Your SlideShare is downloading. ×
Arcil NON PERFORMING ASSET seminar [kompatibilitätsmodus]
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Arcil NON PERFORMING ASSET seminar [kompatibilitätsmodus]

715

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
715
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
24
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. NPA Seminar – 2007 Excellent Management of Non Performing Assets Clemens Frowein HLP entwicklungspartner Mumbai, February 1th, 2007Asset Reconstruction Company (India) Ltd. Arcil NPA Seminar - Mumbai 2007
  • 2. Evaluation ofNon Performing Assets Arcil NPA Seminar - Mumbai 2007
  • 3. Managing NPA from a Banks perspective: Evaluation Managing Risk in Loan Origination Background: NPA in Germany has become a huge story The economic value approach relevant for NPA Significant relation between credit cost and stage of impairment Behind every distressed debt is a crisis The challenging task: Finding the path back to Value Timing is crucial in dealing with NPA Arcil NPA Seminar - Mumbai 2007
  • 4. Managing NPA from a Banks perspective: Evaluation The German NPA case In Germany, NPA has become a very important issue for the banking industry. Germany‘s reunification Insolvency case: Germany Tax privileged and driven real estate Low equity capital ratio and high outside investments in East Germany, financed capital ratio in small- and mid-cap by Banks companies Lack of economic growth leads Inflexible legal framework especially in East Germany to recession Increase in insolvencies in late 1990s Value-decrease of real estate market High saving ratio of consumer Mortgage loans: from performing to Value-decrease in the real estate non-performing market Dramatic changes in economic frameworkSource: Prof. Dr. Schalast, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 5. Managing NPA from a Banks perspective: Evaluation The German NPA case The German NPA market (2006) Ernst & Young Mercer Oliver Wyman € 35 billion of SPL € 300 billion of NPA € 125 billion of NPA € 160 billion of bad loansSource: Prof. Dr. Schalast, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 6. Managing NPA from a Banks perspective: Evaluation The German NPA case …and even more, NPA is becoming a real success story Established and dynamic NPA market No concrete estimation about market volume possible Economic recession Key reason for increase in NPA risks NPAs advantages for seller and buyer Servicing success key Attractive secondary market New business field for ARC Arcil NPA Seminar - Mumbai 2007
  • 7. Managing NPA from a Banks perspective: Evaluation Credit Risk Evaluation Adage: Every debt is paid, if not by the borrower, by the lender. (But how does a lender pay for borrower defaults?) The four C´of good Credit The four C´of bad Credit - Character - Complacency - Capacity - Carelessness - Covenants - Communication - Collateral - Contingencies Arcil NPA Seminar - Mumbai 2007
  • 8. Managing NPA from a Banks perspective: Evaluation Starting with the Discounted Cashflow (DCF) Market Price of Loans = Future Cash Flow Even if the loan is valued in terms of collateral value, the price of the collateral, if it is fair, will reflect the future earnings that will be generated by the collateral assets. Economic Value of Loans = Discounted Present Value of Future Cash Flow (generated by the loan minus the expected loss (credit cost)) Therefore, the economic value of a loan will decline should there be a change in terms (say, an interest waiver) that reduces expected cash flow, or should the borrower’s credit rating decline so that default probability increases and the risk of loss becomes greater. In other words, the current question of the “economic value of a loan” is the same as the future question of “whether the profits earned on the loan will exceed the expected losses.” To put this yet a different way, loans that do not earn sufficient returns to cover future credit costs result in a decline in economic value. Arcil NPA Seminar - Mumbai 2007
  • 9. Managing NPA from a Banks perspective: Evaluation The Basic Concept of DCF 1. Forecasting future cash flow DCF method for Loan.. • uses the original lending interest 2. Calculating default rate and survival rate rate as the discount rate and Calculating expectation there are no changes in value Principal and interest due to subsequent fluctuations payments in survival cases in market interest rate. Amount collected from • looks only at the portion of disposal of collateral economic value that has at bankruptcy declined to levels below book value and requires the Year 1 Year 2 Year 3 Year 4 Year 5 appropriate provisioning against this 3. Calculating a discounted present value • Basically attempts to cover all Impairment expected losses throughout the life of the loan. Book value Economic Year 1 Year 2 Year 3 Year 4 Year N value Arcil NPA Seminar - Mumbai 2007
  • 10. Managing NPA from a Banks perspective: Evaluation Closer look at Credit Quality and Economic Value Value The appropriate starting point for dealing with NPL is provisions against the impaired economic value. Book value General provision Specific Specific Provisi- Provisions ons + Impairment Partial write-offs Economic value of loans Credit quality “Normal” borrowers Borrowers that “need attention” “Bankrupt”; “need “in danger “effectively special attention” of bankruptcy bankrupt” Arcil NPA Seminar - Mumbai 2007
