Business recovery and restructuring Banking Sale of non-performing loans October 2009
Agenda Sale of NPLs Appendix Q & A Slide 2
Sale of NPLs Section 1 Slide 3
Rationale for NPL Sale Quantitative Benefits Immediate Reduction of NPLs in a timely manner improve NPL position Possible gain on disposal for the NPLs (depending on provision levels) Improve liquidity position of the bank and capital adequacy position possible release of capital and resources which can be used for other purposes Reduction in other holding costs relating to NPLs eg ongoing legal fees, payment of maintenance on collateral Minimise and/or better management of future provisioning requirements Qualitative Benefits Free up resources of Recovery teams account officers can be re-assigned to other areas in the bank Recovery teams can focus on remaining NPLs that have a better chance of recovery and maximise recovery potential Speed up timing of recoveries as a large number of NPL loans can be sold at one time via a portfolio sale Positive market perception proactive management of NPLs may lead to improved ratings Potentially investors may pay a premium for entry into a new NPL market Slide 4
NPL Resolution Strategies There are 2 broad strategies to deal with NPLs continued in-house work-out or sale to a 3 rd party, the pros and cons of which are outlined below. Manage in house Pros Likely to maximise gross recoveries of loans due to better understanding and longer history of dealing with the loans Likely to result in a higher NPV recovery for loans subject to long recovery periods. Can retain customers through restructuring and return to performing status Cons No immediate reduction in provision Recoveries will be spread over time Loans will still require mandatory provisions/write offs pursuant to Regulatory requirements Will require significant resources to effect recovery. NPLs Sale to 3 rd Party Pros Free-up resources Improve liquidity position of the Bank. Improves capital adequacy position Possible immediate reduction of NPLs on books Possible immediate release of provision on books Improve capital and debt markets perception of Banks as well as improved ratings (S&P, Moody s, etc) share price enhancement, lower cost of funds Cons Gross recoveries may be less than inhouse management Possible lower realisations than if worked out by Bank Will still require certain data rectification works to be completed by the Bank No customer retention Possible loss on sale Slide 5
NPL Sale Process Approach NPL sales can generally be split into two phases as follows Phase 1: High Level Review of NPL Portfolio Phase 2: Sale Preparation and Execution Process Review of NPL pool Portfolio identification Sample validation High Level Value Estimation High Level Recommend ation Full validation Strategy Development Sale Preparation Execution High level portfolio review Portfolio analysis based on sampling from data tapes and extrapolation of the results obtained Estimate the sale proceeds from the disposal of the portfolio in various scenarios Assessed the financial impact to the Bank in the event of a disposal Benchmark sale prices of NPLs around the region Propose a structure to facilitate the sale of the NPLs 4-5 months (Tranche1) Finalisation of sale strategy Data cleansing exercise Initiate investor contact and finalise pricing Prepare information package and bid documents Assemble Data Room, issue bid document and commence due diligence Short listing of bidders and analyse final bids Analyse final bids and bid acceptance Negotiate SPA, regulatory approvals and completion Decision Time To Proceed or Not Proceed With Phase 2 based on recommendation Slide 6
NPL Sale Strategy Sale to 3rd Parties Pros 3 rd Party JV Cons Can facilitate expert external asset managers to potentially realise value for Banks Deal structuring options Potential upside sharing Partial release of resources Bank returns will be reduced by investor expenses and required rate of returns Difficulty in comparing bids Perceived as less transparent than outright sale May not achieve derecognition Pros Outright Sale Cons A reasonably quick process Immediate release of resources Is favoured by investors Immediate de-recognition Perceived as transparent Information needs wide but remains controllable Process requires more management Pros Securitisation Cons Provides new source of funds Market image enhanced May enhance Bank ratios May buy time Issues can be topped up with later portfolios Information needs high Can be time consuming Underwriting costs can be high Investors may look for super profits Slide 7
NPL Sales in Poland - Examples Bank BPH Bank PEKAO Portfolio face value of around EUR 150m Ca. 400 corporate and SMEs borrowers One of the first transaction in the newly opened NPL market Project involved discussions with regulator of the banking sector and tax authorities Good international interest in the portfolio Transaction closed in December 2006 Portfolio face value of around EUR 450m Ca.1,400 corporate and SMEs borrowers The largest ever NPL sale in Poland Portfolio divided into two tranches secured and unsecured Very efficient transaction closing and documentation transfer Main bidders well established players in the Polish market Transaction closed in September 2008 On both transactions we: used securitisation vehicle to have tax efficient transaction structure had electronic data room to facilitate investors due diligence and Q&A process Slide 8
