[ Malaya.com.ph ] September 11, 2009
By AMADO P. MACASAET
The Special Purpose Asset Vehicle (SPAV) worked two ways for commercial banks which availed of it.
The upside is it helped clean their balance sheets which were splattered with receivables they could not collect.
The downside is the banks took heavy losses selling defaulted loans at as high as 80 per cent discount.
That might have been the single biggest factor that reduced non-performing loans (NPL) from higher than 10 per cent of total loans to the present below five per cent.
The SPAV also produced big winners. They are the firms which bought the loans at a discount and later sold them for almost a hundred per cent gain.
At least three sources in the financial sector who did not want their names mentioned told Malaya Business Insight that immense benefits were derived from the SPAV by those who bought the toxic loans.
The law says that after a bank foreclosed a collateral, the borrower has one year to redeem the asset. During that period, the lender is not authorized to entertain any offer to buy.
After the lapse of one year, the banks can keep the assets in their books for only five years. They have to be sold.
But then, there is an easy and legal way of skirting the law. The banks go into the simple process of setting up wholly owned property development companies where the assets are transferred for payments which are paper transactions.
This neat trick, a source explained, might have been the reason why not even half of the bad loans were sold under the SPAV.
Some banks like Metro Bank which set up Federal Land, might have discovered that foreclosed real estate mortgages should be developed, not just to recover the value of the loans but to make fat profits by building condominiums which now seem to be in demand.
They estimate that loans available for SPAV purposes range between P150 to P200 billion. But ony about 30 to 35 per cent of the amount has been sold under the SPAV after seven years since 2002.
About 60 per cent of the SPAV market is controlled by the local operation of Deutsche Bank of Germany; Avenue Asia, a hedge fund based in the United States; Standard Bank of South Africa; and the Philippine operation of Lehman Brothers of the US.
A buyer of a loan under the SPAV takes the first effort of trying to collect the balance of what he paid for.
Failing that, he offers to sell the asset at a discount of as much as 40 per cent. If a transaction takes place, that buyer makes a 100 per cent gross spread. He bought the loan at a discount of 20 per cent and sold it for 40 per cent.
It is a good but not that easy a kill.
There are two other ways of getting rid of the asset. The balance of the loan held by the SPAV buyer is restructured for as long as six years at an interest rate at least two per cent points lower than market.
The next option is to voluntarily surrender the asset under the so-called "dacion." The owner is paid between 60 and 80 per cent of the market value.
There are a few cases where the former owner of the asset sold by the bank through the SPAV refuse to take advantage of the options which are payment of the loan to the SPAV buyer, agreeing to a restructure, accepting a discount and dacion.
They opt for litigation by filing cases for recovery in court. The effect is to prevent the disposal of the asset under the four options and pay handsome amounts in lawyers’ fees.
In the initial years of the SPAV which took effect in 2002, the buyers shared their profits with the bank from which said assets were bought at an incredible discount of as high as 80 per cent.
If the buyer sells the asset at say, 40 per cent discount, the spread or profit of 20 per cent is shared equally with the banks concerned.
That arrangement did not last long. The accountants of the banks declared that such sharing should not be practiced if the toxic assets do not stay on the receivables side of the banks’ balance sheets.
The little recovery added to the discount at purchase was driven away by the accountants of the banks.
As of yesterday, about P70 billion worth of assets were sold. That is on the high side of the estimated P200 billion open for SPAV sale.
On the low side of P150 billion, the value of SPAV transaction is about P45 billion.
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