  • 11. Managing NPA from a Banks perspective: Evaluation Unprofitable Loans become a critical Problem Rate Credit cost By continuing to make rate unprofitable loans in order to support Return ratio borrower companies, the bank saps its own Cause of strength. impairment “Normal” “need attention” “need Credit Value special attention” quality Book Impairment value Economic value of loans “Normal” borrowers Borrowers that “need Borrowers that “need attention” special attention” Credit quality Note: Return ratio – lending interest rate – funding rate – the rate of expense Arcil NPA Seminar - Mumbai 2007
  • 12. Managing NPA from a Banks perspective: Evaluation Phases of Loan Value Loss Asset value The loan officer recognizes deterioration of credibility, and degrades to Watch List. The bank begins measures towards the Stage 1 business improvement of the borrower Stage 2 Virtual period of workout Stage 3 Since workout does not work, Stage 4 the bank considers the shift to liquidation procedures. The borrower lapses into Stage 5 liabilities exceeding assets and loss occurs Time Note: 1. Refer to Morsman (1982), etc. Arcil NPA Seminar - Mumbai 2007
  • 13. Managing NPA from a Banks perspective: Evaluation Effects of DCF – for resolution / dealing with NPLs Improvement in transparency and governance Economic value will increase the transparency of bank accounting and provide investors, creditors, and depositors with information for their decision making. This evaluation method will give banks more discipline & provide them with incentives to pursue more economically rational behavior. Improvement in earning power of banks Since banks would become more conscious of economic value, they make further efforts to ensure economic value of loans. Such transformation of lending business model to include loan management and NPL disposal would strengthen bank profitability and contribute to the restoration of sound banking. Faster business rehabilitation Accounting systems that recognize the impairment of the economic value of a loan will require banks to quickly identify rebuilding strategies and take appropriate measures in a timely manner. Early, fast implementation of rebuilding strategies will limit the loss of a borrower’s business resources. Reallocation of credit risk through secondary market for loan assets With accounting systems that recognize impairment of economic value through enhanced incentives to deal with NPLs in a timely manner, the secondary market for loan assets expands. Such a market reallocates credit risk rationally, and as a result, efficient risk taking in the whole economy might ensue. Arcil NPA Seminar - Mumbai 2007
  • 14. Managing NPA from a Banks perspective: Evaluation Issues to be addressed (for Evaluation with DCF) Improvements to Internal Management Accounting Internal profit evaluations and management accounting shall reflect the economic value of loans. Once changes in the economic value of loans are reflected in the internal performance assessment of lending and screening departments, these departments would have incentive to be conscious of economic value. Emphasis on Borrower Cash Flow in Loan Screening Banks should place more emphasis on cash flow as they screen potential loans, which includes the introduction of screening methods that appropriately evaluate the business value of a proposal. Lending Framework that responds to Risk Changes One method of ensuring an early response to declines in creditworthiness that is used is to attach covenants to the loan contract. Should financial conditions of a borrower deteriorate, the covenants dictate that the loan contract be reviewed to take account of the change in credit quality. Organizational Framework that permits early Action In collaboration with the borrower to make fundamental changes before there is a significant loss in the economic value of the loan. Cutting problem credits off from the credit generation and screening departments (business line) at an early stage. Arcil NPA Seminar - Mumbai 2007
  • 15. Managing NPA from a Banks perspective: Evaluation Credit Risk Evaluation: Focusing Borrowers Perspective Evaluate a borrower’s ability and willingness to repay Three Questions to address: What risks are inherent in the operations of the business? What have managers done or failed to do in mitigating those risks? How can a lender structure and control its own risks? Arcil NPA Seminar - Mumbai 2007
  • 16. Managing NPA from a Banks perspective: Evaluation Reasons for Distressed Debt Reasons for distressed debt from banks‘ perspective (% of banks)1) Liquidity crisis 73,9% Decrease in sales 69,6% Endangered equity 65,2% Uncompetitive cost base 60,9% Strategic reorientation 56,5% Drop in prices 43,5% Negative earnings 43,5% Safeguard rating 13,0% Earnings lower than target 8,7% 1) RB Study on German Banks, 2006 Banks identify liquidity crisis, sales decreases and endangered equity as the most common reasons for distressed debt Arcil NPA Seminar - Mumbai 2007
