The ADB’s role in encouraging and facilitating Asset Reconstruction Companies Dr. William Willms Principal Investment Offi...
Introduction <ul><li>ADB: Participating at early stage </li></ul><ul><ul><li>Public Sector: Advising policy and framework ...
NPL market drivers and the ADB <ul><li>INVESTMENT BANKS: Principal business needs risk sharing </li></ul><ul><ul><li>Requi...
Section 1: ADB’s Role in NPL Resolution Projects outside  India
Overview <ul><li>MAIN: Senior, limited-recourse debt </li></ul><ul><li>Partial Credit & Political Risk Guarantees </li></u...
ADB Loan for NPL Portfolio Purchase <ul><li>Portfolio Acquisition Loan </li></ul><ul><li>Senior, limited recourse </li></u...
Example:  Outright Sale Originating Bank  Portfolio Purchase Price Servicer Servicing SPV Fee Investor 100% Debt
ADB and Securitization <ul><li>ADB Partial Credit Guarantee (PCG) </li></ul><ul><ul><li>timely payment of interest and ult...
Example:  Conventional CLOs Charitable Trust Outright sale  of Portfolio Originating Bank  Portfolio SPV Originating Bank ...
Critical Issues:  The Servicer <ul><li>More than for any other asset class, the Servicer is  critical  for an NPL deal.  T...
Section 2: ADB’s Role in NPL Resolution in India
ADB and Indian ARCs ARC Trust Local Investor Originating  Bank Foreign   Investor 100% Sale of NPL Security Receipts (SRs)...
THANK YOU
Appendix 1: Asia’s NPL Resolution Problem
New strategies in investment banking <ul><li>Moving away from “client focus” to principal business </li></ul><ul><li>Rampi...
Equity Solution for Asian NPLs? <ul><li>NO. Equity is not sufficient. </li></ul><ul><ul><li>Magnitude of NPL problem in As...
ADB’s Involvement: EARLY STAGE <ul><li>EARLY STAGE: CATALYTIC </li></ul><ul><li>“ Common Funder” </li></ul><ul><li>Strong ...
ADB’s Market Tiny   Starting   Growing Thailand   Philippines   PRC India <ul><li>Outside ADB Scope: </li></ul><ul><li>Sou...
Appendix 2:  ADB Due Diligence
Introduction <ul><li>NPLs can be classified into two categories: </li></ul><ul><ul><li>Secured NPLs  have a security – a m...
General Principles <ul><li>The Asset Side: </li></ul><ul><ul><li>the characteristics of the NPL portfolio (secured vs. uns...
Modeling Process INPUTS  on:  - assets  (recovery, timing)  - support  mechanisms Modeling of Cash Flows Generated by NPL ...
Modeling Assets’ Cash Flows <ul><li>Assets’ Cash Flows:  Secured or Unsecured </li></ul><ul><li>Secured NPLs – Loan-by-Loa...
Appendix 3: Other Potential NPL Structures
(1) Joint Venture Management Originating Bank  Outright sale  of Portfolio Market Value <ul><li>ADB Loans </li></ul><ul><l...
(2) Joint Venture with Pooling Bank  A Outright sale  of Portfolio A Market Value <ul><li>Junior Loan A </li></ul><ul><li>...
(3) Synthetic Sale Originating Bank   SPV Investor 1/3 : Financial close 1/3 : 1 st   year 1/3 : 2 nd   year Market Value ...
(4) Synthetic CLO with CDS Premium only Originating Bank  Charitable Trust 100% equity <ul><li>Senior Tranche </li></ul><u...
(5) Hybrid CLO with Equity Portfolio 45% of equity of SPV 1 Secured Loan 7.5% of equity of SPV 1 100% of equity of SPV 2 C...
