking to reduce its 140debt by at least 25 percent before theend of 2013. But with only EUR2.7 120billion in approved sales over the last12 months, NAMA will need to conduct 100significant sales to achieve a EUR7 .5billion reduction in debt (net of costs),particularly since only 23 percent of 80NAMA’s loan portfolio is classified asperforming. It is worth noting that – 60to date – NAMA had also providedEUR730 million to developers in order 40to complete projects.With commercial property prices in 20Ireland down 61 percent from their2007 peak5, NAMA believes that – while 0residential property values will likely Sep-09 Jan-10 May-08 Sep-08 Jan-09 May-09 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07continue to fall – commercial property Jan-08prices have probably hit their bottom.NAMA is now exploring opportunities to Source: Central Statistics Office, Ireland, 22 June 2011finance both commercial and residentialproperty deals, particularly throughstapled finance deals. Figure 11: Commercial real estate historical performanceNAMA’s potential loan sales are also 1,000 15%being impacted by ongoing uncertainlyabout the retrospective nature of 10% % return per quarter (lines) 800legislation proposed to prevent Upward Index value (shaded area)Only Rent Reviews, and speculation 5%surrounding the establishment of a 600 0%REIT to house certain properties.And while NAMA’s highest profile 400 -5%sale to date has been the purchase ofDublin’s Montevetro building by Google -10%for EUR100 million, a number of assets 200 -15%are expected to come to the market inthe near future including Citi Canada 0 -20%Square HQ in Canary Wharf (estimated 03 03 03 03 03 03 03 03at EUR1 billion), the sale of Santander ch ch ch ch ch ch ch chHQ in Madrid (EUR1.9 billion), as well ar ar ar ar ar ar ar ar M M M M M M M Mas the Rothschild HQ in London and All property index All property Retail Office IndustrialClaridges hotel. Source: Recreated from Investment Property Databank, March 20115. SCS/IPD Quarterly Property Index April 29, 2011 Global Debt Sales  |  15© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • GermanyWhile there is little doubt that activity in banks already sold their older legacythe German market has picked up overthe past six months, this has mainly been NPLs during the ‘first wave’ of sales “The German between 2003 and 2007 As a result, .driven by international banks cutting a large proportion of their current NPL debt sales markettheir exposure to the German market,with a particular emphasis on real estate portfolios now relate to cases that are only two to three years old, and German continues to lag farsecured loans to corporate borrowers. banks have not yet exhausted their behind historicalAt the same time, German banks haveall but stopped selling their corporate potential to be worked-out rather than disposing them to third parties. highs, but there isand SME non-performing loan portfolios The second reason is that most troubled still a significantin Germany. German banks have refocused their amount of activity –Non-domestic assets offer the most strategy and long-term business model on supporting German businesses and just not with largeopportunities in the near-term individuals at home and abroad. For face values yet. ”There are two main factors driving these German banks, therefore, the key focusshifts. The first is that many German has been on reducing their balanceFigure 12: Composition of total loans for some of the German banks as of sheets and raising Core Tier 1 capital December 31, 2010 by disposing of their foreign exposures (particularly where the loans were 500 originated in foreign currencies). For the 447.9 Landesbanks, where a significant portion 9.5 411.8 of their funding is sourced by way of debt 21.4 3.2 issues through their local Sparkassen 400 8.4 network and direct retail deposits, the disposal of foreign-originated loans has been particularly active. 300 246.1 Overall, however, the volume of 1.3 defaulted loans seems to have€bn 217.2 3.0 0.7 189.6 190.8 stabilized recently in the German 417 3.7 5.1 200 400.2 9.3 market. 0.8 9.7 123.0 1.8 113.3 244.1 4.6 204.9 100 185.1 176.0 3.0 12.3 118.2 96.4 0 k nk e LB BW ) nk k VB an an at Ba ba t rn zb (H db LB Es st ye e er or nk Po ch al m Ba N Re Ba ts m SH eu Co o t di yp H D re H c ni U Book value of total loans Non performing Loans Loan Loss Provision less NPL and LLPSource: Capital IQ16  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 13: NPLs/impaired loans, loans 90 days past due from some of the Competition creates margin German banks as of December 31, 2010 pressures at home 2,500 25,000 As German banks refocus their services on German borrowers at home and 21,356 1,955 abroad, there has been a noticeable 2,000 20,000 tightening of margins, particularly on 1,514 loans to ‘investment grade’ borrowers, 1,500 15,000 larger Mittelstand companies, loans 12,282 which would qualify for Pfandbriefe€m €m 1,000 8,435 9,676 9,250 10,000 cover pools or can be used as collateral 6,767 with ECB or Bundesbank. This is largely a result of the improved economic 500 3,986 5,000 302 200 conditions in Germany and increased 79 1,314 competition from German banks – 29 – 0 0 fighting to acquire and maintain these LB nk BW k nk te ) k VB borrowers as clients. an an ta ba Ba rn (H zb stb LB Es rd ye he er nk Po No al Ba mm sc Ba Re But as a result, the profitability of these ut H Co it HS po De ed Hy icr clients is largely being eaten away. Un Non-performing/impaired loans (LHS) Loans 90 days past due & accruing interest (RHS) While in other markets (such as the UK),Source: Capital IQ banks are employing a loss matching strategy as part of deleveraging, thisFigure 14: NPLs/impaired loans to total gross loans as of 31 December 2010 could prove difficult for German banks due to tight competition. A number of 12% German banks are also particularly ‘loss 10.8% sensitive’ due to the increased Core Tier I capital requirements imposed by 10% Basel III. This has led commentators to recently suggest that accumulated 8% profits over the next three years may be insufficient for allowing some GermanPercentage 6.5% banks to meet the capital requirements. 6% 5.4% 4.3% What about the German bad banks? 4% 3.5% 3.4% There are now two fully established ‘bad banks’ operating in Germany. The 2% 2.0% first was EAA, which initially received 0.9% EUR67 billion of assets from WestLB, followed by FMS which now owns 0% EUR171 billion in assets transferred from HRE late in 2010. Both ‘bad banks’ k BW k nk te ) LB nk VB an an ta Ba ba rn db zb (H LB Es have a similar structure, whereby asset st ye he er or nk Po al m Ba N sc Re Ba management is primarily outsourced m SH t eu Co o it H yp ed D (WestLB’s Portfolio Exit Group (PEG) H cr ni manages EAA’s, and PBB and Depfa U Source: Financial Statements at 31 December 2010 and Capital IQ manage FMS’s assets). Global Debt Sales  |  17 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • However, it may be some time before International banks with German with another bank, either due to poorwe see portfolio sale transactions exposures feel the pinch ratings, high LTVs or simply because theyemerge from these entities. At the Many of the international banks have cannot obtain refinancing under terms asoutset, the management teams of both significant exposures to the German favorable as their current agreements.banks have been focused on stabilizing market, including LBG, RBS, ING bank, On the non-performing side, the trendthe portfolios that were transferred DSB, Unicredit, Rabobank, Credit of giving borrowers maturity extensionsin and implementing a competitive Agricole, AIB, Santander and ABN and capital deferrals cannot go on forever.and sustainable asset management AMRO. But in most cases (Unicredit and Indeed, as international banks scaleplatform through third party servicers. Santander being the notable exceptions), back operations (and often lose someThey now appear to be shifting their it is believed that the parent companies of their best talent to banks that are stillfocus onto building up multijurisdictional have either substantially reduced the originating), banks will find that theseservicing platforms with an eye towards capital allocation, or frozen origination tactics will start to require significantexpanding their business to service altogether for their German operations. resources to monitor and implement.assets of other banks in the region. This has left a number of international banks with substantial corporate So where does this leave theAnd while at this early stage of the (primarily CRE) portfolios, which were international banks? With low marginsworkout process both EAA and FMS originated during the boom years at on performing portfolios, debtor-friendlyseem unwilling to accept steep thin margins. But today, borrowers are loan documentation, and complicateddiscounts to the book value. That said, either unwilling or unable to refinance (and resource intensive) restructuringthis activity has generally been limitedto situations where the investor hasexposure to the same borrower and islooking to build up a controlling interest  On the non-performing side, the trendin the borrower or the SPV in orderto access the underlying assets or of giving borrowers maturity extensionsbusiness. and capital deferrals cannot go on forever.18  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • cases, we believe that internationalbanks will be the most likely source of transactions since our last edition of the Global Debt Sales. However, pricing  In many cases,transactions in the German market in continues to be a big issue for loss- acquirers are stillthe short- to medium-term. This mayalready be playing out: a recent article in sensitive German banks, and some deals have been slowed by a prolonged trying to work throughThe Financial Times suggests that RBS process (such as Project Lichtenburg these portfolios, oris planning to put their German and U.S.portfolios up for sale in the near future. which started in August 2010), or not completed at all due to a pricing gap looking to re-trade some between the seller and buyers. of the exposures inWait and see... As a result of the first wave of NPL secondary markets.During the ‘first wave’ of German sales, most German banks have gainedNPL sales, more than EUR50 billion in valuable experience in the transactionportfolios were sold by German banks process. But while banks are nowto specialist distressed investors and relatively sophisticated when it comes through these portfolios, or lookingPE funds. However, today, we would to the process of disposing loans, they to re-trade some of the exposures inestimate that pure portfolio sales of are not seeing the same high prices that secondary markets.German-based loans will amount to were typical of the first wave.somewhere in the region of EUR5 And while we anticipate further activitybillion, with the bulk of this resulting Certainly, the current amount of in the German loan sale market as wefrom Apollo’s purchase of German leverage in the market is a key factor. head into the second half of 2011, weresidential mortgage loans as part of But it is also because, during the first also recognize that there are a numberthe Project Oracle transaction. wave, a number of investors who of critical issues that rank higher on a acquired large portfolios of loans at high bank’s boardroom agenda than the saleThat is not to say that there has not prices did not achieve the returns or the of German-based loans.been activity in the German market. timelines that they expected. In manyIn fact, there have been a number of cases, acquirers are still trying to workTable 15 Seller Buyer Asset type Face value (€bn) Completion date German Bank N/A CRE NPLs 0.4 Expected H2 11 (Project Lichtenburg) Dutch Bank N/A Performing RM & Consumer 0.1 Expected H2 11 Corealcredit Bank N/A RM NPLs 0.3 Expected H2 11 German Bank N/A Large commercial NPLs 0.2 Expected H2 11 Residential/commercial mortgage Confidential TPG Credit 0.2 Q2 2011 NPLs Japanese Bank N/A RM NPLs 0.2 No sale* German Bank U.S. PE House RM NPLs 0.1 H1 11 German Bank EOS RM NPLs <0.1 H1 11 Servicer of German Bank N/A 2 pools of RM NPLs 0.2 (combined) No Sale* Eurohypo, Landesbank Hessen- Thuringen (Helaba), Berlin Hyp Colony Capital Institutional RE NPLs 0.370 Q3 2011 and Archon Capital Bank*Buyer pricing below seller expectationsSource: KPMG Analysis Global Debt Sales  |  19© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • SpainIntroduction rate is expected to start slowlyThe Spanish economy ended 2010 with reducing in 2012. “Whether asa whimper. A slight increase in GDP(0.6 percent year-over-year) when Spain´s economic situation has also a result of the created an ever-increasing level ofviewed in annual terms (a decline ‘doubtful’ (defined as loans more than financial institutionof 0.1 percent6), places the Spanisheconomy in virtual stagnation. The Bank 90 days past due) and defaulting debt. In fact, by June 2011, doubtful loans restructuringof Spain expects gradual improvement as a percentage of total loans reached process or thein economic activity and is thereforeforecasting economic growth of their highest level since May 1995 at 6.42 percent. And while this is certainly increased capital0.8 percent for 2011 and 1.5 percent driven by an increase in the quantity of requirements of thefor 2012. However, this is somewhatovershadowed by continued high levels doubtful loans, it is also influenced by the overall reduction of total loans in new regulations,of unemployment in Spain (21.3 percent the market. 2011 should provein the first quarter of 2011 accordingto Spain’s statistics institute) with The real estate market is also to be a year ofjob creation numbers still not strong struggling to stabilize. Prices have fallen approximately 15 percent since the intense activity inenough to overcome the past joblosses. That said, the unemployment first quarter of 2008 (in the first quarter the Spanish loan sales market. ”6. INE and Bank of Spain20  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 16: Doubtful debt (2006–June 2011) and exorcise the demons of a Spanish 116,611 bail-out — at least for the time being. 120000 7% 107,199 100000 93,327 6.42% 6% Change in capital requirements: a 5.81%Doubtful debt (€m) step ahead in the restructuring of the Doubtful rate (%) 5% 80000 5.08% financial system 63,057 4% 60000 The reinforcement of the Spanish 3.37% 3% financial system continues to be a 40000 primary objective for the Bank of 2% 20000 10,859 16,251 Spain and the Spanish Government. 1% 1% 0.92% In 2009, the FORB (Fund for the 0 0% Orderly Restructuring of the Banking 2006 2007 2008 2009 2010 JUN-2011* Sector) was created, and in 2010 a new Source: Bank of Spain provisioning calendar and a new law regulating savings banks was adopted. And in February 2011, new capital requirements were adopted through  External factors of 2011 alone, prices fell 4.7 percent year-over-year and 2.6 percent quarter- the Royal Decree-Law 2/2011, which established a general minimum core are also influencing over-quarter). As a result, the stock of capital ratio of:the cost of financing, properties is still high (approximately 700,000) and the outlook for the real • 8 percent for consolidated groups with the bail-outs of estate market remains uncertain. of credit institutions and individual credit institutions that do not belongGreece, Ireland and Indeed, many analysts consider that official statistics and appraisals used to a consolidated group and that arePortugal pushing up by banks do not reflect actual market able to raise repayable funds from the general public; andSpanish risk premiums values, with some suggesting that actual real estate prices could be as much as • 10 percent for those groups or to levels not seen since 20–30 percent lower in large cities and institutions that have not placed1995 (the 10-year bond up to 50 percent lower in coastal areas than the current valuations indicate. securities representing at least 20 percent of their share capital oryield hit 6.44 percent on External factors are also influencing voting rights with third parties and5 August 2011). the cost of financing, with the bail- that have wholesale funding of more than 20 percent7. outs of Greece, Ireland and Portugal pushing up Spanish risk premiums to In this scenario, a total of 13 financial levels not seen since 1995 (the 10-year institutions will need to increase bond yield hit 6.44 percent on 5 August their core capital to comply with the 2011). It remains to be seen whether new regulation, which – by the Bank the government’s fiscal policy and of Spain’s estimates – will require reinforcement of the financial system additional capital of approximately measures will be enough to reduce EUR17 billion in July 2011 (EUR15 uncertainty, restore market confidence billion in the March 2011 Bank of Spain estimation).7 Bank of Spain . Global Debt Sales  |  21© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • The measure also encourages financial In effect, the adoption of the most Table 17institutions (particularly savings banks) to recent law will herald a new phaseraise private capital and requires banks in the restructuring process of the Key figures of the restructuring processthat are seeking government funds to Spanish financial system (see table Reduction in cajas from 45 to 18pursue their financial activity through a 17). By establishing new core capital Average total assets from €29bn to €72bncommercial bank. Those institutions that requirements and settling the needdo not reach the required capital levels for private capital, the law should act 13% reduction of branches (3,075)will be expected to implement their as a catalyst that drives savings banks 11% reduction of workforce (14,112)recapitalization plans (approved in April) to hand over their financial activity Additional balance sheet write-downsby 30 September 2011. to a bank in order to expedite their totaling €22bn* access to capital markets and funding.It should be noted that – for those FORB has already injected €11.56bn into banks The process will also lead to theinstitutions which have opted to raise establishment of ‘bad banks’ to hold *Through the application of fair value accounting inprivate funds – the Bank of Spain may ‘business combinations’ and ‘joint ventures’. Overall, toxic assets (as in the cases of La Caixagrant a postponement in duly justified savings banks have recognized impairment losses of and Caja Madrid). €52bn since Jan 2008cases if it reasonably considers that the Source: Bank of Spainmeasures proposed in the plan will be But in the great battle for private capitalcarried out. The plan may be postponed that is being waged around the world, of the restructuring process, whereuntil the end of 2011 for off-exchange banks must demonstrate confidence in major banks play a lead role.recapitalizations and until March 2012 the quality of their assets, the strengthfor share listing processes, provided of their management teams, and the Table 18 outlines many of the integrationthere is a resolution by the competent value and credibility of their ‘equity processes that were being undertakengoverning body and a detailed story’. Many may not be in a position to by Spanish financial institutions as ofimplementation timetable. do so. This may lead to a second phase July 2011. Table 18 Capital Additional Additional Total FROB Savings banks integration processes requirement capital required capital required assets (€m) support (€m) March 2011 (p.p.) March 2011 (€m) July 2011 (€m) BANKIA (Caja Madrid, Bancaja, Layetana, 344.508 4.465 10% 5.775 Listed – None Ávila, Segovia, Rioja, Insular) CAJA DE AHORROS DEL MEDITERRANEO 72.000 – 10% 2.800 2.800 EFFIBANK (Caja Asturias, Cantabria, Extremadura) 52.000 – 10% 519 519 GRUPO BANCO MARE NOSTRUM (Murcia, Penedés, 71.723 915 10% 637 637 Granada, Sa Nostra) BANCA CIVICA (Municipal Burgos, Navarra, 71.668 977 10% 847 Listed – None Canarias, Cajasol, Guadalajara) CAJA 3 (Inmaculada, Burgos CCO, Badajoz) 20.856 – 8% None None LA CAIXA (Caixa, Gerona) 289.627 – 8% None None NOVACAIXAGALICIA (Galicia, Caixanova) 78.077 1.162 10% 2.622 2.622 CATALUNYACAIXA (Cataluña, Tarragona, Manresa) 76.649 1.250 10% 1.718 1.718 BBK (BBK, Cajasur) (1) 48.739 392 10% None None CAJA ESPAÑA DE INVERSIONES 45.543 525 10% 463 463 (Caja España, Caja Duero) (2) UNICAJA (Unicaja, Jaén) (2) 34.838 – 10% None None UNNIM (Sabadell, Terrassa, Manlleu) 28.550 380 10% 568 568(1) Current merging process with Vital and Kutxa(2) Saving banks under bilateral merging processSource: Bank of Spain22  |  Global Debt Sales © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Loan portfolio sales Table 19). What’s more, there are consumer portfolios and residentialThe Spanish loan portfolio sales several transactions currently in the and commercial mortgage loans (bothmarket enjoyed a welcome uptick in market with a total Unpaid Principal performing and non-performing) and, inthe first quarter of 2011 with three Balance (UPB) of approximately EUR5 some cases, a servicing platform.transactions successfully closed (see billion. These include several unsecuredTable 19: Recent loan