  • 17. Managing NPA from a Banks perspective: Evaluation The dynamics from the corporate perspective Urgency Small Large INSOLVENCY LIQUIDITY Scope for Action CRISIS Need for Action EARNINGS CRISIS STRATEGIC CRISIS Large Small Time Arcil NPA Seminar - Mumbai 2007
  • 18. Managing NPA from a Banks perspective: Evaluation Causes of Corporate Strategic Crisis External causes of crisis Internal causes of crisis Structural change, e.g. due to Management problems Globalization – Ignoring the signs of crisis Integration – Wrong HR policy Technology leaps Shareholder value orientation Focus on sales rather than profit Cyclical problems Drop in demand Growth trap Change in the dynamics of competition Increasing complexity of Sales channel switch the product portfolio and customer focus Unpredictable changes to the market/competitive framework Insufficient transparency Drop in public-sector demand for corporate control Ban on certain products Arcil NPA Seminar - Mumbai 2007
  • 19. Managing NPA from a Banks perspective: Evaluation Analysis of the Crisis: Put Your Focus on… 1 2 3 Financials Operations Strategy Revenue and cost Structure Product portfolio Revenue, cost and profits by Departments (structure/heads) Product mix products, markets, customers Hierarchical levels Complexity Benchmarking by cost type Regional coverage Innovation (material, person., overhead) Holding structure Pricing model Main causes of losses/risks (subsidiaries) Market and customers Cash flow Key processes Market segment development Monthly develop. /forecast Decision-making/ reporting Trends & key success factors Accounts receivable Value chain (in/outsourcing) Market access and distribution Inventory Sales/marketing efficiency Customer and order structure Investment/divestment Purchasing efficiency Production efficiency Competitive position Capital structure Logistics efficiency Existing and potential Excessive debt/loss of equity competition profiles Hidden risks in balance sheet Management/ personnel Relative positioning (market Need for „fresh money“ Qualification share, success factors) Motivation Arcil NPA Seminar - Mumbai 2007
  • 20. Managing NPA from a Banks perspective: Evaluation Mastering Crisis: Most difficult & demanding mgt. tasks • Problems are so different and situations so complex, there can be no universal remedies for corporate crisis. • Knowing the strategic and operative causes is key to success and the basis for effective counter-action. • Major decisions must be made under extreme time pressure. • A corporate crisis is always a crisis of trust. Therefore, management must show the utmost personal commitment, integrity, stringency, and impeccable behavior. • Management must be self-critical and open-minded: in the final analysis, most corporate crises are down the management mistakes. Arcil NPA Seminar - Mumbai 2007
  • 21. Managing NPA from a Banks perspective: Evaluation Regain Corporate Value: Critical Balance for Renewal Liquidity Profitability Sales up Reduce investments to absolute - Increase prices where possible minimum - Focus sales efforts on customers (only essential repairs/replacements) - Speed up new product launches Reduce inventories Reduce procurement costs - Lower safety stocks - Lower material/service standard Regain - Dispose of slow movers - Negotiate with suppliers - Increase quality in delivery Value - Change suppliers Reduce accounts receivable Reduce personnel costs - Intensify claim management - Layoffs/part-time employment - Speed up settlement - Reduce/waive salary - Push for faster payment terms or - Stop employment advance payments - Reduce overtime Reduce overhead costs Sell fixed assets - Cut travel budgets - Real estate - Reduce perks - Machinery - Negotiate interest relief - Holdings Arcil NPA Seminar - Mumbai 2007
  • 22. Managing NPA from a Banks perspective: Evaluation Turning around: The Path back to Value Redefine the product Identify extra sales and Focus on the profitable mix earnings potential elements of the value - Focus on quality of chain Reduce complexity customer handling costs - Enter complementary Develop a business - Eliminate unprofitable markets model that creates products value - Reduce no. of product Choose unusual market variants entry or exit strategy Optimize business - Introduce a modular units/ jettison non-core system business segments Product portfolio Target markets Business model Arcil NPA Seminar - Mumbai 2007
  • 23. Managing NPA from a Banks perspective: Evaluation Turning around: Speed is Key for all Parties Phase 1: 4-8 weeks Phase 2: 6-24 months Firms „fact book“ Restructuring conecpt Detailed restructuring plan Financials Restructuring Further detailing - Revenue and cost concept - Cash flow - Financial the restructuring - Capital structure - Operational concept - Strategic Operations Bottom-up - Structure Top-down planning of - Key processes improvement remedies - Management/personnel targets Strategy - Product portfolio Integrated business Change management - Markets/customers plan - Regain confidence of - Competitive position - Base case stakeholders and transform - Restructuring targets management/employees Implementation Quick wins Project organization Activity management - Costs down/sales up - Establish strong leadership - Monitor progress of action - Raise cash and clear responsibilities plans and results in business plan Arcil NPA Seminar - Mumbai 2007