William Willms Asian Development Bank +63 2 632 5469 [email_address]
Upcoming SlideShare
Loading in …5
×

The ADB's role in encouraging and facilitating asset ...The

1,450 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,450
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
13
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

The ADB's role in encouraging and facilitating asset ...The

  1. 1. The ADB’s role in encouraging and facilitating Asset Reconstruction Companies Dr. William Willms Principal Investment Officer, Asian Development Bank 6 November 2004
  2. 2. Introduction <ul><li>ADB: Participating at early stage </li></ul><ul><ul><li>Public Sector: Advising policy and framework dialogue, coordination and relationship management with Governments </li></ul></ul><ul><ul><li>Private Sector: Debt and Equity funding at early, riskier, stage </li></ul></ul><ul><li>ADB and India </li></ul><ul><ul><li>Public Sector: TA on the SAFREASI Act and Secured Transactions </li></ul></ul><ul><ul><li>Private Sector: Equity funding for ARCs, potentially Security Receipt investor </li></ul></ul>
  3. 3. NPL market drivers and the ADB <ul><li>INVESTMENT BANKS: Principal business needs risk sharing </li></ul><ul><ul><li>Require leverage to lower equity cost, WACC </li></ul></ul><ul><ul><li>Seek diverse partners to better share risks </li></ul></ul><ul><li>ASIAN NPL MARKETS: Early-stage Development </li></ul><ul><ul><li>Early stage: Fewer players, higher costs </li></ul></ul><ul><ul><li>Later stage: More standardization like other markets </li></ul></ul><ul><li>ADB: Valuable Early-stage Participant </li></ul><ul><ul><li>Public Sector: Provide political value as multilateral </li></ul></ul><ul><ul><li>Private Sector: Offer Debt and Equity funding at riskier early stage </li></ul></ul>
  4. 4. Section 1: ADB’s Role in NPL Resolution Projects outside India
  5. 5. Overview <ul><li>MAIN: Senior, limited-recourse debt </li></ul><ul><li>Partial Credit & Political Risk Guarantees </li></ul><ul><li>Equity Participation at Early Stage </li></ul><ul><li>General “Comfort” as Multilateral Partner </li></ul>
  6. 6. ADB Loan for NPL Portfolio Purchase <ul><li>Portfolio Acquisition Loan </li></ul><ul><li>Senior, limited recourse </li></ul><ul><li>Maximum of 25% of total transaction cost (funding) or US$ 75 </li></ul><ul><li>million (whichever is less) </li></ul><ul><li>Full credit, market asset and legal due diligence </li></ul><ul><li>Market-based spread </li></ul><ul><li>Underwriting Fee of 1% - 1.5% </li></ul><ul><li>US$, Euro or, depending on the country, local currency </li></ul>
  7. 7. Example: Outright Sale Originating Bank Portfolio Purchase Price Servicer Servicing SPV Fee Investor 100% Debt
  8. 8. ADB and Securitization <ul><li>ADB Partial Credit Guarantee (PCG) </li></ul><ul><ul><li>timely payment of interest and ultimate payment of principal </li></ul></ul><ul><ul><li>up to 100% of one tranche </li></ul></ul><ul><ul><li>2 shadow ratings by acceptable rating agency </li></ul></ul><ul><li>Liquidity Facility </li></ul><ul><li>Political Risk Guarantee </li></ul>
  9. 9. Example: Conventional CLOs Charitable Trust Outright sale of Portfolio Originating Bank Portfolio SPV Originating Bank Investors Investors <ul><li>Senior Tranche </li></ul><ul><li>rated bonds </li></ul><ul><li>1st priority security over Portfolio </li></ul><ul><li>5 years (callable after 3) </li></ul><ul><li>Coupon Bearing </li></ul><ul><li>Liquidity Facility from OECD Bank </li></ul><ul><li>Mezzanine Tranche </li></ul><ul><li>unrated bonds </li></ul><ul><li>2nd priority security over Portfolio </li></ul><ul><li>7 years </li></ul><ul><li>Coupon Bearing </li></ul><ul><li>Junior Tranche </li></ul><ul><li>bond/loan/preference shares </li></ul><ul><li>subordinated </li></ul><ul><li>10 years </li></ul><ul><li>zero coupon (cash sweep) </li></ul>100% equity <ul><li>Guarantee </li></ul><ul><li>Loss bearing Liquidity Facility </li></ul>Market Value
  10. 10. Critical Issues: The Servicer <ul><li>More than for any other asset class, the Servicer is critical for an NPL deal. There will not be any cash flow from the assets without a Servicer. </li></ul><ul><li>Two kinds of Servicer: </li></ul><ul><ul><li>Special Servicer </li></ul></ul><ul><ul><li>Seller (Bank) </li></ul></ul><ul><li>Recovery Strategies: </li></ul><ul><ul><li>Legal Proceedings </li></ul></ul><ul><ul><li>DPOs (Discount Pay-Offs) or out-of-court settlements </li></ul></ul><ul><ul><li>REO company, a third party that will go to auction if prices become too low with the purpose of selling the property on the open market afterwards </li></ul></ul><ul><ul><li>Marketing & Sale Programmes </li></ul></ul><ul><ul><li>Funding Programmes, to provide funding to potential buyers of real estate properties (at auction or outside) </li></ul></ul><ul><li>Other Critical Issues: Underlying asset pool (secured vs. unsecured), legal environment, structural enhancements </li></ul>