portfolio transactions Seller Buyer Portfolio characteristics Face value (€bn) Completion date Price MBNA Confidential Unsecured 0.1 Sep-10 4–5% Citibank Aktiv Kapital Unsecured 0.4 Nov-10 3–4% BBVA DEShaw Unsecured 0.3 Dec-10 4–5% Banco Santander/ Lindorff Unsecured and platform 0.3 Jan-11 4–5% Reintegra Orange Calyon Unsecured 0.3 Jan-11 2% Barclays card Link finanzas Unsecured 0.13 Jun-11 4–5% UNNIM Aktua NPL Mortgages 0.1 Feb-11 15–20% RBS Perella Weinberg Commercial mortgages 0.3 Mar-11 55–60% Banco Santander Cerberus Corporate mortgages 0.3 May-11 20–30% Credifimo Cerberus NPL Mortgages & REO 0.2 Jun-11 Confidential Barclays Cap Confidential Unsecured 0.1 Jun-11 4–5% MBNA Apollo Unsecured & platform 0.5 Jun-11 Confidential Bankinter DEShaw Unsecured & servicing contract 0.3 Jul-11 Confidential Banco Santander Confidential Unsecured 1.2 Aug-11 ConfidentialSource: Press articles and market feedback.For its part, FROB will likely alsoinfluence increased sales in the Spanish And – largely as a result of the conservative generic provisioning  On top of themarket, particularly at a time when system established by the Bank restructuringmost analysts expect savings bankprofitability to remain under pressure of Spain in 2010 – most Spanish banks and savings banks have now efforts and possibleuntil 2012, with a return to a 10 percent provisioned ahead of the required resulting loss of marketROE not expected until 2014. Assuminga cost of 8 percent for the FROB funds, calendar, especially for their real estate related loans. At the same time, share, pundits suggestinstitutions will need to come up with excess provisions were adapted in an that institutionsa combined EUR12 billion. Analystsestimate that these institutions may attempt to smooth the cycle and stem the current deterioration in the macro participating in thebe able to generate close to EUR6 environment. The Bank of Spain is FROB may have tobillion in net income, which implies theremaining EUR6 billion would need to already requiring banks to hold a 20 percent provision for acquired assets reduce their loan booksbe repaid through asset disposals and/ (Real Estate Owned, or REOs) that have (on average) by up toor loan book downsizing. On top ofthe restructuring efforts and possible not been realized after two years. And given that the increased provisioning 20 percent by 2014 inresulting loss of market share, pundits should help breach the current bid-ask order to repay FROBsuggest that institutions participating inthe FROB may have to reduce their loan spread, this may – in turn – result in an increase in the sale of REOs later this funding.books (on average) by up to 20 percent year and into 2012.by 2014 in order to repay FROB funding. Global Debt Sales  |  23© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • The table below highlights the number Whether as a result of the financial new regulations, 2011 should proveof REOs held by the main financial institution restructuring process or the to be a year of intense activity in theentities as of December 2010. increased capital requirements of the Spanish loan and REO sales market.Table 20 Total assets Total assets Gross REOs Provision REOs revenues Entity % Covered €bn (Sep. 10) €bn (Dec. 10) 2010 €m 2010 €m 2010 €m Banco Santander 441 429 7,509 2,300 31% 1,100 BBVA 402 392 4,793 1,601 33% 657 Bankia 346 328 7,402 2,443 33% n.a La Caixa 282 286 4,869 1,217 25% 993 Banco Popular 128 130 3,689 1,079 29% 264 B. Sabadell 84 87 2,880 888 31% n.a SIP Vascas 84 n.a. n.a. n.a n.a n.a Unicaja + Espiga 81 80 1,772 n.a n.a n.a Catalunya Caixa 78 77 5,485 1,700 31% 8 Nova C. Galicia 76 73 2,103 n.a n.a n.a SIP Base 76 n.a. n.a. n.a n.a n.a CAM 74 72 3,332 n.a n.a 834 GBC + Cajasol 72 71 1,983 555 28% n.a Mare Nostrum 72 70 2,949 905 31% n.a Bankinter 55 56 378 106 28% n.a Ibercaja 45 45 963 290 30% n.a Banco Pastor 31 31 1,526 311 20% n.a Unnim 29 28 1,985 360 18% 252 Banco De Valencia 23 24 865 163 19% n.a Caja3 21 21 544 176 32% n.aSource: Annual reports, CNMV and Bank of Spain24  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • ItalyWith increasing concern regarding the represents a growth rate of 18 percentstability of the Italian economy, thegovernment recently launched a plan since the beginning of 2011, and a staggering 50 percent between February “A recently launchedto control the national debt. Given that 2010 and February 2011. The NPL rate plan by the Italianthe Italian GDP growth rate slowedin the last quarter of 2010 (for a total (measured by gross NPLs/total loans) has also steadily increased, gaining government toGDP growth rate of 1.3 percent year- at least 1 percentage point between control the nationalover-year8) and that consumption in theprivate sector reportedly decreased January 2010 and February 2011. debt may, in fact,2.9 percent in the last quarter of 2010, With both local and major banks experiencing an increase in NPLs, loan thwart futurethis most recent move may, in fact,thwart future investment in debt sales. origination was greatly reduced, thus investment in debt causing a ‘credit crunch’ for the Italian financial system. The combination of sales.”Stagnating loan origination and a worsening underlying loan/borrowerincreasing NPLs quality (not only for NPLs but also during the global financial crisis (seeThe Italian banking sector has seen delinquent borrowers – the class Figure 22). In fact, after rising moretotal loan growth slow dramatically known as ‘incagli’), and growing capital than 70 percent from 1998 to 2008, theversus previous years. Indeed, the requirements and liquidity pressures is house price index has largely remainedsector grew by less than 6 percent likely to encourage banks to revisit the unchanged since the crisis, falling abetween January 2010 and January sale of loan portfolios. mere 0.3 percent in year-over-year2011, dropping to only 0.5 percent in terms10. According to Nomisma (anFebruary 2011 as compared to December Real estate market poised to remain flat Italian economic research institute),20109. At the same time, the volume of Unlike many other countries in house prices in the 13 major Italiannon-performing loans (by gross book Europe and the Americas, Italy did not cities should remain stable in 2011.value) surged to exceed EUR90 billion experience a sharp fall in house pricesin February 2011 (see Figure 21). This8. ISTAT-Banca d’Italia9. ABI; Banca d’Italia10. Bank of Italy and the Global Property Guide Global Debt Sales  |  25© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 21: NPL portfolios development in Italian market 100,000 6.0% 90,000 5.0% 80,000 70,000 4.0% 60,000€m 50,000 3.0% 40,000 2.0% 30,000 20,000 1.0% 10,000 0 0.0% J-10 F-10 M-10 A-10 M-10 J-10 J-10 A-10 S-10 O-10 N-10 D-10 J-11 F-11 Gross non-performing loans Gross non-performing loans/total loansSource: ABI; Banca d’ItaliaFigure 22: House price change, Recent transactions and outlook Unlike some of their European annual (%) In large part due to a continued bid-ask counterparts, Italian banks have not20 gap, Italian NPL sales have remained established ‘bad banks’, preferring fairly flat in 2011. Additionally, the instead to opt for re-engineering their15 NPL recovery process, rather than ongoing lack of liquidity is also affecting a number of distressed debt investors, directly selling NPLs. Recent examples10 include: particularly in transactions that require equity of between 40–50 percent. • the identification by Banca Etruria 5 Some of Italy’s recent ‘non-core’ loan of a firm (within its banking group)0 portfolio deals include: that will be specifically tasked with managing relationships with external-5 • an unsecured retail loan portfolio with recovery partners; and a gross book value of EUR150–200-10 million from a mid-sized bank • the outsourcing to a third party of operating in the centre of Italy; and the collection function for selected 91 93 95 97 99 01 03 05 07 10 NPL portfolios of two mid-sized19 19 19 19 19 20 20 20 20 20 • a mixed and geographically diversified banks operating in the retail market Nominal Real secured and unsecured portfolio (but without transferring creditSource: European Central Bank with a gross book value of around ownership). EUR3 billion from a major bank. September is likely to bring about a large transaction by a big player.26  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • PortugalIntroduction the complex job of formalizing the aidAfter seeing GDP fall 2.5 percent in request and negotiating the terms of the bail-out. “Given Portugal’s2009, the Portuguese economy enjoyeda year of positive growth in 2010. GDP Subsequently, agreement was macroeconomicincreased 1.4 percentage points in 2010, reached on a bail-out from the EU situation and thelargely off the back of stronger domesticdemand (+0.9 percent against -3.2 and the International Monetary Fund. The centre-right Social Democrats need for Portuguesepercent in 2009). (PSD) won the general election banks to strengthenHowever, despite this wistful recovery, and formed a majority with the conservative Democratic and Social their capital ratios,the Portuguese economy remains undersignificant pressure. A number of factors Centre (CDS). One of the first tasks there is likely to behave contributed to this: an EU-IMF facing this new coalition government will be to implement a demanding an increase in thejoint bail-out was announced, just as thegovernment reported a fiscal deficit of austerity program as a condition of country’s overall9.1 percent. This was quickly followed the EU bail-out. To complicate matters further, Moody´s recently downgraded debt sales market. ”by the rejection of the government’sfourth wave of austerity measures by Portugal’s debt to junk status citing athe Portuguese parliament, which in turn growing risk that the country wouldled to the prime minister’s resignation. need a second bail-out before it wasThis effectively left the country with ready to borrow money from financiala caretaker government tasked with markets again. Global Debt Sales  |  27© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • To facilitate this, a non-performing loans will continue to grow in the near future. while strengthening banking regulation and supervision. As part of these series of on-site measures, Banco de Portugal (BdP)inspections are being Bail-out measures and implications for the Portuguese financial sector will now direct all monetary financial institutions (MFIs) under its supervisionplanned in cooperation As part of the EU-IMF austerity plan, the to reach a Core Tier 1 ratio of 9 percentwith the European government must achieve fiscal deficits by the end of 2011, and 10 percent in 2012 (or possibly higher, depending of no more than 5.9 percent of GDP inCommission, the December 2011, 4.5 percent of GDP in on each institution’s risk profile).ECB, the IMF as, 2012, 3.0 percent in 2013 and then to The measures also aim to influence deleveraging, with the transformation continue a declining ratio of governmentwell as Portuguese expenditure-to-GDP in 2014. Progress ratio expected to reach 120 percent bysupervisors, will be measured against the cumulative the end of 2013. quarterly deficit ceilings that thesupervisory agencies, government will have to achieve. Financial institutions will also see new mandatory reports and data validationexternal auditors and In response, the government has requirements for the purpose ofother experts. outlined a number of measures to assessing solvency. To facilitate this, a series of on-site inspections are achieve the targets including: being planned in cooperation with theOn the retail credit side, markets • decreasing corporate and personal European Commission, the ECB, theexperienced a significant slowdown in income tax deductions; IMF as well as Portuguese supervisors, ,2008 and 2009, with the growth rate supervisory agencies, external auditorsstabilizing at around 2 percent in June • reducing benefits and special regimes; and other experts.2010, due largely to the increase inmortgage loans and consumer credit. • extending personal income taxes As a result of the austerity plan, theIn comparison, loans to non-financial to apply to all types of cash social corporate/household debt restructuringcompanies registered a slightly lower transfers; framework will also be revised withincrease. technical assistance from the IMF To. • restructuring the existing VAT promote the effective rescue of viable2010 was also a year of increased categories; entities, the framework is expectedcredit defaults for Portuguese financial to introduce faster court proceduresinstitutions. The ratio of non-performing • shifting certain goods and services from the reduced and intermediate for restructuring plans. Generalloans held by non-financial institutions international ‘best-practice’ principlesincreased from 4.1 percent in December tax rates to higher rates; on voluntary out-of-court restructuring2009 to 4.5 percent a year later, while • raising car sales tax and taxes on will also be introduced. Furthermore,NPLs to households increased from tobacco products; these measures are also extendable2.9 percent to 3.4 percent over the to households, with existing personalsame time period. For its part, the ratio • achieving a reduction of 1–2 percent in central, local and regional insolvency procedures being revised toof non-performing mortgage loans support the rehabilitation of ‘financiallyremained steady, although at a historical administration staffing; and responsible individuals’. To communicatehigh of 1.9 percent for the last three • decreasing state-owned enterprise this change, authorities are expectedquarters of 2010. operational costs by at least to launch public awareness campaignsSet against the backdrop of a fluctuating 15 percent in 2011. to promote the new and more effectivePortuguese economy, the impact of In relation to the financial sector, the restructuring tools.austerity measures, as well as strains austerity plan aims to maintain liquidityon employment, income and the real and support a balanced deleveraging,estate market, it is expected that28  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Table 23 Face value Value Dec 2010 Seller SPE Asset type Date (thousand ) (thousand ) Banco Espírito Lusitano Leverage Leverage finanace loans 516,534 418,031 February 2010 Santo finance No. 1 BV Banco Espírito Santo Lusitano EME No. 2 Loans to small and medium entities 1,951,908 1,727,710 December 2010 Millennium BCP Tagus Leasing No. 1 Limited Leasings 1,233,699 1,141,824 February 2010 Millennium BCP Caravela SME No. 2 Limited Loans to small and medium entities 2,697,300 2,582,885 December 2010 Banco Português de DOURO Mortgages No. 5 Mortgage loans 1,500,000 1,421,000 August 2010 Investimento Banco Português de PME-Douro SMS 2 Loan to SME 3,500,000 n/a 2011 Investimento Banco Santander Totta Hipototta n.˚11 Mortgage loans 2,040,000 1,926,835 July 2010 Caixa Geral de Depósitos Nostrum Mortgages n.˚1 Mortgage loans 1,004,000 n/a November 2010 Caixa Geral de Depósitos Nostrum Consumer Finance Consumer loans 402,625 n/a November 2010 Caixa Geral de Depósitos Nostrum Mortgages n.˚2 Mortgage loans 5,429,950 n/a November 2010Source: Press articles and market feedbackGovernment intervention in thefinancial sector financial sector in order to ensure wider economic stability. However, unlike Interestingly, itInterestingly, it was not the condition other countries, Portugal’s intervention was not theof Portugal’s financial institutions thattriggered the EU-IMF intervention. was neither systemic nor applicable to all of the banking sector. Rather it condition of Portugal’sRather, it was the overwhelming public focused on two institutions which had financial institutionssector deficit that resulted in rapidratings downgrades that, in turn, caused very specific situations: first was the nationalization of Banco Português that triggered thean increase in spreads. As a result, de Negócios (BPN), a small bank EU-IMF intervention.the austerity program was primarilydesigned to significantly reduce public considered to carry systemic risk; and secondly in the form of a government Rather, it was theexpenditure, create the conditions to guarantee (that has been called on) in overwhelming publicprovide liquidity into the economy, andgenerate economic growth. relation to a loan provided by the six largest Portuguese banks to Banco sector deficit thatTo their credit, Portugal´s main banks all Privado Português (BPP), a small private resulted in rapid ratingsachieved positive results in the European bank that ceased activity in 2010. In total, these two events had an impact downgrades that, instress tests, proving a ‘high degreeof resilience to the adverse scenario’. on the fiscal deficit for 2010 of 1 percent turn, caused anFurthermore, the Top 5 Portuguese and on the other hand, 0.3 percent of GDP respectively. , increase in spreads.banks currently have a Core Tier I ratioof between 7 .9–10 percent. BPN, on the other hand, saw the creation of three state-ownedOf course, as was the case in vehicles in October 2010 to receivemost European jurisdictions, the the bank’s EUR1.8 billion of toxicfinancial crisis forced the Portuguese assets: Parvalorem SA for bad loans,government to intervene in the Parparticipações SGPS for participations Global Debt Sales  |  29© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Table 24 Face value Seller Buyer Asset type Date Sources and notes (€ million) Banco Espírito n/a Project finance, leverage 1,100 4th Quarter 2010 2011 1st quarter results release Santo finance and structured trade finance Banco Santander n/a Loans (not detailed) 2.500 1st Quarter 2011 2011 1st quarter results release Totta Benco Espírito n/a Corporate Loans and 1,300 1st Quarter 2011 Bloomberg 29th March 2011 Totta Infrastructure Project Financings Banco Espírito n/a Corporate Loans and 1,200 TBA Bloomberg 25th Jan 2011 and Diário Económico 26th Santo Infrastructure Project Jan 2011 (portfolio of corporate loans and project Financings financings including Wembley and London Airport; 945 M€ loans in Spain and Portugal, 418 M€ in USA and 1,300 M€ in Europe, Middle East and Africa). Millennium BCP n/a Corporate Loans and 1,600 TBA Agência Financeira 7th May 2011 and Factiva 9th Infrastructure Project May 2011 (407.7 M€ credits in Spain, 681 M€ in Financings other European countries and 500 M€ in USA). Caixa Geral de n/a Infrastructure Project 1,065 TBA Diário Económico and Factiva 10th May 2011 (400 Depósitos Financings M€ credits in Spain and 500 M£/665.1 M€ in UK). Confidential TPG Residential mortgage 75 Q2 2011 – Credit NPLsNote: 1) TBA: To be announcedSource: Press articles, annual reports and market feedback Since the inception in other companies and Parups SA for participation units in investment funds. (the Portuguese securities market commission) who is also responsible of securitization in for granting activity permission and thePortugal, volume has Debt market overview regulation of securitization activities. While the legal framework forbeen growing at a securitization operations by Portuguese However, the eligibility of loans for securitization largely depends onconsiderable pace, MFIs was set up in 1999, it was not until the originator and will need to meet 2001 that the first Portuguese-originatedparticularly for the mortgage loan securitization was a set of general conditions, such as not being subject to transmissibilityperiods from 2002 to issued. The framework offers issuers restrictions, being of a pecuniary two alternative types of vehicles: FTCs2005 and from 2007 to (Fundos de Titularização de Créditos nature and not being associated with any litigation processes (in Portugal,2009. or securitization funds) and STCs the ability to securitize loans under (Sociedades de Titularização de Créditos litigation processes are granted only to or securitization companies). These two the government and social security). vehicles have different legal features In addition, there are restrictions on but are both subject to the CMVM insurance companies, pension funds30  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • and asset management companies As Portugal reached the end of 2009, That notwithstanding, non-performingwho can only securitize mortgage loans, total securitized assets amounted to loans did grow at a rate of 7 percent in .8loans extended to the government EUR50 billion. Of this, loans were the the first quarter of 2010 to 9.3 percent(and other state-owned enterprises) most significant asset class, accounting in the second quarter, to reach EUR12and credits resulting from pension fund for 95 percent of the total assets of billion in June 2010. Table 24 sets outcontributions. the FTCs and STCs. Approximately 79 some recent NPL deals in Portugal. percent of these loans consisted ofFurthermore, in an FTC securitized fund mortgage credit originated by MFIs.portfolio, loans require a weighting of at For FTCs, 11 percent corresponded toleast 75 percent. And while this vehicle non-financial corporation loans, whilecan be open or closed to the investment for STCs the number was higher atin new loans (and other assets), it is 16 percent. According to the CMVM,reliant on the