Holistic Active Management of Non-Performing Loans (eBook)

Claudio Scardovi is a managing director and head of Financial Services for EMEA at AlixPartners. For the last 15 years he has been managing director for a number of companies including KPMG, Accenture, Intervaluenet, Oliver Wyman, Lehman Brothers, Nomura, and Advent. He is a professor at Bocconi University, at SDA Bocconi, and at Imperial College. A serial entrepreneur, he has written more than 200 articles and 12 books, published by Edibank, EGEA, Il Sole 24 Ore, Quondam, and Mondadori.

Acknowledgments 5
Contents 6
1 Work-Out: Holistic Active Management of NPL 9
Abstract 9
1.1 Introduction 9
1.2 An Overview of the Book 11
2 The Bad Bank and the Good Banking 16
Abstract 16
2.1 What NPL Really Means 16
2.2 Perception, Deception 17
2.3 NPLs: A Booming Market 18
2.4 NPLs: A Macro and Micro Perspective 19
2.5 NPLs: The Lake and the River 20
2.6 Ways Back from Hell 21
2.7 The ``Bad Bank'' Approach 23
2.8 Systemic Bad Banks: The NAMA and SAREB Cases 24
3 The Work-Out Value Chain: Permutations and Clusters 28
Abstract 28
3.1 The ``Traditional'' Credit Lifecycle 28
3.1.1 Credit Origination 29
3.1.2 Credit Management 30
3.1.3 Credit Management, Collection and Recovery 30
3.2 A More Proactive Approach to the Credit Lifecycle 31
3.2.1 Credit Origination 31
3.2.2 Credit Management 32
3.2.3 Active Management of Sub Performing Loans 33
3.2.4 Active Management of Non Performing Loans 34
3.3 Segmentation of Non Performing Loans 35
3.4 Permutations and Clustering of NPL Portfolios 37
3.5 Credit Work Out Strategies for NPL Clusters 38
3.6 Economics of the Recovery Strategies and ``Make'' Versus ``Build'' 40
3.7 Cost Income Analysis for Independent Work Out Platforms 41
4 The Work-Out Unit: Captive--Deceptive 45
Abstract 45
4.1 Alternative Set Ups: Captive Versus Non Captive 46
4.2 The Internal ``Embedded'' Set Up 47
4.3 The Internal ``Separate Legal Entity'' Set Up 48
4.4 Captive ``Deceptive'' 49
4.5 The External ``Outsourcing'' Set Up 49
4.6 Model Selection: Three Factors to Consider 50
4.7 Bank Owned, Independent Credit Work Out Units 53
5 Developing a Credit Work Out ``Alpha Platform'' 57
Abstract 57
5.1 Beta Trackers and Alpha Players: A Snapshot of the Asset Management World 57
5.2 Different Ways of Becoming an Alpha Player 59
5.2.1 Talent Driven Alpha Playing 59
5.2.2 Process Driven Alpha Playing 60
5.2.3 Algorithms Driven Alpha Playing 60
5.2.4 Scale Driven Alpha Playing 61
5.3 The ``Trade off'': Cost Optimization Versus Recovery Maximization 62
5.4 Defining the Best Recovery Strategy 63
5.4.1 An Equipment Leasing Work Out Case Study 64
5.4.2 Real Estate Backed NPL Case Study 66
5.5 Defining the Best Position to Recover 68
5.6 Industrializing the Internal Capabilities 69
5.7 Ensuring the Effective Monitoring of Internal Structures 70
5.8 Ensuring the Effective Monitoring of External Structures 72
6 Developing an Holistic and Active Credit Work Out Unit 75
Abstract 75
6.1 Developing a WHAM Approach 75
6.2 Design and Creation of a Credit Workout Unit 76
6.3 Crash Program on the Most Urgent Situations 81
6.4 Design and Development of Accelerators 82
6.4.1 Real Estate Agency 83
6.4.1.1 The Concept and the Economic Rationale 83
6.4.1.2 The Management of a Real Estate Agency 85
6.4.1.3 The Real Estate Agency Structure and Set Up 86
6.4.2 REOCO 87
6.4.2.1 The Concept and Its Economic Rationale 87
6.4.2.2 The Management of a REOCO 89
6.4.2.3 The REOCO Structure and Its Set Up 92
6.4.3 Active Real Estate Management (AREM) 94
6.4.3.1 The Idea, the Setup and the Structure 94
7 Managing Competitively NPL Portfolios and Third Party Servicers 95
Abstract 95
7.1 Managing Competitively NPL Portfolios 95
7.2 An Approach to Credit Workout Excellence 96
7.3 NPL Portfolios Database Assessment 98
7.4 Portfolio Valuation and Recovery Strategy Implementation 100
7.5 The ``as is'' Value 101
7.6 The ``To Be'' Value 107
7.7 The Overall Assessment of the Strategy 108
7.8 Defining the Best Set of Actions 112
8 The WHAM of a Troubled Corporate Loans Portfolio 115
Abstract 115
8.1 Corporate Restructuring and Credit Work Out 115
8.2 Sub Performing Corporate Loans: The Ways Out 117
8.3 Corporate Restructuring: An Overview 120
8.3.1 Company Crisis: Reasons and Indicators 120
8.3.2 Early Actions: Institutionalizing Cash Management 122
8.3.3 Determining the Value of Options for Shareholders 124
8.3.4 Assessing Restructuring Options 125
8.4 The Importance of a Holistic Turnaround Approach 127
9 The WHAM of a Real Estate Loans Portfolio 129
Abstract 129
9.1 Banking and the Real Estate Sector---The Interconnections 129
9.2 How Many Real Estate Assets Does a Bank Have in Its Portfolio? 130
9.3 An Optimal Management of Real Estate Assets 132
9.4 AREM---Active Real Estate Management 135
9.5 Active Space Management 139
9.6 The Bank as an Integrated Real Estate Player 140
10 The WHAM of a Troubled Leasing Equipment Portfolio 143
Abstract 143
10.1 The Management of an NPL Leasing Portfolio 143
10.2 Leasing: It's All About the Underlying 144
10.3 Short Term Management Actions on Leasing NPL 145
10.4 A Medium-Long Term Program for Real Estate Leasing Contracts 147
10.5 Value Creation in Leasing 149
11 Working It Out: From Value Recovery to Value Creation 151
Abstract 151
11.1 The Evolution of the Credit Work Out Business 151
11.2 The Industrialization of Credit Recovery 152
11.3 Innovations 156
11.4 Working It Out: Holistic and Active 157
Bibliography 159