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Non Performing Loan Factory

Problem

Many country's banks have substantial book value non performing loans(NPLs) on their balance sheets. This is problematic for two reasons: NPLs reduce liquidity and depress profitability, which could erode bank resilience over time. In some cases, banks have inadverteently under declared their level of NPLs to the International Monetary Fund(IMF). If the under reporting is dicovered, it may result in the imposition of fines and a reduction in the bank and/or country's credit rating.

Banks have traditionally had two options for dealing with NPLs: write them off, and absorb the loss; or sell them to hedge funds at a significantly discounted price. The hedge funds will then usually asset strip the companies, depressing the local economy and resultion in job losses. Bond Asians Ventures(BAV) does not consider either of these options to be sustainable for national economies, banks, or individual companies.

Solution

BAV believes that a holistic solution is required for the large scale processing of NPLs. Our NPL Factory process is conducted off market, off balance sheet, but with the option for the transaction to go on market once the problem has been fixed. The below process is based on having the Central Bank as the counter party. Variants for indiviual banks are available on request.

  1. The Central Bank sets up a "bad bank" and hoovers into that structure all the NPLs from local banks.

  2. BAV enters into an off market arrangement with the newly created bad bank to invest a sum equsl to the total book value of the NPLs. The Central Bank will be required to provide BAV with a bank guarantee as security.

  3. Third party firms conduct independent legal, risk, and financial assessments to establish the current value of the NPLs. The cost of these assesssments is borne equally by BAV and the Central Bank.

  4. BAV purchases the NPLs from the Central Bank at a mutually agreed price based on the valuation given by the independent assessors.

  5. BAV uses the balance of the NPL's book value to restructure, invest in, and otherwise turn around the companies, making the previously non performing loans.

  6. BAV authors an investment memorandum(IM) and sells the now performing loans to an exchange traded fund(ETF) so that the capital and profits can be reinvested.

The investors requires a return on investment (ROI) of 7% per year. If an NPL takes three years to turn around, that is to say that expect 21% profit on the funds deployed. Any profits realised above three figures will be shared on a 50:50 basis with the Central Bank.

If the NPL book value exceed $250. BAV reserve the right to process the NPLs in tranches of $250m. These may be processed in sequence or concurrently, depending on the availability of resources and the time sensitivity of the turn arround.