rating notation initially there are currently 41 FTCs and four Conclusionattributed to the fund’s securitization When viewed in the context STCs operating in the Portuguese debtunits not being compromised. of Portugal´s current securitization market. Table 23 showsSince the inception of securitization in some recent securitizations, all of which macroeconomic situation, thePortugal, volume has been growing at were recorded off-balance sheet. expected need for Portuguesea considerable pace, particularly for the banks to strengthen their capital Data from BdP shows that, in June ratios and deleverage theirperiods from 2002 to 2005 and from 2010, credit portfolios represented balance sheets will likely lead2007 to 2009. The first securitization of approximately EUR331 billion, or to an increase in the sale ofnon-performing loans (NPL) occurred 62 percent of banks’ total assets, non-performing loans and non-in 2007 Aimed at foreign investors and . while on-balance sheet securitized core asset portfolios in the nearissued in partnership with international loans accounted for 6.5 percent (EUR34 future.financial institutions, the pool included billion). Non-performing loans made upnon-performing assets from major credit 2.4 percent of total assets within theinstitutions operating in the Portuguese financial sector.market. Sources: http://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=83253056&DESTAQUESmodo=2 BdP Estabilidade Financeira Novembro 2010 PDF (http://www.bportugal.pt) Racios credito vencido soc nao finan CSV (http://www.bportugal.pt) Racios credito vencido Households CSV (http://www.bportugal.pt) Portugal: Memorandum of Understanding on Specific Economic Policy Conditionality Enquadramento legal Titularizações: http://www.igf.min-financas.pt/inflegal/bd_igf/bd_legis_geral/Leg_geral_docs/DL_303_2003.htm#DL_453_99 http://economico.sapo.pt/noticias/veiculos-financeiros-do-estado-para-limpar-bpn-estao-criados_107183.html http://www.ionline.pt/mobile/120863-bpn-estado-ainda-pode-ter-avancar-ate-3500-milhoes-pagar--caixa Relatório Assessing Securitisation Activity in Portugal – compilation and measurement issues – PDF (http://www.bportugal.pt) http://www.bcpinvestimento.pt/sub/sub.asp?pagina_id=274 http://www.dn.pt/inicio/interior.aspx?content_id=652818 Global Debt Sales  |  31© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • PolandIntroduction non-core secondary debt sale market inWhile the debt sales market in Poland remains in its infancy, with only a few sales of performing loan portfolios "Poland will be one ofPoland may still be at an early stageof development, it already shows closed in the last five years. the hottest marketssignificant growth potential. Indeed, for debt sales overby 2014 the NPL debt sales market Pre-crunch boom setting the stage foris expected to grow by more than 66 a boost the next few yearspercent to Polish zloty (PLN) 8.9 billion Prior to the global financial crisis, the as banks shed NPLsfrom a current level of PLN5.4 billion.There are a number of factors that point Polish banking sector was enjoying a period of rapid expansion. Between to meet aggressivetowards growth. On the supply side, 2005 and 2008 the sector saw a targets for 2014."these include the current NPL overhang, 32 percent CAGR increase in totalexpected increases in the level of bank corporate and consumer loans (fromlending, and some positive changes in PLN258 billion to PLN591 billion). As unsecured consumer and corporatebanks’ attitudes towards portfolio sales in most markets, the outbreak of the loan segments. Now left with a largeprocesses. As for demand, this is largely financial crisis caused the tightening of overhang of NPL portfolios in thebeing driven by the increased funding bank lending policies, which resulted market, Polish banks are expected toof debt collection companies, greater in a decrease in total loans in 2009. sell NPL portfolios with renewed vigor inuse of securitization, as well as the Starting as early as mid-2008, the the quarters to come.risk-minimizing benefits that come with quality of loans had already begun toparticipant experience. However, the deteriorate sharply, particularly in the32  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • More loans and lower cost of risk Figure 25: Value of personal and corporate loans in PolandOver the next few years, the Polish 800 14.0%economy is expected to see stable 12.8% 715 12.8%growth (3–5 percent GDP growth 700 11.5% 12.0% 634through to 2014), which should 600 562 10.0%encourage a systematic increase in 504the value of loans granted by domestic 500 7.9% 7.8% 8.0% PLN bnbanks. Overall, however, the banking 400 7.2%market remains largely underdeveloped 6.0% 283 6.0% 300 245 264in terms of mortgages, credit cards and 227 4.0%corporate loan levels when compared 200 3.3%to EU-15 countries, which leaves 100 2.0%plenty of room for lending growth. In 0 0.0%fact, according to the IBnGR Institute 2011 2012 2013 2014(Figure 25), the value of personal loanswill increase by 42 percent to PLN715 Personal loans Corporate loansbillion by 2014 as compared to 2010. The % growth in personal loans % growth in corporate loansforecast value of corporate loans will Source: IBnGR, November 2010grow at a respectable, yet more modestrate of 25 percent (to PLN283 billion) inthe same timeframe. example, banks have increasingly started sales. And while corporate and to shift the collection process towards mortgage loan portfolios are seeingAccording to the latest economic outsourcing at an earlier stage of a some activity in the market, their fullforecast by the Polish Central Bank, borrower’s delinquency, and have put potential continues to be hamperedthe cost of risk for the Polish banking increased pressure on the efficiency by a range of complications includingsector is expected to return to its of workout departments. Furthermore, tax issues, legal obstacles influencinglong term values in the quarters to Polish banks are beginning to show a the efficiency on the buy-side, andcome, mainly as a result of sustainable greater interest in new forms of collection operational efforts to collect requiredimprovements in both the labor market processing which – to date – have data and documentation.and the business climate for corporate traditionally been the domain of collectionborrowers. That said, it is expected As noted on page 2, Basel III will also companies. In some cases, banks arethat the long-term cost of risk will bring additional pressure to bear by way running pilot projects to test the use ofsettle above the pre-crisis level and, of increased capital requirements and EPU (electronic writ proceedings andas a result, the volume of corporate, required improvements on margins. transferable court payment orders).mortgage and non-mortgage personalNPLs will remain fairly unchanged over And while most Polish banks are Market perspectivethe medium-term11. currently at different stages of preparing According to IBnGR Institute forecasts, their NPLs for sale, they are also there is great growth ahead for the NPLChanges in the approach to the demonstrating more reluctance to sell market. By 2014, Polish banks will becollection process (particularly in comparison to Western encouraged to have sold 39 percent Europe) due to a perceived mismatch of their non-performing mortgagesThe increase in supply of NPL portfolios in pricing expectations between sellers (compared to 7 percent in 2009),will also be influenced by the changing and buyers. 20 percent of their non-mortgage NPLsattitude of Polish banks towards sellingNPL portfolios and outsourcing debt In any event, the Polish market remains (14 percent in 2009) and 33 percent ofcollection services in general. For dominated by consumer loan portfolio their corporate NPLs (22 percent in 2009).11. IBnGR Institute forecast Global Debt Sales  |  33© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • As a result, the value of the NPL debt Relative easy access to funding for the market. At the same time, thesales market is expected to increase local debt buyers market also saw oversubscriptions bothby 66 percent to PLN8.9 billion by 2014 Another factor driving the purchase on the equity and debt issue sides.(as compared to PLN5.4 billion in 2010). of NPL portfolios is the continued Combined with a recent favorable zlotyIn fact, we expect the number of loan access to funding available (at relatively foreign exchange rate, local investorsportfolio transactions to increase this attractive pricing) to debt collection are now also in a more favorableyear, mainly driven by the expected companies. Throughout 2010 and well position when compared to theirsale of non-performing loans that were into the first quarter of 2011, major foreign competitors. The table belowgranted during the credit boom period debt collection companies received shows some of the larger loan portfolioof 2006–2008. considerable capital injections or gained transactions in the Polish market for the access to relatively cheap capital from first four months of 2011.Figure 26: Value of the Polish NPL debt sales market 10.0 9.4 80.0% 9.0 8.9 9.0 8.3 70.0% 8.0 60.0% 7.0 55.6% 50.0% 6.0 5.4PLN bn 40.0% 5.0 30.0% 4.0 25.6% 3.0 20.0% 12.9% 10.0% 2.0 –4.9% –0.5% 1.0 0.0% 0.0 –10.0% 2010 2011 2012 2013 2014Source: IBnGR, KPMG analysisTable 27: The largest portfolio sale transactions in the period Jan–April 2011 Seller Date Face value Buyer Loans Assumed price Combined with a (PLN m) Consumer recent favorable PKOBP April 542 Kruk S.A. unsecured NPLs 17% zloty foreign exchange BRE Bank April 600 Undisclosed Consumer 12% rate, local investors are unsecured NPLs now also in a more Consumer Kredyt Bank April 1,015 Best unsecured NPLs 20% favorable position when Santander Project in Performing At par or with a compared to their Consumer Finance Pending 6,000 progress residential mortgage loans slight discount to par foreign competitors. BRE Bank SA H1 2011 621.5 Kruk SA Retail c. 14.5%Source: KPMG analysis34  |  Global Debt Sales © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • RussiaRussia has seen a number of changes in banks had significantly reduced the levelthe provisioning methodology for banks of lending activity during 2009-2010 and “While the Russianrecently: between 2009 and 2010 the strengthened their lending policies.Central Bank of the Russian Federation NPL portfolio At the same time, the overall increase in(CBR) established more flexible the level of legacy NPLs catalyzed banks market is only justrequirements for the creation of reservesin relation to NPLs, and then, at the to make significant efforts to collect or developing, there restructure overdue loans. However, in thebeginning of 2011, introduced new rules majority of cases, banks found that the is high potential forfor provisioning in relation to repossessedassets. These new rules stipulated that, borrower’s ability to generate free cash NPL sales in the flow for debt repayment was so low thatas of 2012, banks should recognize a restructuring or bankruptcy were often the future as banks10 percent provision for repossessedassets that are not sold within one year only options left for corporate NPLs. attempt to divest(with increases to 35 percent within two As a result of this rapid growth in overdue non-core assets andyears and 75 percent within three years) in loans, banks found their earnings andorder to reflect the impairment of assets. capital significantly reduced, and (in improve capital andBut the Russian economy suffered a order to avoid breaching statutory liquidity. ” capital adequacy ratios) many Russiansignificant decline as a result of the global banks started to move overdue loansfinancial crisis. With unemployment off their balance sheets by selling themincreasing to 8.4 percent in 200912, many to affiliated companies. In 2009, for12. Federal State Statistics Service Global Debt Sales  |  35© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    •  While the banks example, Sberbank transferred around USD 4 billion of overdue loans at face Consolidation, Morgan & Stout, and EOS Group to name a few). However, have started to sell value to their affiliate, Sberbank Capital. there are serious doubts as to whetherretail NPLs over the Overview of overdue loan portfolios this traditional outlet will have the liquidity to absorb the accumulatedpast three years, much According to the CBR, the volume of NPLs now in the Russian economy.of the activity has been overdue debt in relative terms increased Furthermore, collection activity in the Russian market remains unregulated, from 1.4 percent of total bank loanscentered on collection as of 1 January 2007 to 5.1 percent which is considered by many experts asagencies (Sequoia at the start of 2010 (see below). The a key obstacle to the development of the country’s secondary NPL market. majority (61 percent) of overdueCredit Consolidation, loans to corporate clients and almost Regardless, the Russian NPL marketMorgan & Stout, and half (46 percent) of overdue loans to has seen strong growth year-over-year. individuals were concentrated in theEOS Group to name a top 10 Russian banks. According to research by collection agencies, it grew from USD 1.3 billionfew). in 2008, to USD 2.5 billion in 2009 and Loan portfolio sales then USD 3.5 billion in 2010. Over that While the banks have started to sell time, the market saw a number of large retail NPLs over the past three years, sales of non-performing loans by MDM much of the activity has been centered Bank (USD 266 million), OTP Bank (USD on collection agencies (Sequoia Credit 180 million), Raiffeisenbank (USD 170 million), and VTB 24 (USD 130 million).Figure 28: Overdue loan portfolio development 40 6% 4.7% 35 5.1% 4.7% 5% Other Top 10 30 8 9 10 54% 46% 4% 25$bn 20 3% 2.1% 15 26 25 25 2% 1.4% 1.4% 5 Other Top 10 10 39% 61% 1% 5 3 9 2 3 3 0 0% 1 Jan 2007 1 Jan 2008 1 Jan 2009 1 Jan 2010 1 Jan 2011 1 Feb 2011 Overdue loans, corporate Overdue loans, individuals Overdue loans/total loans (%)Note: According to the Association of European Businesses in Russia, there is insufficient transparency from the Russian market on credit quality, risk management andcorporate governance standards. Discrepancies in the information made available combined with the many NPL definitions used in the market result in reduced comparabilityand create confusion in areas where transparency is needed. It should be noted, therefore, that our analysis in this overview is based on available data on overdue loans from theCentral Bank website.Source: Central Bank of the Russian Federation36  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • For their retail portfolios, however, loans, which had not been the case in beginning of 2010. In large part, this ismost Russian banks have displayed previous years. apparently due to the deterioration in thea preference for initially transferring quality of loan portfolios being offered for According to press articles, the averagedistressed portfolios to collection sale. The table below shows some recent price for retail loan portfolios decreasedagencies under agency schemes rather portfolio transactions. from a range of 4-5 percent of the valuethan selling portfolios. That said, since of the portfolio at the beginning ofthe end of 2009, banks have started to 2009, to a range of 1.5-3 percent by thesell non-performing secured mortgageTable 29 Portfolio Completion Face value, Seller Buyer Sales price characteristics date (USD m) Ursa Bank n/d individuals Q1 2008 74 12% Home Credit Bank n/d individuals Aug 2008 135 n/d Credit Europa Bank Morgan&Stout n/d Sep 2008 n/d n/d Raiffeisenbank EOS Group individuals Oct 2009 170 5% OTP Bank Morgan&Stout individuals Dec 2009 180 n/d Alfa-Bank Lindorff individuals Jan 2010 37 3% Alfa-Bank MDM bank corporate, secured Jun 2010 40 n/d AK Bars n/d individuals H1 2010 3 n/d VTB 24 Russkaja Dolgovaja Korporacia individuals Jul 2010 130 n/d Rosbank n/d individuals H2 2010 49 n/d MDM Bank EOS Group individuals Jan 2011 266 4% Swedbank Raiffeisenbank retail loans Aug 2011 21.5 n/d (Russian branch)Source: Press articles and market feedback2011 market outlook likely hold overdue corporate portfolios, as the latter are usually secured  It should be noted,Overall, the Russian NPL portfolio salesmarket is best described as being in the by pledges. however, thatdevelopment stage, with no specific It should be noted, however, that Sberbank, one of therules and regulations currently in place.However, certain draft laws aimed at Sberbank, one of the largest Russian banks, is rumored in recent press reports largest Russian banks,regulating collection activities are being to be planning to sell a retail NPL portfolio is rumored in recentdiscussed and may be introduced later in2011. As a result, the market may see the with a face value of up to USD 230 million in the second or third quarter of 2011. press reports to beestablishment of greater restrictions and In our opinion, the total amount of NPLs planning to sell a retailobligations on buyers and sellers. in the Russian market is likely to be NPL portfolio with aWhile there are certainly a large numberof investors interested in the Russian significantly higher than the reported 5 percent of total loans. And given that face value of up tomarket, very few Russian banks tend to we do not anticipate any substantial USD 230 million in thesell their bad loan portfolios. This maybe a symptom of an unwillingness to positive trends in the current economic situation that could significantly reduce second or third quarterdisclose information on the quality of this amount, investors can expect to see of 2011.their portfolios and, as a result, they do a more active Russian NPL sales marketnot tend to offer their bad assets for sale. in the future as banks there attemptAnd while we expect banks to continue to divest non-core assets and improveto sell overdue retail portfolios, they will capital and liquidity. Global Debt Sales  |  37© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Spotlight on AfricaThe Nigerian banking sector: markets. The crisis brought Nigeria’s AllMistakes, lessons and opportunities Share Index (ASI) down from its peak of 60,527 in May 2008 to a low of 31,450 “Nigeria’s bankingPrior to the global financial crisis,Nigeria’s banking sector had seen in December 2008, representing a sector has recoveredexceptional growth in its capital loss of some 48 percent of market capitalization in just seven months. well since thebase. Indeed, thanks largely torecapitalization exercises conduced in The falling price of oil in 2008 also financial crisis and2005 and 2007 many Nigerian banks , had a significant effect on Nigerian the country nowfound themselves with more capital onhand than they did investment outlets. banks, many of whom had a sizable exposure to the downstream oil and presents numerousAs a result, there was a significant gas sectors through the funding of opportunities formove towards gaining exposure tothe capital markets in the form of letters of credit (bank guaranteed loans) for the importation of refined petroleum investors.”proprietary investments and advances products. And so as oil prices declined(given as margin loans). But as the from USD 146/barrel to a low offinancial crisis hit, global foreign direct USD 76/barrel, Nigerian banks saw ainvestment also began to dive, sparking correlated decline in foreign exchangea significant flight of capital from the earnings which, in turn, put pressureFigure 30: The capital market crash resulted in the default of margin loan repayments. NSE Index 2006 – March 201170,000 Aftermath of the banking consolidation60,000 in 2005 left banks very liquid and funds were pumped into the stock market50,00040,00030,00020,000 The height of the Relatively stable position10,000 financial crisis following CBN intervention - N 8 Ja 8 M 9 M 09 Ju 9 Se 9 N 8 Ja 9 M 0 Ja 6 M 7 M 7 Ju 7 Se 7 N 7 Ja 7 M 8 M 08 Ju 8 Se 8 M 10 Ju 0 Se 0 N 0 Ja 0 M 1 1 06 M 06 Ju 6 Se 6 N 6 0 -0 0 -0 l-0 0 -0 1 -0 l-0 0 -0 0 -0 -0 l-0 0 -0 0 -0 l-0 -1 l-1 1 -1 1 -1 - p- n- p- n- p- n- - p- n- - p- n- n- - ay ov ar ay ov ar ay ov ar ay ov ar ar ay ov ar Ja MSource: Cashcraft Asset Management Limited38  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • on the country’s foreign reserves. As a Actions taken by government However, in order to meet their day-result, the Naira (NGN) was devalued Much of the response to the Nigerian to-day settlement obligations some(from NGN118 to NGN150 to the dollar financial crisis has been spearheaded banks gradually became excessivelyin late 2008) after enjoying a long period by the Central Bank of Nigeria (CBN). As dependent on the EDW, effectivelyof relative stability. early as October 2008, the CBN started becoming perpetual net-receivers of to take corrective action by creating funds from the interbank market, whichIn the aftermath of these events, an expanded discount window (EDW), in turn heightened liquidity concerns.the economy saw strong liquidityconstraints as banks withdrew credit which provided perpetual overnight In response, a special joint auditin reaction to the general economic standing facilities and extended the was conducted by the CBN and theslowdown and