Methods of settlement.

There are several traditional methods of resolving issues related to non-performing assets: quick resolution, individual resolution or restructuring, where the company is simply restructured without selling assets, the banking approach and the decentralized approach.

Let's look at the pros and cons of each approach. The pros are mainly due to the removal of problem loans from the bank and the concentration of these loans in one organization - an asset management corporation. Both restructuring and the rapid resolution method help the bank to recover and continue its activities. At the same time, corporations benefit from "economies of scale", since they concentrate many portfolios. As a result, a buyer is found who specializes in the sale of such portfolios, and the loans are concentrated in the hands of one buyer. This helps to find the most convenient transaction structure and work out the best terms. The relationship between the bank and the borrower improves. This approach also provides banks with certain regulatory and infrastructural advantages. For example, tax breaks.

For banks, the benefit is also in the fact that in order to create the most favorable transaction options, the bank is given the opportunity to determine its own incentives for fulfilling the requirements set before it. This can lead to restructuring the bank, to revising the infrastructure and credit policy of the bank. The bank needs this so that problems do not arise in the future. That is, in these restructuring measures, there is an element of prevention of problems with loans in the future.

When SP is needed.

Sometimes these difficulties are very difficult to resolve because it requires a change in legislation. In this case, in order to solve the problem of non-performing assets, I think it is possible to use a special type of joint venture. Basically, JVs are created to conduct bilateral transactions. But I think it is necessary to look at this method more broadly. It is possible, for example, to hold a competitive tender, which can lead to the participation of the private sector. And this is already very profitable.

If there is a secondary market for distressed assets, it is necessary for the debts to be sold to a third party. In this case, it is necessary to involve specialists, it is necessary for new capital to be introduced. At this stage, some companies can be involved. As a result, the distressed asset can become a secondary unit on the market, which will work well in the future.

Fast and slow selling.

The longer it takes to sell an asset, the lower its price on the market. Restructuring should be done before the assets are sold. If proper restructuring does not take place while waiting for the sale, the asset price will be significantly lower. The highest price will be if the restructuring is done early. However, it may happen that the seller's balance sheet shows a higher price for the asset than the one for which he can sell the asset on the market. And then he will not sell it. And this is one of the problems that often occurs in many countries. In this case, you can try to postpone the recognition of the loss. This is the paradox that arises. Here it makes sense to achieve a deferment and make sure that there is a gradual understanding of what the real value of this asset is. Of course, the sale will not be as successful as in the framework of a quick settlement. But the sale can still be quite quick due to the fact that everything will be agreed upon in advance, the risk for investors will be mitigated and there will be no misunderstandings and inconsistencies between the expected price and the price that actually needs to be paid for the assets. This is already a decentralized approach. And it also often turns out to be profitable for banks and asset management corporations.

Structured transactions can take very complex forms, and so the most important thing is to ensure transparency. Transparency must accompany complexity. The structure of the joint venture, the sales operations, all forms of instruments must be described in great detail, and a detailed description of the method of profit sharing and a description of the portfolio must be created. This is very good from the buyer's point of view.

Of course, there is a lot of extra work required from the asset management company and the bank before the deal, but once the work is done, everything else is just a technical process. And on top of that, before you announce the structure of the deal, you already know exactly what you want to get.

It should be noted that the deferral of inclusion of losses on the balance sheet is an incredibly complex mechanism. And some even say that it does not always make sense to use it. But both the World Bank and the International Finance Corporation very often say that this is done in order to ensure the true price of assets. Buyers of assets from a joint venture also enter into direct relations with the debtor. But this process can also be quite complex. And I would not say that traditional open auctions, which the International Monetary Fund loves so much, are always a solution to the problem. Yes, of course, buyers are attracted, but even if all transactions are transparent, very often hidden transactions take place at an open auction.

TECHNOLOGIES: SP and traditional methods