April-20-2016 in Banking & Financial Services

Following our examination of the key factors in ensuring capacity to sell, this second article in our three-step series on successful debt disposal considers the next vital stage - preparing for sale.

Remediation of security defects and clarifying original vendor’s capacity to remediate

In many instances the underlying security acquired is flawed and the purchase price was discounted to reflect this. The current owner has an opportunity to remediate in order to optimise the return on disposal. Certain elements of the remediation may remain post-sale and may still be incomplete. Depending on what stage of the process the original loan transaction has progressed to, a borrower may no longer be bound to cooperate with the original vendor as it is no longer the legal or beneficial owner of the debt or security and has no privity with the borrower. Early assessment and taking control of the remediation process by the current owner will expedite the process.

Assessment of Accountable Trust Receipts secured (ATRs)

On the acquisition of the loans not all security or title documentation will have been physically delivered. In many instances ATRs will have been assigned as documentation would have been held by external solicitors for remediation purposes or other reasons such as consensual sales. It is important to assess the current position with these ATRs to clarify progress on sales/remediation and determine if it would be advantageous to call the documentation back in if remediation could be expedited or, for example, consensual sales are not proceeding. This assessment will also facilitate finalising a definitive list of ATRs to be assigned to a future purchaser.

Consideration of disposal options

There are various considerations involved in the disposal strategy. These include timeline targets, disposal targets, appetite of the market, shifts in the loan-to-asset-value ratio, and cooperation of the borrowers. These factors all go into the mix in determining the preferred strategy. A non-exhaustive list of disposal solutions includes:

Macro approach

  • Portfolio loan sale multi-bidder process
  • Large volume asset sale (post enforcement) multi bidder process.

More granular approach

  • Bilateral loan sale to third party
  • Bilateral loan buy back
  • Consensual property/asset sale
  • Refinance by a third party Bank/Alternative funder
  • Post enforcement Mortgagee in Possession/Receiver sales.

In the final part of this three-part series, we offer pointers on avoiding post-disposal commitments.

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