resulting deterioration tenor for borrowing from overnight Nigerian Deposit Insurance Corporationin their loan books. Exacerbating the to 360 days. The CBN also reduced (NDIC) on all banks in August 2009 tosituation, Nigerian banks were declined the monetary policy rate by 200 basis determine their true financial positionaccess to lines of credit by their foreign points to 6 percent in order to boost (see Figure 31). The audit exposedcounterparts, which only worsened the liquidity in the market and stimulate significant issues at ten banks thatlocal liquidity situation. banks to lend to the economy. ranged from capital inadequacy andFigure 31: Financial position as at December 2009 UNITY* BANK PHB INTERCONTINENTAL OCEANIC FINBANK AFRIBANK UNION SKYE FCMB STANBIC UBA DIAMOND ZENITH GT BANK STERLING WEMA FIDELITY FIRSTBANK ECOBANK ACCESS (400,000) (300,000) (200,000) (100,000) – 100,000 200,000 300,000 400,000 NGN million* Although Unity Bank recorded positive shareholders’ funds as at December 2009, it failed the CBN audit as it did not meet minimum capital adequacy requirementsSource: Annual Reports Global Debt Sales  |  39© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • The plan has been largely successful in As part of these measures, the CBN reviewed the overall banking reducing the NPL overhang on banks. framework, which resulted in theIn December 2010, AMCON purchased NPLs revocation of the universal banking license model and a mandate for allwith a face value in excess of NGN2.2 trillion banks to divest from non-core banking(approximately USD 13.3 billion) paying a total operations. That said, banks willing to retain non-core banking businessesconsideration of around 50 percent. were permitted to establish a ‘HoldCo’ structure in which the bank and all other businesses operate as subsidiaries. In effect, this enabled banks to ring-fenceliquidity constraints to insufficient Management Corporation of Nigeria depositors’ funds, thereby creating acorporate governance and risk (AMCON) bill on 19 July 2010. AMCON, clear demarcation between banking andmanagement procedures. Of the ten, a ‘bad bank’, was established as the non-banking activities.two (Unity Bank and Wema Bank) were principal vehicle for the acqusitiondeemed to be less dire than the other of NPL and the recapitalisation of So what next…?eight banks, and they were given till distressed banks in Nigeria. Thanks largely to the quick actionJune 2010 to independently The plan has been largely successful in taken by the regulators, the Nigerianre-capitalize. reducing the NPL overhang on banks. banking sector has seen notableFor the other eight (namely, In December 2010, AMCON purchased improvement over the past year.Intercontinental Bank, Oceanic Bank, NPLs with a face value in excess of AMCON’s intervention sparked a rally inAfribank, Union Bank, Bank PHB, NGN2.2 trillion (approximately USD 13.3 banking stocks in January 2011, and theSpring Bank, Equitorial Trust Bank and billion) paying a total consideration of stock market has recovered somewhatFinbank), the management teams around 50 percent. This was followed from the lows experienced in 2009.were immediately replaced by CBN up in March 2011 with an additional There have also been strong indicationsappointees. The CBN also enforced the acquisition of NGN1 trillion (approximatly of interest from a few strategic andmaximum tenure of 10 years for bank USD 6.6 billion) for around NGN600 financial buyers in acquiring some ofCEOs as required in the Corporate billion, or 60 percent of face value. the banks that failed the CBN specialGovernance code. This resulted in the audit (see Table 32).retirement of three CEOs, namelythose of Zenith Bank, UBA andSkye Bank. Table 32: List of potential target Nigerian banks and acquirersOver the next few months, the CBN Target bank Market share Potential Investorinjected NGN620 billion (USD 4.13 by asset base* acquirers typebillion) as liquidity support and long Oceanic Bank** 6.1% None yet Nilterm loans to nine of the 10 banks Intercontinental Bank 4.2% Access Bank Nigerian bank(all except Unity Bank). The CBN alsoassisted banks with their loan recovery FinBank 1.1% FCMB Nigerian bankefforts, resulting in the recovery of Union Bank 7.5% African Capital Alliance Private equitymore than NGN110 billion (USD 733 Afribank*** 2.0% Vine Capital Private equitymillion) of previously non-performingloans owed to five of the rescued Bank PHB 3.4% Habib Bank Foreign bankbanks. * Based on Q3’10 balance sheet ** First Bank recently pulled out of negotiations for the acquisitionThe Nigerian government also played *** Fidelity Bank Plc (a local bank) also showed interest in Afribank and has been identified as a reserve bidderits part with the passage of the Asset Source: KPMG Market Research40  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • To date only three Nigerian banks(UBA, Stanbic IBTC and First Bank) of with Nigeria’s Sterling Bank Plc) or to enter into strategic partnerships with A second serieshave indicated their interest in adopting other Nigerian banks. of bonds for thethe HoldCo structure, with mostother banks seeking to divest their There is also continued flux in the sum of NGN1.3 trillioninvestments in their subsidiaries and market, with some troubled banks yet to attract investor interest, and some (USD 8.7 billion) haseither sell them to interested buyers orliquidate them. investors opting out of negotiations also been proposed,According to recently published mid-stream. The abolition of universal banking and subsequent directives by and is expected to befinancial results, these measures are the CBN also means that banks are auctioned in thealready having a positive impact onthe banking sector, with some banks currently streamlining their operations and divesting from non-core banking primary bond market(Guaranty Trust Bank Plc, Zenith Bank operations such as insurance and by AMCON in thePlc, Access Bank Plc, for example)showing significant improvements in investment banking. We expect these factors to create opportunities proposed sale of uptheir results for 2010 versus 2009. for foreign investors in the Nigerian to NGN3 trillion zeroIt should be noted that the CBN financial services industry. coupon bonds.has also mandated the adoption of Additionally, there is an opportunityInternational Financial Reporting for the acquisition of non-performingStandards (IFRS), which all listed and loans (both from AMCON and banks)significant public entities (including through a structured sale process. Abanks) are required to adopt by 2012. number of banks have set themselves aggressive targets to significantlyOpportunities for investors reduce NPL ratios down to single digits,Nigeria presents numerous which will mainly be achieved throughopportunities for investors. In part, this a combination of sales to buyers (otheris due to the recent banking reforms. than AMCON) and enhanced internalBut it is also a factor of the country´s recovery efforts.improving economy (which saw GDP There has also been interest ingrowth of 7 percent to USD 370bn in investing in AMCON’s three-year zero201013), and its large population (with coupon bonds, which are currently150 million people, Nigeria is Africa’s trading at a 10.25 percent yield throughmost populous country). the secondary market and are backedAs existing banks seek additional capital by the federal government. A secondto fortify their market position and gain series of bonds for the sum of NGN1.3market share, competition will intensify trillion (USD 8.7 billion) has also beenin the industry. Indeed, a number proposed, and is expected to beof opportunities potentially exist for auctioned in the primary bond marketinvestors either seeking to acquire by AMCON in the proposed sale of upexisting banks (as FirstRand of South to NGN3 trillion zero coupon bonds.Africa is rumored to be in the process13. CIA Global Debt Sales  |  41© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Introduction to the AmericasThe Americas have proven to besomewhat of a mixed bag for the debtsales market. On the upward trajectory “Opportunitiesis the U.S. which – over the past few in the Americasmonths – has seen a steady flow ofdeals. Most investors and market must be viewed onobservers forecast that deal activity a market-by-marketwill continue at either the same level orslightly higher over the next quarters. basis since activityGoing forward, most transactions in has varied widelythe U.S. are expected to include poolsof commercial mortgages and large across the region. ”commercial and industrial (C&I) loans,although an increase in OREO dealscould also be expected as pricing propped up loan portfolios at manygaps narrow. major banks. Here again, KPMG has been engaged by a global bank toIn Brazil, several banks have started advise on the sale of a large unsecureddiscussions regarding disposals of consumer pool, and there are stronglarge portfolios of performing and sub- expectations that this may lead to anperforming non-core loans (especially increase in activity from other financialunsecured consumer credits), but it is players (such as department stores oruncertain whether these transactions auto lenders) in the short-term as bankswill materialize within the next and financial institutions attempt tosemester. While the Chilean market clean-up their NPL stocks.has not been particularly active, KPMGhas recently been engaged by a global Throughout the rest of the region,bank to conduct a sale of its residential activity has increased slightly, but mostnon-performing mortgage portfolio, and transactions have proven too smallit is expected that this opportunity will for global investors to justify scalablebe followed by similar deals in the next acquisitions. And while banks in bothfew months. Colombia and Argentina continue to sell comparatively smaller tranches directlyIn Mexico, however, the NPL market to servicing entities and local investors,has experienced slower growth in Peruvian institutions have yet to enterthe last semester compared to 2010, the NPL market with any significantlargely as a result of the modest transactions.local economic recovery, which has42  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG has been engaged by a global bank to advise on the sale of a large unsecured consumer pool, and there are strong expectations that this may lead to an increase in activity from other financial players (such as department stores or auto lenders) in the short- term as banks and financial institutions attempt to clean-up their NPL stocks. Global Debt Sales  |  43© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • The United StatesBank failures in the U.S. reached an activity: U.S. banks looking to sell18-year high in 2010, with 157 insuredcommercial banks and savings their non-performing/non-core assets; international banks seeking to sell their “ signs look Allinstitutions failing over the course of non-performing/non-core assets in the positive for furtherthe year. At the same time, the numberof institutions on the FDIC’s ‘Problem U.S.; FDIC sales; and potential sales due to impending regulatory changes. growth in the U.S.List’ increased almost 3 percent (from By most estimates, the current amount debt sales market,860 to 884) in the fourth quarter of2010 representing total assets of of non-performing and non-core portfolios with regulatoryUSD 390 billion. But there has been in the U.S. market is estimated to be between USD 300 billion–USD 350 change drivinga remarkable improvement in 2011, billion. On top of this, market observers banks to disposewith just 48 failures for the year to24 June 201114. expect an additional USD 100 billion potential market expansion as a result of of non-core or non-Today’s U.S. loan sales market is largely impending regulatory changes that could performing loans. ”being driven by four main sectors of force financial institutions to aggressively mark-down or divest assets.14. FDIC44  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Table 33: Transaction details for last 20 failed banks Assets under Cost of FDIC Announce Failed Loss share Buyer loss share (% of) failed date bank agreement? (US$000) bank assets First American Bancorp 06/24/11 Mountain Heritage Bank Yes 69,200 39.63 Hamilton State Bancshares, Inc. 06/17/11 McIntosh State Bank Yes 242,100 23.53 Stonegate Bank 06/17/11 First Commercial Bank of Tampa Bay No 0 28.90 First Citizens Bancorporation, Inc. 06/03/11 Atlantic Bank and Trust Yes 141,800 17.48 Columbia Banking System, Inc. 05/27/11 First Heritage Bank Yes 142,200 20.77 Blue Ridge Holding, Inc. 05/20/11 Atlantic Southern Bank Yes 585,100 36.87 Blue Ridge Holding, Inc. 05/20/11 First Georgia Banking Company Yes 452,100 21.41 Columbia Banking System, Inc. 05/20/11 Summit Bank Yes 113,400 11.21 Bond Street Holding, Inc. 05/06/11 Coastal Bank Yes 104,074 10.27 First Michigan Bancorp, Inc. 04/29/11 Community Central Bank Yes 362,400 38.46 Bank of the Ozarks, Inc. 04/29/11 Park Avenue Bank Yes 514,100 42.51 Bond Street Holdings, Inc. 04/29/11 First National Bank of Central Florida Yes 246,930 12.40 Bond Street Holdings, Inc. 04/29/11 Cortez Community Bank Yes 46,874 27.05 Bank of the Ozarks, Inc. 04/29/11 First Choice Community Bank Yes 251,000 31.32 Citizens South Banking Corporation 04/15/11 New Horizons Bank Yes 84,600 28.72 Hamilton State Bancshares, Inc. 04/15/11 Bartow County Bank Yes 247,500 21.05 Community Bancorp, LLC 04/15/11 Superior Bank Yes 1,840,000 8.54 AloStar Bank of Commerce 04/15/11 Nexity Bank Yes 384,200 23.15 Trustmark Corporation 04/15/11 Heritage Banking Group Yes 156,400 21.51 Central Bancshares, Inc. 04/05/11 Rosemount National Bank No 0 9.57Source: SNL Financial and FDIC Global Debt Sales  |  45© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • U.S. loan portfolio sales market pools amongst banks also indicate variables and does not belie an overallWhile the U.S. market enjoyed a sharp that increased future sales activity is reduction in sales activity for the year15.rise in sales of non-accrual assets in highly likely. And while the data for In fact, over the year starting 31 March2010, (hitting a high of USD 29.6 billion the first quarter of 2011 indicates that 2010, the most active sellers of non-for 2010 versus USD 14.0 billion in sales declined from the prior quarter accrual assets include some of the2009), the overall level of non-accrual (falling by more than 33 percent quarter- largest banks in the U.S. (See Figure 34).assets held by banks still remains high. over-quarter to USD 6.12 billion), theAdditions to the ‘Loans Held for Sale’ decrease may be related to seasonalFigure 34: Banks’ sales of non-accrual loans 10 300 9 250 Additions to nonaccruals 8 Loans held for sale 7Nonaccruals sold 200 6 5 150 4 100 3 2 50 1 0 0 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 3’ 1’ 2’ 3’ 4’ 1’ 2’ 3’ 4’ 1’ 2’ 3’ 4’ 1’ 2’ 4’ 1’ Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Nonaccruals sold (USD bn) Additions to nonaccruals (USD bn) Loans held for sale (USD bn) Based on data reported in call reports filed by commercial banks and savings banks. Nonaccrual loan sales = Total outstanding balances of all loans, leases, debt securities and other assets held in nonaccrual status that were sold during the quarter ending on the report date. This field includes only the outstanding balance (net of unearned income) of each nonaccrual asset at the time of its sale. Only transfers of nonaccrual assets that meet the criteria for a sale as set forth in FASB Statement No. 140 should be included in the calculation for this field. Additions to nonaccruals = Aggregate amount of all loans, leases, debt securities and other assets (net of unearned income) that have been placed in nonaccrual status during the quarter ending on the report date, includes assets placed in nonaccrual status during the quarter, as well as assets placed in nonaccrual status during the quarter that have been sold, paid off, charged off, settled or returned to accrual status before the end of the quarter. Data current as of 12 May 2011. Source: SNL Financial Additions to the According to a 30 March 2011 note from bank research analysts Christopher the total amount of nonaccrual assets at U.S. banks totaled USD 173.3 billion at ‘Loans Held for McGratty and John Barber at Keefe the end of the first quarter of 2011.Sale’ pools amongst Bruyette & Woods, roughly USD 23 billion of non-performing assets were sold in Key drivers for disposal of non-core/banks also indicate 2010, a 300 percent increase over the non-performing loansthat increased future 2009 total. Looking ahead, the analysts expect ‘continued momentum’ in 2011, Regulatory change in the U.S. hassales activity is highly driven by narrowing bid-ask spreads been the primary objective behind the banks’ disposal of non-core orlikely. and improving bank balance sheets. Reinforcing this position is the fact that non-performing loans. Indeed, the15. SNL Financial46  |  Global Debt Sales © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Table 35: Largest sellers of nonaccrual assets*, 31 March 2010 to 31 March 2011 Nonaccrual assets Additions to nonaccrual Total nonaccrual assets as of Company sold, LTM (USD m) assets LTM (USD m) 03/31/2011 (USD m) Citigroup Inc. 9,161 25,743 16,136 JP Morgan Chase & Co. 2,552 24,989 23,305 Ally Financial Inc. 1,768 6,735 4,643 Wells Fargo & Co. 1,658 27,484 25,105 Regions Financial Corp 1,262 4,245 3,468 BB&T Corp 1,091 4,917 2,616 BBVA USA Bancshares Inc. 1,024 2,164 1,734 Bank of America Corp 1,012 26,203 33,359 U.S. Bancorp 978 4,142 4,136 Synovus Financial Corp 798 1,361 1,006 KeyCorp 763 2,269 969 HSBC North America Holdings Inc. 594 11,223 8,353 Capital One Financial Corp 575 1,758 1,265 CIT Group Inc. 537 1,536 1,306 Associate Banc-Corp 509 433 489 Sun Trust Banks Inc. 508 4,712 4,018 Marshall & Ilsley Corp 462 2,747 1,579 Fifth Third Bancorp 459 2,054 1,861 Zions Bancorp 457 1,709 1,690 UnionBanCal Corp 444 1,040 875*All nonaccrual asset figures displayed may include assets guaranteed by the U.S. governmentBased on Regulatory Date reported on Y-9Only currently operating top-tier bank holding companies were rankedData current as of 19 May 2011Source: SNL Financial and FDICconcurrent goals of increasing capital shortened timeline. And while the bank may seriously impact the ability ofratios while simultaneously improving was successful in receiving multiple relatively small banks to divest theirportfolio quality generally tend to be bids for the portfolio, it was ultimately toxic portfolios.mutually exclusive, and therefore pose a unable to complete the transaction due Basel III regulations should also actnumber of unique challenges for banks to its inability to raise the necessary as a catalyst to NPL and non-core(especially the smaller regional and amount of capital. However, the level transactions in the U.S.. In fact, a recentcommunity institutions). of interest that resulted in multiple bids Barclays capital study suggests that within such a short period of time is aAs a case in point, KPMG was recently the top 35 U.S. banks may be short of clear indication of the appetite for suchengaged by a regional bank in the between USD 100 billion to USD 150 deals in the marketplace. That said,southeastern U.S. seeking to sell its billion in equity capital when these transactions in this particular segmenttroubled portfolio. Given the stringent regulations are imposed. What’s more, of the banking universe should beFDIC deadlines, the sale process was the study expects that 90 percent of analyzed thoroughly as capital needsconducted in a very aggressive and the shortfall will be concentrated in the Global Debt Sales  |  47© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 36: NPLs, loans 90 days past due and allowance for credit losses/ biggest six banks (assuming the banks NPLs for some of the U.S. banks as of 31 December 2010 will need to hold ‘top quality’ capital equal to at least 8 percent of their total Allowance for credit losses/non-performing loans assets, adjusted for risk). 87.7% 126.2% 114.9% As discussed in more detail on page 2, 25,000 40,000 22,379 Basel III reforms will impact banks in 33,190 two ways: they will gradually tighten 20,000 18,500 the definition of what counts as Tier 1 30,000 26,242 ‘top quality’ capital; and they will force 15,000 banks to increase their risk adjustment for big swathes of their businesses. As$m $m 20,000 a result, banks will need to respond by 10,000 14,481 either increasing their capital through 10,000 retained earnings or equity issuance, or 5,000 4,037 by reducing their risk-weighted assets through sales and cutting back on risky 0 0 business lines. Bank of America JP Morgan Chase Wells Fargo Corporation The performing loan market is also set to see increased activity as a number of Loans 90 days past due & accounting interest Non-performing/impaired loans non-U.S. based banks with performingSource: Capital IQ portfolios in the U.S. re-categorize them as non-core, and start to consider their realization options. In turn, this willFigure 37: Composition of total loan books for some of the U.S. banks offer a number of great opportunities as of 31 December 2010 for healthy U.S. banks and financial investors interested in acquiring 1,200 portfolios to grow inorganically or add new asset classes to their portfolio. 