  • 24. Managing NPA from a Banks perspective: Evaluation Turning around: Critical Success Factors MANAGEMENT COMMITMENT The most important success factor in restructuring – implementation has room for improvement 1. HOLISTIC CONCEPT – Strategic, Operational and Financial Very important (P&L, balance sheet, cashflow, strategy, systems) – implementation has improvement potential 2. SUCCESSFUL RESTRUCTURING QUICK IMPLEMENTATION – Speed is of essence Rated as very important; but low rate of early warning systems implementation 3. Successful restructuring projects are fast, require management commitment and affect the entire company Arcil NPA Seminar - Mumbai 2007
  • 25. Managing NPA from a Banks perspective: Evaluation Identifying Distressed Debt Mechanisms to identify credit as distressed debt (% of banks)1) In identifying a loan as Internal early distressed debt, 73,9% warning system 73,9% of respondents rely on Credit risk criteria internal early warning 52,2% systems pursuant to Basel II General default in Credit risk criteria 26,1% pursuant to Basel II are payment applied in 52,2% of Inconsistent cases 8,7% payment behavior General default in Other 34,8% payment and inconsistent payment behavior are more rarely used as indicators 1) RB Study on German Banks, 2006 To identify a loan as distressed debt, most respondents rely on their internal early warning systems Arcil NPA Seminar - Mumbai 2007
  • 26. Managing NPA from a Banks perspective: Evaluation Conclusion: Each bank has its unique situation in a loan - recognize it and reduce uncertainty and stress NPL Managers job - view the NPL portfolio like a fund manager, maximizing the value from the portfolio Leaving it to specialists – create NPL management competencies Acting decisively , on a commercial basis Improved risk management & early warning mechanisms (e.g. early symptoms approach “ common cold or terminal illness”) Relationship management is key – communicate! Arcil NPA Seminar - Mumbai 2007
  • 27. NPA StrategyArcil NPA Seminar - Mumbai 2007
  • 28. Managing NPA from a Banks perspective: Strategy NPA Strategy - Overview Learning from Germany: NPA creates opportunities The strategic aim is a win-win situation NPA strategy is the path between workout and sell Start your transaction strategy by defining what you want Follow a well defined transaction process The different NPA strategies are dealing with stress management Case Study: Berlin Hyp has defined NPA as core-business Arcil NPA Seminar - Mumbai 2007
  • 29. Managing NPA from a Banks perspective: Strategy NPA resolution a strategic imperative for banks Accelerating NPA resolution process and resolution in a time bound manner is critical Activity carried out by banks (work-out group) and / or Through specialized agencies (servicing) Role of banks and specialized agencies differ across the markets depending on level of sophistication of financial markets and size of NPA problem The objective is to achieve the NPA clean-up and thereby unlock and recycle the capital blocked in NPAsSource: Prof. Dr. Schalast, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 30. Managing NPA from a Banks perspective: Strategy Impact on the banks: NPA exit - a “win win situation” Advantages for banks Impact of NPAs Consequence of sale NPAs non core business Focus on core business High risk potential Risk-reduction Capital locked in unproductive Release of capital and improved assets liquidity for business growth Impact: (Realizable value of Improved market valuation NPAs * cost of capital p.a.) Aid fresh capital raising Impact on rating Better rating Increase in administration Decrease in administration expenses expenses Reduced liquiditySource: Prof. Dr. Schalast, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 31. Managing NPA from a Banks perspective: Strategy Impact on the banks: NPA exit - a “win win situation” Selling vs. work-out Pros - Selling Cons - Selling Cut-off with NPA engagement Loss of possible profitable Positive balance sheet-effect foreclosure proceeds Cost effective (especially staff Reputation risks costs) Pros – Work-out Cons – Work-out Possible profitable foreclosure Work-out is not the core proceeds business Business relation Increase of staff and Progressive portfolio administrative costs management A new start for investorsSource: Prof. Dr. Schalast, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 32. Managing NPA from a Banks perspective: Strategy Impact on the banks: NPA exit - a “win win situation” Investor Side Investors Competencies Returns commensurate with risks NPA core business Attractive secondary market Quick decisions Strategic purchase possible New start Attractive financing Economies of scale conditions Rich experience in work- outs / liquidations Highly motivated staff Arcil NPA Seminar - Mumbai 2007