NPL Sale Strategy Global Experiences Outlined below is a sample of NPL sales in other countries as well as a high level global NPL pricing table. Please note these numbers were obtained from independent research and market speculation and have not been verified or subjected to a confirmatory review. Accordingly these tables cannot be relied upon and are presented as a guide only. In addition this data only relates to recent sales data. InvestorExit Loan Strategy Loan Type Pricing Type (indicative) and note2 Structure Data source: PwC research Majority of global NPL sales in recent times have generally been on a cash basis. Prices variances usually range from single digit up to 50% of outstanding principal balance and are largely influenced by loan/collateral type (with secured/real property loans generally attracting higher prices). Taiwan Germany Latin America Philippines Performing Non Performing 100% 100% 100% 100% Secured (note 1) 65% majority mix majority Unsecured 35% minority mix minority Corporate 20% 10% 80-90% 35% Retail/Consumer 35% 10% 5-10% 10% SME 20% 10% 5-10% 35% Real Estate/Other 25% 70-80% 5-10% 20% Restructure yes yes yes yes Foreclosure DPO Sale majority yes majority yes majority yes majority yes Refinance yes yes yes yes Rumoured Price (% UPB) (note 3) 10 to 50% 10 to 60 % 0 to 40% 5 to 45% Primary Structure (Cash, JV, Other) Cash Cash Cash Cash Timing to close (from signing SPA) 1 to 3 mths 1 to 6 mths 1 to 6 mths 1 to 6 mths Average Life of Portfolio (indicative) 3 years 3-10+ years 3-6 years 3-6 years note 1: indicates existence of some form of security, not that the loan is fully secured note 2: recovery strategies based on each loan as opposed to the portfolio note 3: based on market speculation and not verified Country Rumoured Prices(note 4) China 15-30% India 9-22% Japan 7-30% Malaysia 15-25% The Philippines <10-45% SouthKorea 3-40% Taiwan 17-50% Thailand <10-35% Germany <20-60% Poland 10-20% Mexico 0to 80% note 4: based on market speculation and not verified and does not encompass all sales. Slide 9
Final Comments Consider regulatory framework for transaction Clearly define your objectives before embarking on a sale Integrate local practices with international standards/benchmarks Information is the key to success Don t go it alone experienced advisors will enhance value Slide 10
Appendix Slide 11
Private sale structure 2 Options (Subject to applicable accounting standards) Option 1 Outright Cash Sale Investor NPL Bank Option 1 Outright Cash Sale The first option involves the outright sale of the Portfolio to an SPV owned entirely by third parties. In this instance, all economic interests in the Portfolio would pass to the SPV and its ultimate owners. Cash Equity Option 2 JV Arrangement Investor Cash Equity SPV SPV NPL Cash Bank Cash Equity Option 2 JV arrangement The second option is for the Bank to form a joint venture ( JV ) in which it holds an equity stake in the SPV alongside the investor. Under this option, the SPV would acquire the Portfolio from the Bank for a combination of cash (from the investor) and non-cash contribution from the Bank. The economic interest in the Portfolio would then be shared by the equity holders pro rata to their equity stakes or by some such other method (eg profit sharing) as agreed between the parties. Slide 12
Securitisation Structure (subject to applicable accounting standards) Trustee Investor servicing Servicer (could be Bank) Investors Asset transfer Bank ABS issue Cash SPV Cash Securitisation is the process by which assets with generally predictable cash flow and similar features are packaged into interest-bearing securities with marketable investment characteristics. The key to securitisation is the predictability of cashflows and supporting loan documentation and history to verify these cashflows. Unlike a bulk sale, the focus of the investor group in this instance is usually on the rating of the special purpose vehicle ( SPV ) and the coupon payable. The costs and timing of preparation are usually high as estimated future loan recovery needs to be attested by an independent 3 rd party, which generally requires significant supporting loan documentation and history. Loans that typically lend themselves to securitisation include: Loans with dependable cashflow streams (eg performing loans) Real estate porftolios with clear cashflow streams. Where loan documentation is complete and in electronic form allowing easier verification. Slide 13
Questions? Janusz Sekowski Director, Business restructuring services, Poland Tel.: + 48 (22) 523 44 76 janusz.sekowski@pl.pwc.com This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation, and, to the extent permitted by law,, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. 2009. All rights reserved. refers to the network of member firms of International Limited, each of which is a separate and independent legal entity.