1,000 Before considering a potential sale 229.6 of assets in the U.S., however, some 800 36.0 key regulatory issues will need to be 147.1 considered. These include:$bn 600 182.2 25.7 • the expectation from U.S. bank 21.7 regulators for full documentation of 400 760.6 the transfer (including objectives, 595.7 rationale, and details of the 485.4 200 structure), and appropriate senior management approvals, even for 0 private transactions. Depending on Bank of America JP Morgan Chase Wells Fargo the volume of assets considered Corporation for transfer, participants would be Book value of total loans less capital Impaired loans Total capital prudent to inform the appropriate and impairment U.S. banking regulators in advance ofSource: Capital IQ any transaction; • transfer of assets (particularly those of low quality), will often lead to enhanced scrutiny by regulators on the lending and/or investment function in order to identify any48  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • unsafe or unsound practices or USD 200 million through a venture with performing loans, which had a face potential weakness in the risk Deutsche Bank AG. But Toll Brothers is value of $1 billion to $1.5 billion and management process; not the only homebuilder on the hunt for consisted of debt maturing in two years real estate loans: the Rialto Investments or less; Wells Fargo won the second• U.S. bank regulators now expect unit of Lennar Corp. reports contributing and third pools, which were performing organizations to conduct an impact USD 33.6 million in revenue to the loans with around five years remaining analysis of the transfer to the balance company’s total during the fiscal first and a total face value of $3 billion to $3.5 sheet and capital requirements, with quarter; Barclays Plc announced in billion; and Lone Star, which specializes particular consideration to liquidity March that it had signed a definitive in buying distressed mortgages, won impact and requirements; agreement with CreXus Investment the remaining five pools of Anglo• the expectation that the valuation Corp. to sell 30 commercial real estate Irish’s non- and sub-performing debt methodology will be clearly loans for USD 586 million in cash (the with a face value about $5 billion. The documented; and portfolios consisted of mortgages transaction is expected to close in as well as subordinated notes and October 2011.• regulatory reporting implications with mezzanine debt); and it was recently regard to the transfer of assets. There has also been increasing interest reported that Wells Fargo & Co. has from banks in exploring various put a USD 500 million loan fund up forRecent non-performing or non-core structuring alternatives such as JVs sale16.transactions and loan portfolios to and SPVs in addition to direct wholecome to market International banks have also been loan sales. These vehicles would helpThere are signs that U.S. banks are more active in selling their U.S. assets. the sellers deconsolidate bad assetsfinally starting to be more aggressive Recently, Anglo Irish Bank announced while minimizing losses (and possiblyabout selling distressed real estate the sale of its $9.5 billion portfolio of retaining potential upside and reducingloans. For example, Toll Brothers U.S. commercial real estate loans to the pressure on their internal work-outInc. recently purchased a portfolio Lone Star Funds, Wells Fargo and J.P . teams).of 83 non-performing loans with Morgan Chase & Co. J.P Morgan had .outstanding balances totaling roughly the winning bid for the first pool ofTable 38: Selected non-performing and non-core asset portfolio transactions by U.S. banks: Seller Details FDIC • PMO Loan Acquisition Venture LLC purchased approximately $1.7 billion portfolio including approximately 200 loans and 80 realestate owned properties. • The assets were all from former Amtrust Bank NA which was taken into receivership by FDIC. iStar Financial • iStar Financial sold $1.35 billion portfolio of commercial properties. • The buyer was various subsidiaries of investment firm, Dividend Capital Total Reality Trust Citigroup • Private-equity owned OneWest Bank bought a $1.4 billion real-estate loan portfolio from Citigroup Inc • In addition Citigroup is believed to be planning to sell about $12.7 billion worth of distressed assets Partriot National • Patriot National Bancorp entered into a contract to sell non-performing loans and real estate of ES Ventures One for $65 million Bancorp • The bank plans to reinvest the amount received from the sale into earning assets to improve net interest margin Midwest • Starwood Capital Group acquired a non-performing commercial loan portfolio with an outstanding principal balance of $157 Regional Bancorp million from Midwest Regional Bancorp • The portfolio of loans was purchased for 40 cents on the dollar, representing price of approximately 32% of initial capitalization Confidential • Toll Brothers Inc. and Deutsche Bank purchased a portfolio of 83 non-performing loans totaling $200 million • The portfolio consists primarily of residential acquisition, development and construction loans secured by properties at various stages of completionSource: Press articles and market feedback16. SNL Financial Global Debt Sales  |  49© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Table 39: Selected non-performing and non-core asset portfolio transactions by international banks: Seller/Bank Details Anglo Irish Bank • Anglo Irish Bank recently announced the sale of its $9.5 billion portfolio of U.S. commercial real estate loans to Lone Star Funds, Wells Fargo & Co. and J.P. Morgan Chase & Co • The deal was led by Eastdil Secured and the sale is expected to close in October 2011 Allied Irish Bank • Allied Irish Bank agreed to sell roughly $1 billion U.S. commercial mortgages to Blackstone Group LP and Wells Fargo & Co. • Blackstone is paying mid-80s on the dollar for half of roughly $1 billion portfolio and Wells Fargo is paying low 90s for the other half Barclays • Barclays’ is looking to reduce the size of its book of U.S. commercial real-estate loans, valued at about $3.8 billion at the end of 2010, the bank plans to sell the properties and loans on an asset-by-asset basis rather than as a part of one package • Further, the bank has so far disposed off a portfolio of commercial real-estate loans with a face value of $739 million (in March 2011) Bank of Ireland • Bank of Ireland is marketing U.S. property loans with a face value of EUR1.26bn • The Irish bank put the American loans on the block on 16 May and expects to close the sale in the next six months Lloyds Banking • Lloyds Banking Group has tapped JPMorgan and Citigroup to run the sale process to divest 600 UK retail branches. The banks Group were told they would have to provide a GBP15 billion–20 billion loan to help cover a funding gap at Lloyds and ease the disposal process as part of the mandate. Commerzbank AG • Commerzbank is required by the European Commission to dispose of its 100 percent subsidiary Eurohypo by 2014 for the approval of capital injection from the German government • As at 31 December 2010 Eurohypo’s international real estate finance amounted to EUR40 billionSource: Press articles and market feedbackTrends in residential and commercial 50.8 billion in the final quarter. The losses are forecasted to continuereal estate values and forecast On an annual basis, this figure through the first half of 2011, albeit at aThe U.S. commercial real estate represents a 120 percent increase lower rate, followed by a modest growthmarket ended 2010 on an upbeat note. from the decade-low of USD 54.6 billion in the latter half of 2011. Indeed, thereAccording to Real Capital Analytics, in 2009. are already signs that the market isslightly more than 6,000 major stabilizing. A recent Wall Street Journal However, the figures for Existing Homeproperties traded hands during 2010, article reports that the resurgence of Sales as well as New Single Familytotaling USD 120 billion in sales. In fact, the Silicon Valley tech industry has led Homes Sales have not been as positive.investment in commercial real estate to a new boom in the area’s real estate The market experienced a significantincreased with each successive quarter market, with rising rents and a scarce drop in the third and fourth quarterlast year: from USD 15.8 billion in sales supply of homes. Commentators are of 2010, which reflected double digitduring the first quarter of 2010, to USD clearly hoping this is a signal that the percentage losses when compared to21.8 billion in the second quarter, USD housing market might finally have corresponding quarters from a year ago.31.7 billion in the third quarter and USD reached its bottom.50  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • BrazilIn general, the Brazilian market has been and telecom invoices), some institutionscharacterized by banks continuing to sellnon-performing portfolios to specialized have recently demonstrated their intention to sell their SME and corporate “There are still ainvestors for three main reasons. The portfolios. However, there will likely be number of challengesfirst is to realize tax benefits by sellingtheir non-performing loans in order to a gap to be bridged between sellers´ expected sales price and the prices depressing the salespeed up the write-off of loans, thereby offered by the investors. of loan portfolios inallowing them to reduce their incometax calculation base. Increased liquidity The market also suffers from a lack of Brazil, but investorsis another reason, as is the strategic information regarding the loans and borrowers (particularly in relation to can expect a lift inrefocusing of many institutions´ corebusinesses, particularly where non-core corporate loans), which negatively the sale of NPLs asand non-performing loans have been affects the pricing assumptions applied by investors, therefore generating riskier banks look to raisephased out. scenarios, higher return expectations capital outside ofChallenges and creating price expectation gaps. In order to reduce these pricing gaps, their performingWhile most of the recent transactions a number of initiatives are now being portfolios.”in Brazil have largely involved consumer developed, largely focused on improvingportfolios (such as retail, credit cards data quality and creating ‘selling Global Debt Sales  |  51© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • The combination of structure alternatives’ (such as profit sharing structures, joint-ventures, etc.) The combination of these developments has negatively impacted the sales of these developments To that end, the Brazilian market has performing loans by small and mediumhas negatively impacted already seen some activity by local and regional investors who are exploring sized banks in Brazil. As a result, many of these banks are now looking forthe sales of performing structuring alternatives as a means to capital raising alternatives, includingloans by small and create arbitrage between the deals’ actual returns and targeted returns for non-performing and non-core loan portfolio sales.medium sized banks in institutional investors.Brazil. As a result, many Opportunities Transactions perspectives Overall, the non-performing loan saleof these banks are now There has been a significant increase market in the first quarter of 2011 haslooking for capital raising in regulatory control of loan sales followed roughly the same trend as in Brazil. In part, this is the result the first quarter of 2010. However –alternatives, including of reported inconsistencies related historically – banks generally start tonon-performing and to apparent irregular accounting develop their non-performing loan procedures for performing portfolio strategies during the second and thirdnon-core loan portfolio sales at Banco Panamericano, a quarter, with an even greater focussales. Brazilian mid-sized bank, at the end of during the fourth quarter (although this 2010. But the Central Bank of Brazil is often when these institutions also (Banco Central) has also recently feel other pressures related to achieving increased the minimum required their cash-flow budget or taking capital for transactions involving payroll advantage of tax benefits). and auto loans, while at the same As a result, participants in the Brazilian time, the government raised the IOF market can expect to see an uplift in (financial operations tax). non-core loan sale activity in the second half of 2011 and into 2012.52  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • MexicoMexico has seen an overall decrease in diversified companies pulling out ofthe number of non-performing loans ascompared to 2010. In large part, this is a certain segments to focus on their core business. For now, however, there is no “The Mexican loanresult of two main factors: the country’s evidence that the non-core market is sales market hasmodest economic recovery (which hascreated a greater debtor capacity to going through a meaningful change. largely decreasedrepay their loans) and the tighter lending Key drivers for disposal of non-core/ over the past yearpractices set by banks after the crisisin 2008-2009. Combined, these two non-performing loans and shows fewfactors have – in general – translated Since 1999, when the Mexican Federal Government created the Mexican signs of picking up ininto healthier loan portfolios at majorbanks. In fact, non-performing loans as Deposit Insurance Institute (IPAB), the any significant waya percentage of total loans has declined organization has taken over a number of bankrupt banks and their related in the near future. ”every year since 2008, and the trend distressed asset portfolios. In general,seems set to continue in 2011. the IPAB oversees the acquisition ofThe non-core market also seems to these assets and appoints advisors (suchbe somewhat stagnant, with only one as KPMG) in its efforts to dispose of theor two instances over the past year of portfolios. Global Debt Sales  |  53© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • And while favorable tax treatments and Non-performing and/or Trends in residential and commercialminimized losses continue to be the non-core loan portfolios to real estate values and forecastprimary motivation behind the disposal come to market Even though Mexico was harder-hit byof bank’s non-performing loans, liquidity Due to the higher default rate on the 2008 global crisis than any other Latinneeds have also become an increasingly portfolios of financial institutions and American country, this did not result in aimportant catalyst. For example, financial arms of department stores contraction in the value for the real estateduring the course of the financial and car companies in 2009, the market in 2010. In fact, given the keencrisis, many players in the collection market expects to see a moderate competition among banks and otherbusiness saw a reduced cash profit from supply of portfolios that encompass mortgage-lending financial institutions,their operations, reflecting debtors’ different kinds of distressed assets prices actually rose at a healthy rateconstrained cash flow. What’s more, (commercial, consumer, mortgage, while – at the same time – interestsome of these players had traditionally automotive) over the course of the rates started to decline. However, forbeen financed by foreign investors, coming year. 2011, analysts expect that an increasedwho – during these difficult times – often supply of housing stock will likely helpprovided limited or no funding at all. keep prices in check and interest rates at 2010 levels.Figure 40: Non-performing loan portfolio development 100,000 12.0% 90,000 9.92% 10.0% 80,000 70,000 8.0% 60,000$m (pesos) 50,000 5.16% 6.0% 4.86% 40,000 3.31% 3.38% 4.0% 30,000 2.63% 3.25% 2.66% 1.89% 2.44% 20,000 2.08% 2.0% 10,000 92,577 47,028 44,814 30,928 26,916 20,868 27,552 43,142 60,739 60,607 49,544 0 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Gross non-performing loan ($m pesos) Gross non-performing loan/total loans (%)Source: National Banking & Securities Commission of Mexico54  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • ArgentinaDespite the numerous transactions • the existence of many servicing that occurred in Argentina following thecountry’s 2001-2002 crisis, there are still companies offering high-quality collecting services; and “There are still aa number of NPL portfolios available. • the country’s growing experience and number of NPLRecent activity has been largely drivenby utilities and retail companies that comfort with this type of transaction portfolios availablehave started to sell their non-performing which, with each successful sale, demonstrates its viability as a method in Argentina, andportfolios over the last two years. for converting under-performing the conditionsSince the global financial crisis in 2008,Argentina has benefited from several assets into fresh capital. seem set for aconditions that have stimulated sizable And while the financial system has felt renewed confidence and started to ­long-term increasetransactions such as: resume providing credit to consumers, in debt sales. ”• the availability of local funds ‘on retail segment credit in particular has hand’ to investors looking for highly come with high rates and strict lending profitable investments; requirements. Ultimately, however, more Global Debt Sales  |  55© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • easily accessible credit will lead to new continue to carry significant NPLs on distressed balances, which – as time their balance sheets. That said, around goes on – will eventually restock bank’s half of the remaining NPLs are owned by NPL portfolios in the long-term. state-owned banks, who do not seem eager to sell (see Table 41). And while Future opportunities utility companies generated huge NPL Looking at the publicly available financial portfolios during the 2001–2002 crisis, statements published by the country’s most of these have not yet been offered financial institutions, it is clear that they up for sale. Table 41 Bank NPL level Banco de la Provincia de • USD 465 million. Buenos Aires Public bank belonging to the Province of Buenos Aires. Banco de la Nación • USD 309 million. Argentina Public bank belonging to the National State of Argentina. Banco de la Ciudad de • USD 115 million. Buenos Aires Public Bank belonging to the City of Buenos Aires (Federal District). Banco Macro • USD 198 million Banco Hipotecario • USD 203 million HSBC • USD 137 million Banco Galicia • USD 71 million Banco Patagonia • USD 81 million Banco Santander • USD 60 million BBVA Banco Francés • USD 83 million Citibank • USD 31 million Source: Central Bank of Argentina – December 201056  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Introduction to AsiaHalf way through 2011 and the Asian The market in China continues to beportfolio market is picking up, albeit at alower volume than in previous years. The relatively quiet, but many pundits are asking ‘for how long’? Asset “The outlooktraditionally strong markets of Korea and Management Companies (AMCs) for Asia overallIndia have continued to provide portfolioopportunities in the first half of 2011, established in 1999 in order to acquire seems strong with NPLs were initially provided with 10 yearwhile Thailand (also a steady market over financing, which was subsequently continued activitythe past five years), is offering a numberof opportunities with two banks already rolled-over for a further 10 years. In addition, to counter the effects of the in Korea, Thailandslated to run transactions in the third financial crisis, local banks undertook and Australia,quarter of 2011, and a number of othersfollowing closely behind. large lending programs, deploying more than USD3 billion between 2009 and growingAnd while the Australian market and 2010, which will inevitably require expectations forcontinues to focus primarily on single attention in the medium term. an opening of thecredit transactions, the notableexception has been the sale of a (largely Elsewhere in Asia, activity is expected to be relatively minimal and will likely Chinese market. ”performing) GE housing mortgage be driven by the continued selling ofportfolio. The success of this transaction, Lehman assets, single asset deals, andcoupled with increasing buyer appetite, the divestment of non-core assets heldsuggests that we will see more activity by parties looking to exit certain marketsin the Australian market, although (for the or raise liquidity.short-term) it will likely be dominated bysingle credits and performing portfolios. Global Debt Sales  |  57© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • ChinaThe overall asset quality of Chinese have been slow to decline: as of Marchbanks continued to improve through thefirst quarter of 2011 as the government 2011, total NPLs were CNY433 billion, versus CNY434 billion in December “While asset salesincreased the pressure on banks to 2010, and CNY497 billion in December between Chinesetake corrective measures such