  • 33. Managing NPA from a Banks perspective: Strategy The NPA Transaction: The starting point Define what you wantSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 34. Managing NPA from a Banks perspective: Strategy Critical Phases The Transaction Process Decision Sale Quality Sale Data Closing& Preparation Preparation Assurance Process Room Execution Phase Phase Phase Phase Phase PhaseSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 35. Managing NPA from a Banks perspective: Strategy Decision Steps to success Preparation Phase Step 1: Definition of goal Step 2: Definition of portfolio Step 3: Definition of necessary information Step 4: Verifying data sources Step 5: Discussion and definition of Transaction StrategiesSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 36. Managing NPA from a Banks perspective: Strategy Decision NPA Strategy Preparation Phase Step 1: Define your strategic goals! Risk reduction, optimizing the loan portfolio Use core capital to participate in the rising market Reduction of regulatory capital requirements according to Basel I and II Quick liquidity Focus management and resources on core business rather than on work out Improved rating – better refinancing possibilities Tell the market (Rating Agencies) “we deal with it”Source: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 37. Managing NPA from a Banks perspective: Strategy Decision NPA Strategy Preparation Phase Step 2: Define your portfolio categories! Non performing loan The loan agreement has been terminated or can be terminated at any time Sub performing loan The loan / borrower needs to be restructured Non core business This asset class is not in our focus (e.g. involvement of foreign jurisdiction, special assets like Airplanes, Ships, IT/IP) What suits potential investors Industrial / commercial / retail What are the key collaterals What about unsecured loansSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 38. Managing NPA from a Banks perspective: Strategy Decision NPA Strategy Preparation Phase Step 3: Define necessary information – key to obtain better value Pricing information What does an investor, a rating agency, a servicer need in order to offer an acceptable price/rating Transferability information There are reasons (legal/ structural/ transaction costs related) that make any transfer of assets impossible Transfer information Borrower information and loan documentation Type of collateral More you disclose, better the realizations “Lemon theory” Information sharing is key to high profits and successSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 39. Managing NPA from a Banks perspective: Strategy Decision NPA Strategy Preparation Phase Pricing bridge: Think about potential adjustment to prices 100% Reduction reasons Change in interest • Value adjustment due to variable refinancing interest Maximum rate Necessary Bid Bidder reductions Price Profit • Expenses of bidder, risk bonus , profit Legal • Legal enforceability, insolvency questions Queries structure • Missing (legal) documents (claims, guarantees etc.) regarding Sale object & Due • Limited access, time etc. due diligence Diligence Original Transfer • Limitations, Taxes, Transfer charges Transfer Principal questions • Due obligations, claim for damages Queries Swap / Refinancing Hedge • Timing Questions Queries Costs • Quality and Contract Contracts effectiveness Queries Minimum Taxes • Fair & predictable Bid Price Portfolio ValuationSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 40. Managing NPA from a Banks perspective: Strategy Decision NPA Strategy Preparation Phase Step 4: Define the data sources and structures System Everything that is in the system can be transferred into a database Binder Anything with respect to collateral information, original documents needs to be defined and separated Knowledge Is every information needed written down?Source: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 41. Managing NPA from a Banks perspective: Strategy Decision NPA Strategy Preparation Phase Step 5: Define your potential transaction strategy Bank Retains Bank Divests 100% of NPA Risk 100% of NPA Risk High Low Hold & manage Securitization Joint Venture Asset sale (Workouts / (ABS) (Bulk / Single Asset, Private Restructurings) Negotiated) • Bank has 100% risk •Diversification of risk •Recapitalizes bank • Buyer assumes 100% of NPA risk •Immediate capital •Equity Partner • Bank needs significant injection; Market liquidity assumes pro-rata risk resources & financial •Lower cost of capital •Immediate capital • Low recovery commitment to hold and greater availability injection prices assets •Transactions with credit •Highly qualified & enhancements are incentives asset • No upside relatively easy management participation •Work out is still in the •Positive market bank perception •Upside potential •Upside participation Low Impact on stake holder confidence HighSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 42. Managing NPA from a Banks perspective: Strategy Sale strategies: Goal - Benefits analysis Third party Outright Synthetic ABS True Hive Bar Sub- Joint Venture Workout Sale Sale Sale Down Participation Vehicle Risk Transfer Yes Partly Yes Yes Yes Yes Yes Depends on Balance Sheet Off On Off Off Yes Yes the structure Depends onRegulatory Capital Release Release Release Release Yes Yes the structure Liquidity Yes Partly No Yes Yes Yes Yes Yes Upside Depends on Depends on No Partly Yes Yes depending on Potential the structure the structure structure Outsourcing Variable Variable Variable Variable Variable Variable VariableSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 