  11. 11. Section 2: ADB’s Role in NPL Resolution in India
  12. 12. ADB and Indian ARCs ARC Trust Local Investor Originating Bank Foreign Investor 100% Sale of NPL Security Receipts (SRs) In consideration Cash SRs SRs
  13. 13. THANK YOU
  14. 14. Appendix 1: Asia’s NPL Resolution Problem
  15. 15. New strategies in investment banking <ul><li>Moving away from “client focus” to principal business </li></ul><ul><li>Ramping up proprietary business </li></ul><ul><ul><li>shrinking investment banking fees </li></ul></ul><ul><ul><li>growing proprietary trading </li></ul></ul><ul><ul><li>expanding distressed debt investment business </li></ul></ul><ul><ul><li>example: Goldman Sachs’s business model in Japan </li></ul></ul><ul><li>Growing advisory business in area of distressed assets </li></ul><ul><ul><li>continuous conflicts of interest to be managed </li></ul></ul>
  16. 16. Equity Solution for Asian NPLs? <ul><li>NO. Equity is not sufficient. </li></ul><ul><ul><li>Magnitude of NPL problem in Asia </li></ul></ul><ul><ul><li>Country limits and single deal exposures for investors </li></ul></ul><ul><ul><li>Increasing sophistication from sellers (e.g. PRC AMCs): more complex bid/offer spread </li></ul></ul>Total Asia ex-Japan Distressed Debt Distressed Debt to Stock Markets $ in billions Source: Ernst & Young; Bloomberg Source: Ernst & Young; Bloomberg <ul><li>Approximately US$815 billion of Asia </li></ul><ul><li>ex-Japan NPLs </li></ul><ul><li>Value of distressed debt is greater than some local stock markets </li></ul>
  17. 17. ADB’s Involvement: EARLY STAGE <ul><li>EARLY STAGE: CATALYTIC </li></ul><ul><li>“ Common Funder” </li></ul><ul><li>Strong benchmarks and transparent NPL market </li></ul><ul><li>“ Best market practices” </li></ul><ul><li>Catalyzing debt funding from international and domestic banks </li></ul>t Fees Number of Players NPL Resolution Market Market Development (a) ADB (b)
  18. 18. ADB’s Market Tiny Starting Growing Thailand Philippines PRC India <ul><li>Outside ADB Scope: </li></ul><ul><li>South Korea </li></ul><ul><li>Japan </li></ul><ul><li>Taipei,China </li></ul>
  19. 19. Appendix 2: ADB Due Diligence
  20. 20. Introduction <ul><li>NPLs can be classified into two categories: </li></ul><ul><ul><li>Secured NPLs have a security – a mortgage security or personal guarantee – of good quality. In most cases, mortgage loans with a first-rank lien or loans with a corporate guarantee fall under this category. The recovery process will largely depend on legal proceedings, while the extent of the recovery will depend on the real estate market. </li></ul></ul><ul><ul><li>Unsecured NPLs do not benefit from a good security. In most cases, mortgage loans with a second- or third-rank lien, unsecured corporate loans, consumer loans or overdrawn bank accounts fall under this category. The recovery process will largely depend on the efficiency of the servicer. </li></ul></ul><ul><li>The presence and the quality of a security for NPLs will obviously affect the expected level of recoveries for the creditor. </li></ul><ul><li>NPL debtors are either private individuals or corporate legal entities (corporations in most cases). The debtors’ legal characteristics will affect the legal proceedings and their durations. </li></ul>
  21. 21. General Principles <ul><li>The Asset Side: </li></ul><ul><ul><li>the characteristics of the NPL portfolio (secured vs. unsecured NPLs…) </li></ul></ul><ul><ul><li>the efficiency and the recovery strategies of the Servicer </li></ul></ul><ul><ul><li>the eventual support mechanisms (Liquidity Facility/Guarantee in the case of payment shortfall on the NPLs) </li></ul></ul><ul><li>The Liabilities Side: </li></ul><ul><ul><li>The waterfall of payments on the different classes of notes (subordination capital and/or interest) </li></ul></ul><ul><ul><li>The eventual support mechanisms (collateral in the case of payment shortfalls on the notes) </li></ul></ul>
  22. 22. Modeling Process INPUTS on: - assets (recovery, timing) - support mechanisms Modeling of Cash Flows Generated by NPL Portfolio Cash Flow Model OUTPUTS: Expected Repayment Profile of ADB Debt