asreducing their exposure to real estate 2009. As a result, the NPL ratio remains unchanged from the December 2010 domestic companiesand municipality loans. But total NPLs level of 1.1 percent. should see significant growth over the nextFigure 42: Non-performing loan portfolio development (end of period figures) two years, foreign1,400 10 investors continue 1,320 1,260 1,2701,2001,000 8.6 8 to be limited in 800 7.1 6 their investment 600 6.2 561 497 4 opportunities in this 400 434 433 market. ” 2.5 2 200 1.6 1.1 1.1 0 0 2005 2006 2007 2008 2009 2010 Mar-11 NPL (CNY bn) - Left Axis NPL Ratio (%) - Right AxisSource: China Banking Regulatory Commission (CBRC)Figure 43: Asset quality indicators: Chinas major banks120 2.8 107.1 91.7 80.1 80 2.0 70.8 1.8 65.2 64.5 40 1.3 26.6 24.7 1.1 1.1 1.0 0 0.5 Agriculture Bank Industrial and China Construction Bank of of China Commercial Bank Bank Communication* of China NPLs June 2010 (CNY bn) NPLs March 2011 (CNY bn) NPL Ratio March 2011 (%)Source: Companies’ Q1’11 earnings releases, CapitalIQ*For Bank of Communication, the 2010 figure of CNY 26.6 billion is as of September 201058  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • 2011 Outlook ratio may increase to 5 percent by 2013 Furthermore, Chinese banks are –According to industry analysts, China’s (from around 1.1 percent today). on the whole – quite profitable, wellstimulus-driven loan growth during 2009 capitalized, and proving capable However, investors should not expectand 2010 may significantly increase of absorbing most future risks to debt sales opportunities to increaseNPLs over the next two to three years. their portfolios. That said, regulatory significantly in the near-term. In large part,It is expected that – as the government initiatives and deteriorating credit this is due to regulatory restrictions thatcontinues to tighten monetary policy risk profiles in certain segments may require any locally-originated NPLs heldand curb lending to stem inflationary still present opportunities to foreign by state-controlled banks to be sold onlypressures – several borrowers will investors. to domestic investors, thereby limitingeventually default. As a result, Moody’s the overall size of the buyer pool.estimates that the Chinese banks’ NPL Global Debt Sales  |  59© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Segment opportunities: to UDICs and to cease additional funding tightening and the risk of a fall inIndeed, foreign investors may want to if adequate security is not provided. property prices.focus on three areas where significant Real estate: Given the high levels ofopportunities exist: Urban Development lending growth in the real estate sector Regulatory developments:Investment Corporations (UDICs), real during the last two years, this is also For domestic buyers, recent regulatoryestate loans, and off-balance sheet an area that is expected to experience initiatives will likely increase the paceexposures. increased NPLs. The government has of activity for loan transactions. ForUDICs: According to industry experts initiated several corrective measures in instance:and Chinese regulatory authorities, 2010 and 2011 (such as restricting banks’ • During the first half of 2011, the UDICs represent a potential source of exposure to real estate and increasing CBRC, the Ministry of Finance (MoF),NPLs going forward. These specialized interest rates), but many pundits still and the National Development andinvestment vehicles used the believe there is a real risk of a real estate Reform Commission (NDRC) jointlygovernment stimulus measures of 2009 bubble forming, which will ultimately announced plans to dispose ofand 2010 as an opportunity to expand lead to a fall in real estate prices, and CNY2–3 trillion worth of localborrowing. As a result, total government potentially trigger significant defaults. government loans in June anddebt reached CNY14.4 trillion as This rebalancing may already be September 2011. The regulatoryof December 2010, representing underway: according to the National bodies contend that there is an30 percent of total bank loans. Bureau of Statistics of China, the sales increasing possibility that theseAccording to an April 2011 report price of newly constructed residential loans will become non-performing. Inby Standard & Poor’s, as much as buildings decreased in nine out of addition to transferring part of these30 percent of bank loans are expected 70 cities surveyed in May 2011, as loans to new entities, they intend toto turn sour over the next few years, compared to January 2011, when only allow both provincial governmentswith UDICs making up the largest three cities registered a decline. and city-level governments to issueshare of non-performing assets for bonds. Off-balance sheet credit exposure:the industry. A more recent report by Chinese banks have a significant • The CBRC has suggested that it may UBS reinforced that view, suggesting exposure to entrusted loans (where ask banks to segregate the NPLsthat local government debt could be banks merely act as a facilitator of UDICs, and dispose of them inas high as 30 percent of GDP and may between two parties and provide a order to clean their balance sheet.generate around CNY2–3 trillion in non- guarantee). As of December 2010, However, the opportunities to buyperforming loans in the future. As of these off-balance sheet, risk-weighted such NPLs will be restricted tothe end of last year, UDICs already had assets represented approximately domestic investors.more than CNY8 billion in overdue debt CNY5.32 trillion or 5.6 percent of(although 5 percent of these companies • In the second half of 2010, the CBRC total banking assets. But there is little introduced a new regulation layingwere also using new bank borrowing to sign of a slowdown in this area: in therepay existing loans). out the guidelines for the transfer of first quarter of 2011, Chinese banks loans. And while this regulation is notIn response, the government has facilitated CNY320 billion of loans applicable to NPLs, it does lay outannounced plans to limit banks’ between companies. guidelines to facilitate the smoothexposure to UDICs, prohibit municipal Interestingly, more than 40 percent of transfer of loans. For instance, thegovernments from providing guarantees the entrusted loan deals announced law made it mandatory to obtainfor bank debt, and nullify all existing since January 2010 have been granted the consent of the borrower and theguarantees. In addition, the China to property developers, who are guarantor prior to any loan transferBanking Regulatory Commission (CBRC) themselves facing increasing challenges transaction being initiated.has ordered banks to reassess all loans due to government’s monetary60  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KoreaKorea continues to be one of Asia’s most to Project Financing (PF) loans, whichactive NPL markets, having completedmore than 20 deals worth KRW6,178 accounted for only 3 percent of the banks’ loan portfolios, but represented “The Korean marketbillion (USD 5.8 billion) in 2010. Already around 26 percent of their total will see increasedthis year, the market has seen at leastfive deals close worth KRW1,243 billion distressed debt. As a result, South Korea’s Financial Supervisory Service activity in the(USD 1.17 billion), leading to expectations (FSS) has advised Korean banks to short term, driventhat this pace is likely to continue in theshort to medium term. remove KRW1.35 trillion (USD 1.2 billion) worth of distressed loans related to by the sale ofKorean banks, however, have seen a PF through write-downs or sales, and suspended bankssignificant rise in NPLs over the past KRW2.29 trillion (USD 2.15 billion) worth through leasing and auctioning. and assets currentlytwo years. In large part, this is related being consolidatedFigure 44 into bad banks. ” 30.0 2.5% 1.98 1.90 25.0 2.0% 20.0 1.5%KRW trillion Percentage 1.24 1.14 15.0 24.8 25.9 1.0% 10.0 0.72 14.7 16.0 0.5% 5.0 7.7 0.0 0.0% 2007 2008 2009 2010 2011 1Q NPL Balance NPL RatioSource: Financial Supervisory Service, Korea Korean banks, however, have seen a significant rise in NPLs over the past two years. In large part, this is related to Project Financing (PF) loans, whichaccounted for only 3 percent of the banks’ loan portfolios, but represented around26 percent of their total distressed debt. Global Debt Sales  |  61 © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 45: Asset quality performance 1.5 percent in April 2011, they also urged banks to provide support to construction10,000 4.0% companies after five of the nation’s 3.64% 3.33% biggest builders sought credit protection 3.0% from the court. 7,677 6,811 Anticipating a spike in household loan defaults, the FSS governor reiterated his 5,000 2.0% 1.65% concern regarding the pace of growth 1.20% 1.61% in household credit in June 2011. In 1.0% response, the FSS has undertaken a 1.07% 1,878 1,987 number of important steps including: 244 284 • instructing financial services 0 0.0% companies to hold higher provisions Busan Hana Woori for real estate project financing; NPL (USD m) - 2010 NPL (USD m) - Q1 2011 • hinting at the potential for the NPL Ratio - 2010 NPL Ratio - Q1 2011 introduction of policies to suppressSource: Company filings excessive lending for households; • warning credit card firms to curb overly aggressive asset growth in theKey drivers influencing the supply of trillion to KRW6.37 trillion under the household sector;non-core/non-performing loans FSS’s guidance since December 2010. • outlining plans to tighten rules on The banks’ loan portfolios (particularly For its part, South Korea’s Financial subordinated bonds sold by savingthe NPLs) will continue to evolve under Services Commission (FSC) is also banks; andcontinued pressure from regulatory taking steps to reduce the level ofauthorities and the imposition • introducing stricter capital adequacy distressed debt in the Korean market.of stringent liquidity and capital ratios requirements for saving banks. It plans to limit lending per borrowerrequirements. to KRW10 billion (USD 9 million) orGiven the conditions facing major 20 percent of their equity capital and Real estate outlooklenders, the FSS has announced that it restrict savings banks from investing in With a large percentage of 35–55 yearwill initiate an inspection plan to ensure risky assets. olds already owning homes in Korea,that banks set aside enough provisions real estate prices are likely to come However, the FSC is also trying to under severe pressure due to weakeningfor real estate project financing. And carefully balance economic stability demand. Indeed, some analysts suggestwhile details of the inspection plan have with a reduction in debt. So while that the Korean real estate bubble couldyet to be finalized, 18 domestic banks Korean regulators instructed banks to burst in the same way as Japan.have already reduced their distressed reduce their bad-debt ratios to belowproject financing exposure from KRW7 .762  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Outlook banks (Kookmin Bank, Woori Bank, segments (including commercial banksWith eight saving banks suspended Shinhan Bank, Korea Development and insurers). While the total size ofin the first six months of 2011 due to Bank, Hana Bank, Industrial Bank of the fund is not clear, the FSC expectsheavy exposure to the construction Korea and agricultural cooperative to receive KRW710 billion (USD 631loan market, savings banks are under lender Nonghyup) joined forces with million) per year from deposit insurancegrowing pressure to maintain their asset UAMCO Ltd (a privately held asset fees. Separately, Kim Seok-dong,quality. As a result, the pace of NPL or management corporation) in June Chairman of the FSC, suggested thatportfolio disposals is expected to gain 2011 to establish a ‘bad bank’ known the government is planning to spendmomentum through 2011 as authorities as the Project Financing Stabilization KRW10 trillion to support the savings-sell the NPL portfolios of the suspended Bank. By forming a private equity fund bank sector.banks. under UAMCO, the bad bank expects According to the FSC, Korea’s two major to initially buy KRW1 trillion (USD 922As recently as June 2011, state-run asset management companies will also million) worth of non-performing PFKorea Deposit Insurance Corp. (KDIC) start to buy NPLs in their own right. loans at a 50 percent discount to markethad initiated the process of selling State-run Korea Asset Management price. According to senior FSC officials,four of the suspended banks (namely Corp (Kamco) will purchase KRW3.5 by the end of the first half of 2012, theBusan Savings Bank, Jeonju Savings trillion of distressed real-estate PF loans bad bank is expected to purchase aBank, Daejeon Mutual Savings Bank from small lenders, while UAMCO is further KRW2.5 trillion (USD 2.3 billion)and Bohae Mutual Savings Bank). planning to buy KRW8 trillion worth of in troubled real estate loans. The bankAnd while the sale method is – as NPLs. Expecting the Korean bad loans expects to turn a long-term profit byyet – undisclosed, experts believe that market to expand in the future, UAMCO investing capital to complete unfinishedauthorities will consider selling them recently announced that it is planning an projects and selling them on the market.either individually or in a package. It IPO in 2013 to fund its acquisitions. However, given the growth in defaults inis also expected that they will be sold project finance lending that is expected South Korea’s lenders are alsounder a purchase and assumption (P&A) over the next two years, the banks are becoming more active in the market,deal requiring a healthy entity to buy the proposing to set up more bad banks of a with the four largest (KB Financialdistressed bank(s). It should be noted similar size in the future. Group Inc., Woori Finance Holdingsthat the core assets of one suspended Co., Shinhan Financial Group Co. andbank (Samhwa Mutual Savings Bank) As part of their own reforms, the South Korea Securities Finance Corp) showingwere sold to Woori Finance Holdings Co Korean Parliament passed a bill in March interest in acquiring loan portfolios fromalready this year. 2011 to create a fund that will support small saving banks. struggling saving banks. The fund isTargeting non-performing project partly financed by deposit insurance Table 46 represents a summary of thefinance loans in particular, seven local fees collected from various financial main transactions in Korea in 2011.Table 46 OPB OPB Seller Tranche Date Buyer KRW millions USD million Kookmin bank Multiple 212,500 200 17-Feb Woori F&I Kookmin bank Multiple 275,500 259 1-Jun Woori F&I/UAMCO Hana bank Multiple 267,000 251 21-Apr Confidential Woori bank Multiple 257,900 242 2-Jun Woori F&I Woori AMC Multiple 231,000 217 12-Apr Confidential 1,243,900 1,170 1 USD = KRW1063.6Source: KPMG market research. Please note that this information has not been verified. It is not intended to be a full list of all sales, but rather a selection of some publicly known sales that KPMG is aware of. Global Debt Sales  |  63© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • JapanThe Japanese banking sector seems Overall, the debt sales market hasto be stabilising gradually with sound2010 financial results and lower losses not seen much activity in recent times apart from small deals involving “Japan’s debton NPL disposals. However, it may have regional players and some secondary sales market has –to bear the financial brunt of the March2011 earthquake, which is expected to transactions by players trying to exit the market. However, investor understandably –have an economy wide impact at least interest in such deals remains and any been quiet sincein the short term. large transactions going forward are expected to attract many investors. March 2011, but itBanks announced improved earningsfor the fiscal year 2010, on account In April 2011, the Deposit Insurance is clear that theof lower losses on NPL disposals as Corp of Japan set up the Second Bridge ­long-term impactwell as higher income from equity andbond investments but regional banks Bank of Japan to take over deposits of up to JPY10 million and healthy loans of the naturalare facing relatively higher NPLs. of the Incubator Bank of Japan which disasters will beAlthough, there is no real pressure fromthe government to sell or dispose of went bankrupt in September last year. It will be three years before the bank to decrease theNPLs, as the focus remains on helping can be sold off in the market but the quality of existingthe victims of the natural disaster,the market could still expect a few next few months could see the bank’s NPLs being sold off to Resolution and loan portfolios inportfolios being put up for sale sooner Collection Corp. the country. ”or later.Figure 47: Banking sector NPLs300 10.0% 8.7%250 8.0% 7.2%200 284 6.0% 5.1%150 207 4.0%100 2.9% 138 2.4% 1.8% 1.7% 1.9% 1.9% 1.9% 1.5% 1.5% 1.5% 1.4% 1.5% 2.0% 50 76 62 52 50 50 47 40 41 41 39 43 48 0.0% Mar 02 Mar 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 NPLs (JPY bn) NPL Ratio (%)Source: Financial Services Agency64  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Global Debt Sales  |  65© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 48: Asset quality performance moves back to a positive growth rate of approximately 2 percent, led by rapid2,000 3.0% reconstruction efforts. 2.7% 2.6% 2.5% Outlook1,500 2.3% 2.5% 2.3% It was expected that the banks’ may be 2.5% 2.0% forced to review their NPLs and dispose 2.2% them once the ‘Moratorium Law’1,000 2.1% 1.5% 1.9% expired by end of March 2012 (one year 1,629 extension announced in Dec of 2010), 1.8% 1,410 1,572 1.0% but so far banks have not made any 1,862 500 1.3% 1,395 announcements on this subject. 1,766 1.4% 659 680 0.5% Experts expect the six largest banks 128 112 214 217 to have stable gross NPLs (around 0 0.0% CMTH Sumitomo Resona Mizuho SMFG MUFG 2.5 percent) over the next two years Trust but smaller regional banks may report higher NPLs after being badly affected NPL Amount – Q4 2010 (JPY bn) NPL Amount – Q1 2011 (JPY bn) by the earthquake. Several factors NPL Ratio – Q4 2010 (%) NPL Ratio – Q1 2011 (%) including the affect of the earthquake,Source: Macquarie Research Feb 2011 negative 2 percent economic growth expected for financial year 2011 and the credit being extended to the TokyoReal estate market flat throughout the year as foreign Electric Power Company (TEPCO) areDespite the magnitude of the capital investment remains weak due expected to have a negative impact onearthquake in Japan, the real property to uncertainty around the nuclear the quality of loan portfolios.damage is only about 0.02 percent of radiation issues. Outlined below is a summary of theJ-REITs (Japan’s primary real estate Growth in the sector is expected to main transactions in 2011.players) total combined asset value, rebound in 2012–13, when the economymuch lower than what was originallybeing anticipated. However, price Table 49: Outlined below is a summary of the main transactions in 2011.decline in the areas directly affected bythe earthquake has been larger in the Seller Buyer Asset type Face value Completion daterange of 10–15 percent. Japanese bank Various Sub-performing Loan USD 200–300m 6/30/2011Further, real estate cap rates that Lehman Various Sub-performing Loan USD 1bn Prospectiverecovered marginally in the beginning Source: KPMG market research. Please note that this information has not been verified. It is not intended to be a full list of sales, butof 2011 are now expected to remain rather a selection of some publicly known sales that KPMG is aware of.66  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • AustraliaThe Australian NPL market enjoyed customers produced by Fujitsu and J.P .an upturn in activity in the first quarterof 2011, with distressed and leverage Morgan, residential loan delinquencies also continue to rise. And while there are “Increased portfoliotransactions driving secondary loan certainly indications that the delinquency debt sales formarket volumes. But despite this upturn,volumes transacted in the Australian levels may be stabilizing, any upward pressure on interest rates could see a Australia will largelyNPL market remain relatively thin when return of volatility in the market. depend on ancompared to many overseas markets.Indeed, trading is largely dominated by To date, Australian banks and other increased willingnesssingle name asset sales, with portfolio lenders have largely resisted portfolio sales despite the increasing NPL values from lenders todeals outside of retail NPL books lookingparticularly scarce. and delinquencies, looking instead to become moreInterestingly, NPL values on lender recoup losses by enhancing their debt recovery functions. For the big four proactive aroundbalance sheets are at a higher level than banks, there is also a concern of damage their balance sheetthe previous year, at least for the big fourbanks (see Figure 50). But the regional to their brand that may result from a potential sale. Instead, they are looking management, and alenders also seem to be experiencing to replenish loan books, particularly