43. Managing NPA from a Banks perspective: Strategy Sale NPA Transaction Process Preparation Phase Sale preparation phase Final definition of sale structure Impact on balance sheet and tax Data gathering and information packaging Decide on the sale process (bilateral, auction – wide or limited)Source: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 44. Managing NPA from a Banks perspective: Strategy Quality NPA Transaction Process Assurance Phase Quality assurance phase Quality review Finalize representations and warranties Third party discussionsSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 45. Managing NPA from a Banks perspective: Strategy Sale NPA Transaction Process Process Phase Sale process phase Organisation of Data Rooms Organisation of Q&A Process Set up of Confidentiality Agreement and Confidential Information Memorandum Definition of investors to be invited Pre – Invitation discussions with investors Draft of Sale and Purchase AgreementSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 46. Managing NPA from a Banks perspective: Strategy Data NPA Transaction Process Room Phase Data room phase Advise during Data Room Phase / Q&A Process Negotiation and finalisation of SPA and schedules Finalisation of bid sheet documents (bid letter, bid sheet, bid process) Internal organisation of transferSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 47. Managing NPA from a Banks perspective: Strategy Closing & NPA Transaction Process Execution Phase Closing & execution phase Bid comparison Signing and closing Interim servicing Transfer of loan files Transfer of assets Hello and good bye letterSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 48. Managing NPA from a Banks perspective: Strategy Summery To deal with distressed assets / impaired loans / NPAs / SPLs / non core is vital for banks Management bandwidth Rating Regulatory core capital There are different options for bank Straight–forward disposal Joint venture Hive down ABS One option does not exist: Not solving the questions around loans that should not be in the booksSource: Mr. Peter Jark, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 49. Case Study: Managing Stress in the Banks Balance Sheet*NLP Management in Berlin Hyp;* Presented by Bernd Morgenschweis at the Arcil NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 50. Case Study: The Berlin Hyp Case Study: The Situation in Berlin Hyp Key figures Income statement (in € million) 2005 2004 Net interest income 222.3 227.0 Personnel costs 36.1 33.8 Other operating expenditure 30.7 37.1 Depreciation on tangible assets 8.2 5.3 Operating expenditure 75.0 76.2 Risk provisioning 91.3 105.1 Operating result 57.7 45.6 Tax 9.0 6.6 Annual surplus 36.7 24.8Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 51. Case Study: The Berlin Hyp Case Study: The Situation in Berlin Hyp Key figures Business development (in € million) 2005 2004 New loan commitments 8,551 2,219 Mortgages 1,475 850 of which: Residential Loans 551 427 Commercial lending 924 423 Public sector business 7,076 1,369 Loan disbursements 8,666 1,982 of which: Mortgages 1,586 584 Public sector loans 7,080 1,398Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 52. Case Study: The Berlin Hyp Case Study: The Situation in Berlin Hyp The profile Solutions for Everything Berlin Hyp offers their customers tailor-made financing solutions characterised by competitive terms high product flexibility swift decisions reliability and quality Guidelines of our Work Sustaining capacity for change Seizing opportunities Maintaining continuity Increasing competence Rising to challengesSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 53. Case Study: The Berlin Hyp Case Study: Where Stress comes from Bad loans were a major part of balance sheet Most of them without interest / profit Negative outlook (fall in collaterals in the east of Germany) Position on “risk provisioning” was negative in the discussion with the rating agencies (1.6 bill. € as 12/05) The “Bad Loan Team” needs more and more staff – operational expenses are growing NPA Market in Germany was booming – so there was a chance to reduce the risk portfolio faster than expected at acceptable pricesSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 54. Case Study: The Berlin Hyp Case Study: Where Stress comes from Global Aspects: Abolition of the German Mortgage Act (modification of legal basics) – Market and regulatory forces Refinancing advantages (Monopoly to issue mortgage bonds) dropped out – consequence: We are in stiff competition with a lot of other German banks ! An over saturated banking market enforces consolidation in order to stabilise and increase margins Adequate margins as a result of risk-oriented pricing methods Identify the main “risk drivers” and analyse the bad loan cost’sSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 55. Case Study: The Berlin Hyp Case Study: Where Stress comes from Increasing importance of the capital market and consequently more pressure to enhance interest margins and to reduce bad loans Optimise the portfolio structure: push good loans – and: Adjust portfolio by outsourcing or selling non performing loans Pressure due to Basel II regarding the obligation of providing a risk adjusted equity Develop and implement a conservative Credit-Risk-Strategy for new lending business (stop increase in risk portfolio) Reduce the risk loan portfolio – to cut cost (employees, operating, risk) and save equity-costsSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 56. Case Study: The Berlin Hyp The burning issue: Optimise your Portfolio, reduce the mountain of bad debt and increase the value of your company !!!Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 57. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Strategic goals defined for NPA Management Reduction of loan risks (transfer of risks) leads to an adjustment of the balance sheet and to more transparency Market knows – your balance sheet is in good order and there are no hidden risk positions Positive influence on the evaluation of rating agencies Gain of liquidity resulting from a lower amount of equity required owing to Basel II Increased profits / potential profits due to phase-out of interest- free loans (non profit risk assets) switch the interest free assets (sell them off) to interest- bearing assets (work with the purchase price – issue new loans)Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 58. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Strategic goals defined for NPA Management Focusing the existing work out competence on problematical cases with profit-yielding Cutback of resources needed in the work-out field (no core business) Performance and profit determines actions It’s important to distinguish between “dead loans” (there is no chance to get the money back) and “distressed loans” (there is a positive view on recovery) Reducing the bad loan portfolio offers the chance to make the employees in the work out group redundant (cut cost)Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 59. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Strategic goals defined for NPA Management No more provisions caused by a declined loan quality Selling - reduces the risk of the insecure exposures - eliminates the possibility of future risk (fall in value of securities) Bull market constantly demands results at higher prices The higher the price for bad loans - the bigger the profit for the company – at the moment a perfect market in Germany! Highly liquid foreign investors dominate the market Positive external effects of being proactive in problem solvingSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 60. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Critical Points Quality of data / Need for resources ? Investors need a lot of information about the loan (in details history of life of the loan, securities, valuation, etc.) Is the data of high quality or is there further maintenance necessary? Question whether the transaction is legally allowed Sub-performing or non performing loan (banking confidentiality) ? ? Sufficient minimum volume of the identified portfolio in order to be profitable both for the seller and for the buyerSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 61. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Critical Points Sufficient shielding / appraisable securities ! Crucial!!! If the investor pays only 40% of the loan and you need more – the transaction / the closing is at risk! Individual analysis vs analysis of the portfolio Enough collateral / provision / depreciation in detail or in total ? ? Portfolio selection OK or several critical loans ? ? Before doing the “go-to-market” check the values in order to be sure that the buyer won´t cancel the deal Reputation risk!!!Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 62. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Critical Points What sort of cash flow is expected Check the projected loan cash flow – OK in relation to assumed price? The more cash flow – the higher the price! Is there upside potential ? => price in! Warranties / tax issues? No special commercial transaction structure (pool of securities / syndicated loans / public guarantees)!Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 63. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Process of the deal Fundamental Preparing Deal Closing decision the deal process Portfolio- In house Portfolio Confidentiality Bid analysis Identification Valuation statement Accept the tender Check the in- Projecting the Information (best price) house effects Due Diligence letter with procedure In-house decision Portfolio- Investor selection details Clustering (long list) Conclusion of the Opening of the contract Board decision Setup Data room Data room (equipment and Transfer (loans) security) to the new ownerSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 64. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Fundamental Decision (1/3) Berlin Hyp Project: Portfolio-Identification 200 non performing loans, volume 500 Million € Performing/ sub-performing / non-performing ? Most of them interest-free and Strategic/ non strategic ? cancelled by the bank Depreciation/ interest arrear / Selected in two deals: interest-free? • Retail portfolio (80 customers, loan volume 50 mil. €) • Mixed portfolio (120 customers, loan volume 450 mil. €) residential and commercial propertiesSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 65. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Fundamental Decision (2/3) Check the in-house effects Berlin Hyp Project: – Data quality OK or is there – Fill 350 data fields for 1 customer, “homework” to do? thereof only ∅ 150 OK (scheduling time/man- – Check 200 loans for adequate power/requirements) collaterals / depreciation (220 new – Adequate collaterals/ valuations by the surveyor in 2 depreciation? Upside months) potential? – 620 hours of external help from a – Find the balance: loss of temporary employment agency interest rise in depreciation (e.g.: scanning 22.000 pages loan – Check number of employees documents) – reduction in staff feasible?Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 66. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Fundamental Decision (3/3) Portfolio Clustering – Local / international / geographical bundling – Residential / commercial / retail Loans – Board decision – Based on: full report with all the advantages and disadvantages – Discussion over all the pros and cons – Final decisionSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 67. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Preparing the Deal (1/2) In house Portfolio Valuation – Result of the portfolio check – what’s the realistic price? – Can we sell the portfolio at this price (reputation risk)? – Why can’t we manage the problem by ourselves (experience)? – What is our economic valuation of the property market in the near future? Projecting the Due Diligence – Appoint a legal advisor or a consultant for the deal – Prepare all the legal documents and check them carefully (the data in the system must be the same as in the files !) – Prepare the agreement for sale (with all details)Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 68. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Preparing the Deal (2/2) • Investor selection (long list) – Select the potential investors (by yourself or through an advisor) • Setup Data Room Berlin Hyp Project: 5 identical Data rooms in 5 different buildings equipped with 25 workstations (telephone, internet, computer) Catering and security company for every room 1 virtual Data room by internet arranged (Retail Portfolio) 1,400 files – filled with the important loan information 35,000 loose divider copies in the files well-organized 22,000 loan documents scanned for the internet PortfolioSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 69. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp The Deal Process (2/2) Confidentiality statement Prerequisite !!! Information letter with procedure details Telephone list with the people who are responsible Opening Data room Welcoming the auditors Clear the procedure to update the information base Check the schedule for the question and answer process Berlin Hyp Project: 2,100 Q+A – managed by the loan specialists Every week a “loan officer call” (ten biggest loans) Response time: within 72 hoursSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 70. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp The Closing Bid analysis / Accept the tender (best price) Which is the company with the highest price? In house decision Check the pros and cons and say: The winner is: ….. Conclusion of the contract Finalize the deal with the conclusion of the agreement Transfer (loans) to the new owner Send a letter to all customers with brief information about the finalised deal and the transition to the new loan-owner Order a lorry (☺) and transfer the complete files to the owner Berlin Hyp Project: closed both deals with “Deutsche Bank London” a significant decrease in the bad loan portfolioSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 71. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp Review on the Goals A fundamental reduction in the bad loan portfolio resulting in a large profit (purchase price higher than expected) A positive attestation by the rating agency The internationally renowned rating agency Moodys has awarded the banks mortgage bonds the good rating Aa1. This is evidence of good structure of the assets serving as collateral and the progress the bank has made in optimising its risk profile. Berlin Hyp already has two independent rating results with the top “Triple-A-Rating” for its public mortgage bonds. • Reduction in staffSource: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 72. Case Study: The Berlin Hyp Case Study: Strategy of Berlin Hyp The Outlook NPA Portfolio deals are presently our core business in a booming market International investors’ interest in NPA business has continued to grow steadily – on top of that: this brings a lot of fresh money to the German market Probably the next step is to restructure these portfolios and sell them back to new customers Selling all these critical loans result in an optimal balance sheet. This brings on the one hand positive feedback from the rating agencies and on the other hand room and flexibility for new loans Following the positive experience, Berlin Hyp is preparing the next (4th) bad loans Portfolio deal (300 – 500 mil. €)Source: Mr. Bernd Morgenschweis, NPA Summit 2006 Arcil NPA Seminar - Mumbai 2007
  • 73. Managing NPA from a Banks perspective: Strategy Thank You Arcil NPA Seminar - Mumbai 2007

×