  23. 23. Modeling Assets’ Cash Flows <ul><li>Assets’ Cash Flows: Secured or Unsecured </li></ul><ul><li>Secured NPLs – Loan-by-Loan analysis </li></ul><ul><ul><li>Timing </li></ul></ul><ul><ul><ul><li>Type of legal proceedings (insolvency/bankruptcy or foreclosure) </li></ul></ul></ul><ul><ul><ul><li>Phase of the legal proceedings and number of auctions according to the underlying real estate property. </li></ul></ul></ul><ul><ul><ul><li>Court timing recovery according to the legal phase. </li></ul></ul></ul><ul><ul><ul><li>Servicer’s strategy (legal proceedings or out-of-court settlements, or other strategies ….) </li></ul></ul></ul><ul><ul><li>Amount </li></ul></ul><ul><ul><ul><li>Mortgage security amount </li></ul></ul></ul><ul><ul><ul><li>Loan/claim Outstanding Amount (Gross Book Value) at the expected recovery date (legal interest or late payment interest) </li></ul></ul></ul><ul><ul><ul><li>Forced Sale Value (minus legal fees) at the expected recovery date. The Forced Sale Value of the property is derived from the last Market Value and projections for the real estate market (according to the kind of property – residential, commercial, industrial – and the geographic situation) </li></ul></ul></ul><ul><li>Several scenarios regarding timing (courts, Servicer’s efficiency/strategy) and real estate markets (cycles, volatility) </li></ul>
  24. 24. Appendix 3: Other Potential NPL Structures
  25. 25. (1) Joint Venture Management Originating Bank Outright sale of Portfolio Market Value <ul><li>ADB Loans </li></ul><ul><li>secured by Portfolio </li></ul><ul><li>5/7 to 10 years </li></ul>50% In-Kind Equity Funding 50% Cash JV Agreement SPV Originating Bank JV Partner Portfolio <ul><li>Compared to Holding the Portfolio, this solution provides: </li></ul><ul><li>Leverages the expertise & resources of two JV Partners </li></ul><ul><li>Lower upfront proceeds </li></ul><ul><li>Medium up-front write-down </li></ul><ul><li>Financing risk </li></ul><ul><li>Maximum work-out upside / downside </li></ul><ul><li>No deconsolidation </li></ul>Debt Funding
  26. 26. (2) Joint Venture with Pooling Bank A Outright sale of Portfolio A Market Value <ul><li>Junior Loan A </li></ul><ul><li>subordinated </li></ul><ul><li>security over </li></ul><ul><li>Portfolio A </li></ul><ul><li>7 to 10 years </li></ul>25% Funding 25% Funding SPV Bank A Bank B Bank B Outright sale of Portfolio B Market Value <ul><li>Senior Loan </li></ul><ul><li>1st priority security </li></ul><ul><li>over Portfolios A & B </li></ul><ul><li>5 to 7 years </li></ul><ul><li>Junior Loan B </li></ul><ul><li>subordinated </li></ul><ul><li>security over </li></ul><ul><li>Portfolio B </li></ul><ul><li>7 to 10 years </li></ul>Bank B 25% Funding 25% Funding Joint Management Agreement Portfolio
  27. 27. (3) Synthetic Sale Originating Bank SPV Investor 1/3 : Financial close 1/3 : 1 st year 1/3 : 2 nd year Market Value Servicing Contract - Base Fee - Incentive Fee Senior Debt Equity
  28. 28. (4) Synthetic CLO with CDS Premium only Originating Bank Charitable Trust 100% equity <ul><li>Senior Tranche </li></ul><ul><li>rated bonds </li></ul><ul><li>1st priority security over Collateral </li></ul><ul><li>5 years (callable after 3) </li></ul><ul><li>Coupon Bearing </li></ul><ul><li>Mezzanine Tranche </li></ul><ul><li>unrated bonds </li></ul><ul><li>2nd priority security over Collateral </li></ul><ul><li>7 years </li></ul><ul><li>Coupon Bearing </li></ul>No Credit Event : Zero Credit Event : Deliver Asset reference price Portfolio SPV Investors Investors CREDIT DEFAULT SWAP: Funding Funding Guarantee
  29. 29. (5) Hybrid CLO with Equity Portfolio 45% of equity of SPV 1 Secured Loan 7.5% of equity of SPV 1 100% of equity of SPV 2 Charitable Trust <ul><li>Senior Tranche </li></ul><ul><li>rated bonds </li></ul><ul><li>1st priority security over Loan Receivables </li></ul><ul><li>5 years (callable after 3) </li></ul><ul><li>Coupon bearing </li></ul><ul><li>Liquidity Facility from OECD Bank </li></ul><ul><li>Mezzanine Tranche </li></ul><ul><li>rated bonds </li></ul><ul><li>1st priority over 0% RW Assets </li></ul><ul><li>2nd priority security over Loan Receivables </li></ul><ul><li>7 year </li></ul><ul><li>Coupon bearing </li></ul><ul><li>Junior Tranche </li></ul><ul><li>bond/loan/preference shares </li></ul><ul><li>subordinated </li></ul><ul><li>10 years </li></ul><ul><li>zero coupon (cash sweep) </li></ul>Originating Bank Portfolio Originating Bank 47.5% of equity of SPV 1 Investors Investors Originating Bank SPV 2 SPV 1 Guarantee
  30. 30. William Willms Asian Development Bank +63 2 632 5469 [email_address]

×