given significant narrowingsimilar trends, which have – in somecases – been further exacerbated by the rundown of loan assets that resulted from widespread deleveraging during of the bid/offerrecent natural disasters in some states. the GFC. spread betweenAccording to a survey of 26,000 bank buyers and sellers. ”Figure 50: NPL amounts and % of total loan books 7,000 1.7% 1.5%6,000 1.4% 1.0%5,000 1.0% 0.9% 1.3%4,000 0.8%3,0002,000 2.7%1,000 1.8% 0 CBA ANZ NAB Westpac Macquarie Dec-09 Dec-10Source: Capital IQ Global Debt Sales  |  67© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • However, the market has cheered the while – to date – the market has mainly this dynamic is a healthy precursor touptick in secondary activity, as it is been characterized by single name eventual portfolio sales.widely believed to reflect a changing transactions involving highly syndicated Some notable transactions in the firstmindset for Australian lenders who are exposures (often where one bank looks quarter of 2011 include:starting to recognize the benefits of to exit its position which triggers otheroffloading problematic exposures. And banks to also sell down), we believeTable 51 Recent transactions Redcape Property Group With lenders rumored to be exiting at around 90 cents in the dollar Colorado Group With senior bank Mizuho Bank joining other senior lenders such as Unicredit, ANZ, and Bank of Scotland International in selling its AUD29m hold at around 45 cents in the dollar RiverCity Motorway With lenders in the stressed group continuing their exits at around the low 40s I-Med Holdings The private equity-owned company continued to sell at around 70 cents in the dollarSource: Debtwire & Loan ConnectorInitially, the bulk of portfolio sales inAustralia is expected to come from However, for an upswing in portfolio debt sales to be realized in 2011, the A recent exampleforeign banks seeking to exit non-core market will need to see an increased is GE Moneyoperations. A recent example is GEMoney which sold off a performing willingness from lenders to become more proactive around their balance which sold offmortgage portfolio worth approximately sheet management, and a significant a performing mortgageAUD5 billion. And while this wasprimarily a performing portfolio, the narrowing of the bid/offer spread between buyers and sellers. portfolio worthinterest levels demonstrated by the approximatelymarket were high and act as a goodgauge for the regional buyer appetite for AUD5 billion.Australian transactions.68  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • ThailandSince our last edition of this publication a stock of settled and impaired assetsin January 2011, the portfolio market inThailand has seen remarkable growth, (comprised of 15,201 cases with a book value of THB775 billion plus) and more “Thailand enjoyedwith two banks conducting auctions than 141,000 non-performing assets incredible growthand a number of other parties exploringsales. This will likely see more than 20 (with an approximate value of THB77 billion). in debt sales in thebillion Thai Baht (THB) come to market And while there have been a number of first half of 2011, andin the second half of 2011. Other bankswe have spoken to indicate possible buyers expressing interest in Thailand expectations are hightransactions in the fourth quarter after over the past 12 months, the portfolio market is likely to continue to be for continued levelsthe result of the recent governmentelection sinks in. dominated by those players who have of activity throughThere has also been a considerable an established AMC with servicing capabilities in Thailand. It is worth the rest of this year.”rise in single credit transactions/ noting that, while it is not mandatorysecondary trades, a number of which – for portfolios to be traded exclusively toaccording to market feedback – were AMCs (from originating banks), therealready completed in the first quarter are a number of benefits available toof 2011. both buyers and sellers if this is the case, such as tax exemptions (see TableThai market watchers are also closely 52) and certain subrogation rights forfollowing the plans for the closure the buyer (in relation to legal actionsthis year of Thai Asset Management already commenced by the seller).Company (TAMCO), a state agency However, these benefits are applicablecreated in 2001 to tackle growing NPLs. primarily when the originating bank sellsAccording to TAMCO press releases, to an AMC as opposed to secondarythe company will have a liquidator sales. Therefore, most selling banksappointed to manage the orderly sale prefer to sell to AMCs, especially inand resolution of remaining assets. relation to retail/consumer and SMEThe TAMCO website shows that, as at debt portfolios.31 December 2010, the company had Since our last edition of this publication in January 2011, the portfolio market in Thailand has seen remarkable growth, with two banksconducting auctions and a number of other parties exploring sales. Global Debt Sales  |  69© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Table 52 Corporate income Specific Corporate income Specific business Value Transfer of NPLs tax on initial transfer business tax tax on subsequent tax on subsequent added tax (see note 1) on initial transfer recoveries recoveries Bank sells NPLs to AMC Exempt Exempt Exempt (See Note 2) Taxable Exempt Bank sells NPLs to non-AMC Taxable (See Note 1) Taxable (See Note 1) Taxable Taxable Exempt AMC sells to AMC Exempt Exempt Taxable (See Note 2) Taxable Exempt AMC to non-AMC Taxable (See Note 1) Taxable (See Note 1) Taxable Taxable ExemptNote 1: If the NPLs include interest owed by the debtor, the bank (as transferor) is liable for Corporate Income Tax (CIT)/Special Business Tax (SBT) based on the amount ofthe interest that is included within the consideration paid for the NPLs. However, from a CIT perspective it is likely to be tax-neutral, given that the debt is written off and thebad debt provision reverses.Note 2: CIT - Net profit of AMC from administration of NPLs purchased or transferred from a bank or AMC (transferor) that owns more than 50% of the shares with rightsto vote in the AMC will be exempted from CIT equal to the amount of any dividend that the AMC pays to the transferor. However, for this exemption to apply, there must bean agreement between the AMC and the bank/AMC that they will forgo deductions for other expenses equal to the amount of dividends received. It is likely to be rare foran AMC to sell to another AMC in a circumstance where the transferor holds more than 50% of the voting shares in the transferee AMC. For that reason, the more likelyoutcome is that an AMC sale to an AMC is often going to be taxable.Note 3: The formula to calculate the amount of the interest that is subjected to CIT/SBT is complicated and is based on a methodology that results in pro-rating cashcollected into principal and interest. From a practical perspective, tax can be payable notwithstanding an economic loss is incurred in managing a portfolio of NPLs.Source: Public sources and KPMG analysisThe market for larger transactions in to actually be around three months. degree of vendor finance typicallyThailand continues to be dominated Significantly, one of the larger local been available.by public auction ‘sealed cash bid’ buyers, Bangkok Asset Managementprocesses. However, there have been Company (BAM), continues to propose NPL figuresa number of smaller bi-lateral deals in an extended settlement period, typically As of March 2011, gross NPLs forthe last 12 months, primarily made up over several years. It is also worth commercial banks stood at THB292of smaller value transactions. And while noting that (to date), local banks have billion or 3.49 percent compared tosecondary sellers often pursue shorter not been willing to undertake financing THB338 billion or 4.58 percent as attimeframes, typical closing periods tend for portfolio acquisitions, nor has any September 2010 (see Figure 53).70  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 53: Gross NPL – Thai commercial banks90,000 10.00%80,000 9.00% 8.00%70,000 7.00%60,000 6.00%50,000 5.00%40,000 4.00%30,000 3.00%20,000 2.00%10,000 1.00% 0 0.00% L B RN B B Y IB K BT B i O IN B BC A IT ha BA BB AN EG LH KT SC TM O SC ED SC AK tT IC KO U B TB M TI CR M N ar SI AT CI Ch TH KA KI an St NPL Amount at 31 March 2011 NPL Amount at 30 Sept 2010 %NPL at 31 March 2011 %NPL at 30 Sept 2010Source: Bank of Thailand web site Global Debt Sales  |  71© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • TaiwanTaiwanese banks have seen a year-on-year to reach TWD110.3 billion insignificant reduction in their NPLassets over the past year as the asset April 2011 – the lowest level since 1999. This brought the average NPL ratio of all “Largely due toquality of Taiwanese banks continued domestic banks down to 0.54 percent, regulatory measuresto improve through the first half of2011. In large part, this has been due to as compared to 1.02 percent a year earlier. What’s more, their average aimed at reducingthe banks’ own internal focus on risk coverage ratio also improved the number of ‘atmanagement as well as a number ofrecent regulatory initiatives such as the dramatically, rising to 176.4 percent in April 2011 versus 102.5 percent a risk’ loans held byimposition of limits on real estate and year earlier. local banks, Taiwan ismortgage lending. expected to enjoy anIn fact, the total NPLs of the domesticbanks fell more than 42 percent increase in loan sales over the next year. ”Figure 54: Non-performing loan portfolio development200 1.2% 1.0% 1.0% 0.9%175 1.0% 0.9% 0.8% 0.8%150 0.8% 191 0.7% 184 0.7% 175 168 0.6% 160 0.6% 0.6%125 152 0.6% 0.6% 144 0.5% 138 122 119 119 113 110100 0.4% 0 0 10 0 10 10 0 0 0 11 11 1 1 -1 r-1 r-1 -1 l-1 -1 -1 -1 n- b- n- g- p- ar ay ov ct ec Ap Ju Ap Ja Fe Ju Au Se M O M N D Total NPLs of domestic banks (NT$b) Avg. NPL ratio of domestic banks (left axis)Source: Financial Supervisory Commission72  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 55: Average NPL coverage ratio of domestic banks180% 176% 172% 162% 158% 159%150% 142% 136% 129% 124% 119%120% 113% 108% 102% 90% 0 0 0 0 0 10 0 0 0 1 1 1 1 -1 -1 -1 r-1 r-1 -1 -1 -1 -1 -1 -1 -1 p- ar n b ay ov n l g ct ec Ap Ju Ap Ja Fe Ju Au Se M O M N DSource: Financial Supervisory Commission2011 Outlook housing prices continue to increase, As a result, Taiwan’s FinancialTaiwan’s banks have also been active in Taiwan’s regulators are hoping to pour Supervisory Commission (FSC)conducting portfolio sales. According some water on the market by tightening announced a series of new measuresto some analysts, in the first half of the lending norms for borrowers and in March 2011 aimed at further reducing2011, banks (including China Trust, ANZ, enforcing higher provisioning. There the number of loans that could be atStandard and Chartered Bank) sold is just cause for concern: Taiwan’s risk. These measures included:loan portfolios worth approximately property prices continued to increase • a 45 percent risk weighting on new TWD 45 billion (USD 1.5 billion). The through 2010, largely driven by record bank loans for owner-occupiedvast majority of these loans comprised low interest rates. And while the residences secured by residential realunsecured consumer loans, a trend that national average house price increase estate;is expected to continue into the second was 12.7 percent during the yearhalf of the year. ended June 2010, a number of cities • a 100 percent risk weighting for loans experienced a much higher growth rate on properties that do not qualify as anIn particular, the real estate sector (Kaohsiung increased 34.3 percent and owner-occupied residence;could witness an increased number Taipei markets rose 20 percent in theof portfolio deals in 2011. Indeed, as same period). Global Debt Sales  |  73© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • One significant • a reduction of construction-related loans to less than 30 percent of a protection and risk management of domestic banks as part of its example is the bank’s total outstanding loans; and examination of banks’ overall businessLand Bank of Taiwan • an obligation to conduct an onsite operations.which, with mortgages appraisal for real estate properties involved in transactions. Combined, these changes will likely result in an increase in loan sales overaccounting for around The FSC is continuing to press the next year. For example, several36 percent of the total those banks with higher NPL ratios banks will need to reduce their exposure to the real estate sector.loan portfolio, has to explore measures that will lower these numbers (such as asset sales) to One significant example is the Landrecently announced improve asset quality. Starting in 2011, Bank of Taiwan which, with mortgages accounting for around 36 percent ofthat it will reduce the FSC also implemented a financial examination rating system for domestic the total loan portfolio, has recentlyits mortgage loan banks to standardize risk-based announced that it will reduce its mortgage loan exposure by 10 percentexposure by 10 percent examinations. As a result, the FSC can now evaluate financial soundness, this year. Clearly there is more activitythis year. regulatory compliance, consumer on the horizon. Figure 56: Selected banks’ property-related loan exposure 2,100 60 51.0 2,000 50 38.7 2,000 40 1,900 30 1,800 25.5 20 1,780 1,700 10 1,700 1,600 0 Bank of Taiwan Land Bank Taiwan Cooperative Total Outstanding Loans (TWD bn) – left axis Share of property-related loans (%) Source: Company reports, CENS.com74  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • IndonesiaIndonesian banks are in a fairly Indonesian GAAP (PSAK No. 55R oncomfortable situation in comparison totheir global counterparts. Indeed, the “Financial Instruments – Measurement and Disclosure”), for which the banks “While Indonesiarecent global economic downturn has now determine their allowance for had not seen anyhad little impact on most Indonesianbanks, which have enjoyed lower NPLs impairment loss based on individual and collective provisioning instead of using NPL sales in theand strong loan growth overall. Bank Indonesia regulations. It should be first four monthsSince 2006, gross NPLs for most major noted that the model used for collective provisioning was introduced last year of the year, thereIndonesian banks have remained belowthe regulatory limit of 5 percent. As and therefore has a limited track record, are indications thatoutlined above, average NPL ratios for but there is a possibility that the NPL figure might increase in 2011. state-owned bankskey banking segments are around 3 to3.4 percent. It should be noted however On an aggregated level, foreign-owned may initiate sales inthat the decrease in NPL (on a net banks have dramatically reduced the near future.”basis) might partially be attributed to their NPL coverage (which had beenthe impact of the first adoption of a new upward of the 5 percent limit imposedFigure 57: Commercial banking sector NPLs60 14.0% 12.2% 12.0%50 10.0%40 7.5% 7.6% 8.0% 6.8%30 6.1% 6.0%20 4.1% 4.5% 3.2% 3.3% 2.6% 2.8% 4.0% Since 2006, gross10 2.0% NPLs for most 0 39 28 30 25 53 48 41 42 48 45 51 0.0% major Indonesian banks 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1 have remained below 2011 Non Performing Loans (IDR bn) NPL Ratio (%) the regulatory limit ofSource: Bank Indonesia 5 percent. Global Debt Sales  |  75© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 58: Asset quality performance (Gross NPL) 6.0% 5.0% 5.0% 4.9% 4.8% 4.6% 4.3% 4.0% 3.8% 3.5% 3.5% 3.5% 3.2% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 2.7% 2.4% 2.0% 2.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 0.0% BCA BRI Bank Danamon Bank Mandiri BNI Indonesia FY08 FY09 FY10 FY11e FY12eSource: Company reports; Morgan Stanley ResearchFigure 59: NPL ratios of financial institutions Historically, NPL 9% sales by state- 8% owned banks have been 7% 6% difficult due to strict requirements for aPercentage 5% 4% number of government 3% approvals in order for the 2% sale to proceed. 1% 0% 0 0 10 11 1 0 0 0 10 0 10 10 1 -1 -1 -1 -1 -1 r-1 -1 l-1 n- g- p- - n- ar ar b ay ov ct ec Ju Ap Ja Fe Au Se Ju M M O M N D Commercial banks State-owned banks Foreign-owned banks Other banksNote: Other banks include: Foreign exchange commercial banks, non-foreign exchange commercial banks,regional development banks and joint venture banksSource: Indonesian banking statistics76  |  Global Debt Sales © 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • on incumbent banks) over the last six While commentators expect the 24 percent. However, total loan growthmonths to a level more comparable to provision treatment to remain robust is increasing faster than the NPL growththeir peers in the Indonesian market so as to avoid wealth loss to the state, rate (estimated to remain well belowspace. the new regulation is likely to make NPL the regulatory limit of 5 percent over the sales an easier choice for state-owned next two to three years), leading to anInterestingly, in the first quarter of banks. overall reduction of the NPL ratio.2011, the country’s central bank (BankIndonesia) began to encourage banks to And while the market did see a rise inincrease lending and attain a minimum Property market growth back NPLs at the beginning of the year, it isloan-to-deposit ratio of 78 percent. on track still too early to say if this will be seenMany industry experts have voiced Indonesia’s real estate sector outlook as a threat by authorities, particularly inconcern about this however, citing the seems stable and positive. In large part, light of the positive outlook predicted bypotential to lead to an increase in bad this is due to the growing strength of market analysts.loans and reduce margins for lenders. the economy and the rising purchasing power of middle-upper income groups. It should be noted that, given the banks’Regardless, the financial industry And while the residential property prudent lending practices and well-regulators remain confident about the market remained weak overall, capitalized systems, there have beenstability of the overall system. continuous price increases have been no NPL sales in the sector so far this the result of the increasing cost of year. However, should the proposedRegulatory changes for NPLs regulatory changes referred to above construction materials, labour costs andHistorically, NPL sales by state-owned occur, then it is likely that one or more higher permittance fees.banks have been difficult due to state-owned banks will investigate astrict requirements for a number of Surveys show that the Residential sale process in the near future.government approvals in order for the Property Price Index (RPPI) for thesale to proceed. first quarter of 2011 had increased to 4.48 percent (up from 2.53 percent inHowever there are now proposals toamend these regulations, which (if the same quarter last year). But it is Surveys show thatapproved), should allow for a more generally believed that there continues to be reasonable demand for residential the Residentialstreamlined process. For example,under the current system, the Financial properties, despite unfavourable Property Price IndexMinister must provide approval for the interest rate conditions. (RPPI) for the first quartertreatment of an NPL portfolio ownedby a state-owned bank. But under the Outlook of 2011 had increased toproposed revisions, receivables will Indonesia is expected to see strong loan 4.48 percent (up frombe allowed to be solved without suchapproval and, instead, will be dictated by growth in the region of 20–25 percent through 2011. In the first four months of 2.53 percent in the samecompany policy. 2011, loan growth stood at a staggering quarter last year). Global Debt Sales  |  77© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • IndiaThe Indian NPL portfolio market level of NPLs held by banks. Indeed, thecontinues to remain relatively active,albeit with mixed results as a number of estimated NPLs of all government-run banks (state and federal) are reported to “India’s banks areportfolios failed to trade in recent times. have topped INR680 billion (USD 15.3 expected to seeIn India, banks typically look to sell billion) as of December 2010 with many of the problem loans found within the an overall increaseNPLs that have been non-performingfor two years or more, primarily to agricultural sector. in NPL ratios ingenerate liquidity. However, most banks In its 2010 banking report, the RBI the near future,appear to prefer selling older NPLs (inexcess of five years) in order to reduce highlighted NPL management and liquidity as two of the most critical but ongoing gapstheir gross NPL numbers and add to the factors for banks in the coming years. The in expectationsbottom line. authority also predicts a deterioration in the quality of restructured advances. And between buyersThere have been a number oftransactions that have either occurred while RBI relaxed provisioning norms for and sellersor been announced in 2011, however banks in April 2011, they also increased the provisioning for bad loans by up to continue to houndthey have all been quite small withprincipal balances of less than USD 50 10 percent. the market. ”million. And while several banks (UnionBank of India, Central Bank of India,Dena Bank, Bank of Baroda, Bank ofIndia, State Bank of India, and UCO Figure 60: Banking-sector NPLBank) are often front runners for sales,the closing rate is actually somewhat 900 6.0%low due to valuation gaps between the 5.2% 800vendors and buyers. 5.0% 700According to the latest data released bythe Reserve Bank of India (RBI), gross 600 3.5% 4.0%NPLs of commercial banks reached 500INR847 billion (USD 19 billion) at the end 2.7% 3.0% 2.4% 2.4% 2.5%of March 2010, a 24 percent increase 400over 2009. That said, NPL ratios have 300 580 2.0%continued to decline over the last few 512 503 200years with the NPL ratio standing at 558 682 847 1.0%2.4 percent at the end of March 2010, 100versus 5.2 percent in March 2005. 0 0.0%However, given the increase in bad debtsfrom state-run banks (reported to be 2005 2006 2007 2008 2009 2010approximately INR300 billion (USD 6.7 NPL (INR bn) NPL Ratio (%)billion) as of December 2010, the marketmay begin to see another rise in the Source: Reserve Bank of India (financial year ending 31 March)78  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Figure 61: Asset quality indicators adequacy norms under Basel) are selling their NPL portfolios to AMC at200 7.0% 6.5% a discount. This trend has been further influenced by the RBI’s objection to 178 6.0% the ‘strong-arm tactics’ employed by 163150 5.0% a number of institutions in recovering 4.3% loans, resulting in more banks being 4.0% inclined to sell their NPLs.100 3.3% 3.3% In fact, commercial banks and AMCs 96 93 3.0% 3.0% are jointly developing standardized 2.3% 2.4% processes for auctioning stressed 1.7% 1.7% 2.0% 2.0% 50 1.5% assets in the banking sector in an effort 2.0% 1.9% 45 1.8% 1.4% to revive the secondary market for bad 1.4% 1.0% 25 28 32 27 loans. And while this is widely expected 19 21 14 16 20 20 18 to expedite the sales process, growth 0 0.0% State ICICI Bank of Punjab Union IDBI Syndicate HDFC of the bad loan market may in fact Bank of India National Bank of Bank slow down as RBI’s recent guidelines India Bank India begin to restrict the AMCs’ ability to NPL (INR bn) – 2009 NPL Ratio (%) – 2009 convert such loans into equity, thereby NPL (INR bn) – 2010 NPL Ratio (%) – 2010 making it more difficult to monetize them. Furthermore, the valuation gapSource: Reserve Bank of India (financial year ending 31 March) between banks and AMCs continues to remain a key challenge in NPL transactions. Besides selling NPLs, banks are also seeking to reduce their non-performing A number of Fully 81 percent of loans in the Indian banking sector are thought to be inventories by organizing recovery camps throughout the country. These key bodies also comprised of low and moderately camps provide a forum for borrowerssupport the NPL risky loans. And while Indian financial institutions are required to allocate 40 to directly discuss their repayment problems with senior bank executivesrecovery including, percent of lending to specific priority with the intention of arriving at aLok Adalats, Debt sectors, at least 50 percent of bad loans already relate to such sectors, with mutually acceptable solution. A number of key bodies also support the NPLRecovery Tribunal and agriculture representing a large majority recovery, including, Lok Adalats, DebtSARFAESI Act. of those. Recovery Tribunal and SARFAESI Act. Despite the pressure from government Banks also fear that their NPLs may towards priority sector lending, many increase by as much as 150 percent due of the nationalized banks (in order to to the introduction of the Core Banking align themselves to stringent capital System (CBS), which banks will need to Global Debt Sales  |  79© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Given the potential adopt by September 2011. The system is designed to automatically process and Rising borrowing and construction material costs may force distressed for only moderate update transactions and help identify debt sales in the real estate sector.credit growth NPLs on a daily basis. According to Knight Frank, Indian developers will be expected to repayexpectations (on account It is worth noting that bank rates have seen consistent increases over the USD 40.8 billion to various lendersof rising borrowing last year following rate hikes by RBI in (including banks and private equity funds) over the next two to three years.costs), increasing a bid to contain high inflation. Not only are the higher interest rates puttingpressure on debt pressure on credit growth for banks, FCCBs The RBI has also voiced concernservicing and the impact they are also expected to lead to an increase in NPLs. regarding companies that have raisedof certain events (such as SBI, India’s largest bank, has been funds through Foreign Currency Convertible Bonds (FCCBs). FCCBsFCCB redemptions, real facing significant pressure with an were frequently used to raise fundsestate sector slowdown, NPL ratio of 3.3 percent in March 2010. With a bad loan portfolio of during 2005–2008 when the equity market was at high levels, but withIFRS applications), many INR253 billion (USD 5.7 billion), SBI almost INR315 billion (USD 7 billion)observers expect the itself accounts for almost 30 percent of the country’s NPLs. As a result, worth of FCCBs falling due by March 2013, a lot of companies are expectedNPL ratio to increase in SBI has recently indicated a stricter to face problems. To facilitate thethe near future. NPL resolution regime, including taking a more aggressive stance in redemption of existing FCCBs, the RBI has allowed Indian companies to take declaring defaulting borrowers as fresh external loans and issue new willful defaulters. FCCBs to address debt obligations. That said, FCCB redemption is likely to Real estate lead to higher defaults, especially for According to the latest data from the relatively smaller players. National Housing Bank, housing prices across eight major cities declined by Outlook 15 percent in the first quarter of 2011, Given the potential for only moderate largely due to a slowdown in property credit growth expectations (on account demand. The situation is aggravated of rising borrowing costs), increasing by increasing construction costs, with pressure on debt servicing and the key construction components such as impact of certain events (such as steel, cement, labor and bricks seeing FCCB redemptions, real estate sector increases of 18 percent over the past slowdown, IFRS applications), many two years. Inventories of unsold homes observers expect the NPL ratio to are also rising, with Mumbai at a increase in the near future. 28-month high.80  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • MalaysiaThe guidelines issued by Bank Negara million. The bid, which involved aMalaysia (BNM) in December 2005allowing banks to sell NPLs (subject to two-stage process, attracted a high level of interest, with over 20 potential “Malaysia’s NPLcertain conditions) has been an ongoing investors at the initial stage. The first market seemedcatalyst to NPL sales in Malaysia, asthe guidelines provide banks with an stage involved the investors submitting non-binding indicative bids, following to be picking upopportunity to quickly resolve NPLs. which four bidders were selected to steam in 2007Malayan Banking Berhad (Maybank), submit bids for the auction during the second stage. and 2008, but hasthe largest bank in Malaysia, conductedthe first ever sale in Malaysia through The following year, Maybank entered into since dropped offa competitive open auction. It sold its an agreement with Standard Chartered completely, largelyfirst major corporate NPL comprisingtwo tranches totaling MYR2.1 billion in Bank (Hong Kong) Limited Alternative Investments and Orix Leasing Malaysia due to lower NPLJune 2007 to Standard Bank of South for the disposal of a secured residential ratios overall andAfrica Group and Standard CharteredBank Group. The sale was completed at portfolio with a face value of MYR1.4 billion. This portfolio consisted of more greater financialMYR424.8 million, allowing Maybank than 8,000 NPL accounts. strength at localto realize an estimated gain of MYR256 banks. ” Global Debt Sales  |  81© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • This portfolio In the same year, CIMB Bank Malaysia Bhd (CIMB), Malaysia’s second largest The momentum for NPL sales in Malaysia has seemed to drop off since consisted of 202 bank, announced that it had sold a portfolio the end of 2008, with no NPL salecorporate and small and to Standard Bank Group of South Africa following a competitive bid. This portfolio transactions reported. Most financial institutions have managed to lowermedium-sized enterprise consisted of 202 corporate and small and their NPL ratios and seem to haveaccounts with a value of medium-sized enterprise accounts with a value of MYR1.1 billion. It realized a gain of sufficient financial strength to hold onto their NPLs. This decision to holdMYR1.1 billion. It realized MYR106 million from the sale. And while is being further influenced by a pricinga gain of RM106 million the bank announced that it was exploring the possibility of selling another NPL expectation gap between buyers and sellers.from the sale. And while portfolio following the initial sales, plans That said, feedback from global investingthe bank announced that for this sale have yet to be released. institutions indicates that Malaysiait was exploring the These successes have caused other banks to explore the sale of NPLs by continues to be a preferred destination for investment, with a creditor friendlypossibility of selling taking a similar approach to that of regulatory environment.another NPL portfolio Maybank and CIMB. For example, in 2008 Bank Islam Malaysia Berhad announced Table 62following the initial sales, that it went through the process of 2009 January 2011plans for this sale have appointing an advisor to evaluate the NPL sale. However, the bank later % %yet to be released. decided not to go ahead with the sale Net NPL ratio 1.8 2.2 citing confidence that it was able to bring down the NPL ratio without resorting Note: In 2010 banks adopted FRS 139 to a sale. It is worth noting that not all Source: Bank Negara Malaysia website transactions that have taken place in Loans in arrears accounted for 4.1% Malaysia were conducted via competitive of total loans as at end 2010, which open auctions with virtual data rooms. remained relatively stable since 2008.82  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Global Debt Sales  |  83© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG’s PortfolioSolutions Group’sService OfferingA Dedicated Portfolio Solutions Sell Side Services investing the proper time into reviewingGroup With extensive experience closing the underlying portfolio informationKPMG’s Portfolio Solutions Group numerous portfolio transactions around and understanding buyer preferences,understands the complexity of loan the world, our team works with portfolio sellers are better able to meet their ownsales. In the last 24 months alone, our vendors to guide them through each objectives and align to buyer demand.team of professionals has helped both stage of the loan portfolio sales process. Navigating buyer negotiationsbuyers and sellers close numerous From early preparatory steps of portfolio and optimizing sale terms: KPMGtransactions and secure real value for analysis and buyer identification through professionals leverage their experiencetheir loan portfolios. to the execution of SPAs and financial gained from numerous successful closing, KPMG firms’ professionals portfolio sales around the world to deliverKPMG member firms can offer both provide a wide range of services, insight into drafting and negotiating thebuy-side and sell-side clients balanced, including: vendor Sale and Purchase Agreementindependent advice based on years ofhands-on experience and extensive Assessing current portfolio (SPA), including methods for gettingglobal insight. values and market demands: vendors comfortable with the “must Face value and market value can have” versus “nice to have” clausesWe have worked with a wide variety in the contract. This in turn results in often be substantially different. Byof vendors and purchasers, including buyers bidding with more confidence as leveraging our strong relationshipsfinancial institutions, commercial a number of transaction risks are already with investors, KPMG professionalsbanks, development banks, utility dealt with in the SPA. undertake market soundings andproviders, governments, private equity indicative bid processes to provide Understanding the implicit valuefunds, insurers and government asset vendors with clear insight into the of portfolios: Selling a portfolio is notmanagement companies, and have existing appetite and potential market always the best outcome of a strategicbuilt a strong reputation for cutting value of their debt portfolios. portfolio review. KPMG experts spendthrough the complexity of loan salesto deliver highly tailored and insightful Identifying buyers and selecting time prior to starting a sales processadvice. assets: KPMG’s global Portfolio to determine whether buyer and seller Solutions Group tracks specialist buyer expectations are aligned. Being able to preferences and uses this knowledge understand and communicate the key to attract the right buyers to deals drivers of the portfolio’s performance, throughout Europe, Asia Pacific and and – by closely monitoring the keep/ the Americas. The additional benefit sell value – can help clients select the of having a dedicated in-house broker strategic best outcome to match their dealer based in the US firm’s New York corporate objectives. office, means that KPMG has a network Independent and transparent of experienced professionals in key process: By acting as independent sales locations around the world to support advisors, KPMG professionals provide multi-jurisdictional sales. both buyers and sellers with confidence Aligning sale processes and that the sales process will be fair and portfolios to maximize value: Not all at arm’s length, particularly in bids or debt portfolios can be pushed through transactions involving state-owned the same sale processes. Indeed, by entities.84  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Buy Side Services expert insight into prevailing market Global strategies with local executionKPMG firms’ professionals are well conditions and industry benchmarks. In today’s global marketplace, bothplaced to support buyers in sourcing, Deal structuring: Our deal structuring buyers and sellers must be able tovaluing and reviewing loan portfolio services cover securitization, work together to confidently structureassets. And by combining our strong tax, regulatory and accounting deals across multiple jurisdictionsmarket relationships and global considerations, meaning that KPMG can and markets at once. With offices innetwork, we provide buyers with help buyers understand the implications more than 145 countries, KPMG firms’the confidence of knowing that their of their asset purchases – both from their professionals understand the benefitspurchases align with their core business own perspective and that of the vendor – of creating global strategies with localassets, achieve competitive pricing to help clients better negotiate and close executions. Our Portfolio Solutionsand provide sustainable value for their deals, and achieve greater value from Group is supported by KPMG’s globalbusiness. We deliver a wide range their portfolio over the long term. network of member firms that seek toof buy-side services, including: provide our clients with a consistently Post deal services: Following successful high level of quality and expertise noDeal Sourcing: KPMG professionals acquisitions, KPMG professionals work matter where the assets are located.maintain deep relationships with with buyers to develop and implementdedicated portfolio and strategic sustainable implementation plansbuyers to identify and source portfolio with the aim of ensuring a seamlessopportunities that match buyers’ unique integration of assets into their overallinvestment criteria. portfolio. With extensive experienceDue diligence and valuation: Whether conducting in-house and externalfor a stand-alone portfolio or as part servicer reviews, we also provide trustedof a wider asset acquisition, KPMG assessments of borrower restructuringprofessionals leverage local expertise plans, compliance with processes andand global processes to provide internal control reviews.market pricing assessments, duediligence services, and assessmentson underlying portfolio data, and deliver Global Debt Sales  |  85© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Glossary of Acronyms ABS Asset Backed Securities AMCs Asset Management Companies CMBS Commercial Mortgage-Backed Securities CRE Commercial Real Estate DCAs Debt Collection Agency DPs Debt Purchaser ECB European Central Bank EDW Expanded Discount Window EUROBOR Euro Interbank Offered Rate FDIC Federal Deposit Insurance Corporation FROB Spain’s Fund for Orderly Bank Restructuring G20 The Group of Twenty (Finance Ministers and Central Bank Governors) GDP Gross Domestic Product ICB UK’s Independent Commission on Banking IMF International Monetary Fund IOF Tax on Financial Operations IVAs Individual Voluntary Arrangements JVs Joint Ventures LDR Loan Default Rate LIBOR London Interbank Offered Rate LP investors Limited Partnership Investors LTVs Loan-to-Value MFIs Monetary Financial Institutions NPL Non-Performing Loan OREO Other Real Estate Owned PFI Private Finance Initiative REIT Real Estate Investment Trust REOs Real Estate Owned Assets RMBS Residential Mortgage- Backed Securities ROE Return on Equity SIFIs Systemically Important Financial Institutions SIVs Structured Investment Vehicles SME Small and Medium Enterprises SPV Special Purpose Vehicle UPB Unpaid Principal Balance86  |  Global Debt Sales© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Global Debt Sales  |  87© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • ContactsKPMG’s Portfolio Solutions Group operates across KPMG’s global network of firms, with experiencedprofessionals based in leading financial centers around the world. Please get in touch with one of theteam listed below, or your local member firm contact, for more information:Portfolio Solutions GroupGraham Martin Bruno Perri AmericasPartner, London Manager, BarcelonaM: +44 78 2519 6802 M: +34 616 71 37 49 Scott MarcelloE: grahammartin@kpmg.com E: bperri@kpmg.com Partner, New York T: +1 212 954 6960Stuart King Sundeep Lakhtaria E: smarcello@kpmg.comPartner, Madrid Manager, LondonM: +34 914 56 82 69 M: +44 77 9581 2518 Salvatore MilaneseE: stuartking@kpmg.com E: sundeep.lakhtaria@kpmg.co.uk Partner, Brazil T: +55 1132 458 324Frank Janik E: smilanese@kpmg.com.brPartner, Bangkok EuropeT: +66 81 869 6522 Guy Warrington AsiaE: fjanik@kpmg.com Partner, London M: +44 7802 608 583 Chris WhittinghamAndrew Jenke Partner, BangkokDirector, London E: guy.warrington@kpmg.co.uk T: +66 2677 2104M: +44 7901 512 747 Joel Eduard Grau Blasi E: cwhittingham1@kpmg.co.thE: andrew.jenke@kpmg.com Director, Madrid M: +34 639 92 65 09 David HeathcoteHernan Magarinos Partner, SydneyDirector, New York E: joelgrau@kpmg.es T: +61 2 9335 7193M: +1 917 656 6042 E: dheathcote@kpmg.com.auE: hmagarinos@kpmg.com Edwin Herrie Partner, Amsterdam WoonChee OoiDavid White T: +312 0656 7981 Partner, Petaling JayaDirector, Bangkok E: herrie.edwin@kpmg.nl T: +60 3772 13388T: +66 2 677 2682 E: wooncheeooi@kpmg.com.myE: dwhite8@kpmg.com Alan Boyne Partner, Dublin John SimSudhi Joshi T: +353 1 4102645 Partner, BangkokVice President, New York E: alan.boyne@kpmg.ie T: +66 2677 2288T: +1 607 592 6258 E: jsim3@kpmg.co.thE: sjoshi@kpmg.com Fabrizio Montaruli Partner, Rome Hiroyuki OshidaNick Colman T: +39 06 809711 Partner, TokyoAssociate Director, Frankfurt E: fmontaruli@kpmg.it T: +81 3 5218 6702M: +49 17 3541 8596 E: hoshida@kpmg.comE: ncolman@kpmg.com Frank Nagel Partner, Frankfurt Fergal PowerJonathan Hunt T: +49 69 9587 4238 Partner, Hong KongAssociate Director, London E: franknagel@kpmg.com T: +852 2140 2844M: +44 7748 701 509 E: fergal.power@kpmg.comE: jonathan.hunt@kpmg.com Mark Bownas Partner, Budapest Kyung Jae YuNicolas Malagamba T: +36 1 8877 122 Partner, SeoulAssociate Director, London/Madrid E: mark.bownas@kpmg.hu T: +82 2 2112 0753M: +44 7197 132 969 E: kyungjaeyu@kr.kpmg.comE: nicolas.malagamba@kpmg.com Africa Bhavesh ParekhFederico Montero Director, IndiaAssociate Director, London Dapo Okubadejo Partner, Lagos M: +91 986 767 6677M: +44 77 8522 5621 E: bparekh@kpmg.comE: federico.montero@kpmg.co.uk T: +234 1271 0533 E: dapo.okubadejo@ng.kpmg.comkpmg.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor toprovide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate inthe future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMGInternational. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.Designed by Evalueserve.Publication name: Global Debt Sales – Issue 2Publication number: 110815Publication date: September 2011