|Simon Lew||Hello. In today's session we're going to talk about consideration structures when used in non performing loan portfolio sales. Alan. Are there any unique features to consideration structures in NPL deals?|
|Alan Bainbridge||So I think NPLs just like loan portfolio deals generally tend to follow a pricing date structure. Whereby you've got a pre existing pricing date for economics and then you effectively have a true up post closing to deal with post closing pricing date payments and post pricing date receipts. So in that sense, they're the same. But where we have tended to see some differences, has been in relation to how you effectively do the true up. Whether you do it once or twice. So in the context of NPLS, we've seen buyers really wanting to do two true ups: one on a pre signing basis, and I think there's a kind of tactic here. One is they probably want to assess whether or not their performance or non performance is in line with the valuation methodologies and give them a chance to renegotiate and then secondly, they probably want to minimise the chance of having an expert determination over a much larger amount of money. So if you can effectively minimise the amount that's exposed to true up, that's probably preferable in the context of NPLs.|
|Simon Lew||What particular issue should buyers and sellers be concerned about?|
I think there's kind of two that sort of jump out at me. I think one is in relation to principal, deferred principal receipts. So this documentation for all these types of deals has been around for decades, but within that documentation there are certain biases or preferences that are well‑embedded. Now when I'm acting for sellers I'm kind of quite happy to work with the existing documentation. But when I'm acting for buyers, I think you've got to look out for that, buyers a preference issue. And one area is in relation to how it creates that deferred receipts of principals and so as far as counsel, it's one to look at quite carefully to ensure it aligns with the valuation methodology. I think secondly there is the issue of enforcement and restructuring. So in NPLs there's two issues of restructuring you've got to look out for. One is, is the loan being restructured in any way, and that's usually quite easy to deal with because you can effectively document in the transaction agreement how you value that particular loan and there's an end‑game in sight for how that restructuring will be documented. I think where it's more difficult is if the borrower is undergoing some kind of corporate restructuring. So how does that impact your price? What assumptions do you make on whether there's going to be a creditor squeeze‑down? Will you end up having a debt for equity swap type of structure that you're buying into? So I think that's the biggest kind of adjustment in NPLs.
I think the other angle is in relation to enforcement. So, are you buying a group of loans where some of them are already subject to proceeding? If they are, how is that going to impact the value you allocate to that particular loan? Are you assuming you can take on their proceedings? You probably can't. Are you going to have a litigation conduct agreement? What does that do to your pricing? What risk sharing is going to apply? So to me, those are the biggest changes.
|Simon Lew||Are you seeing consideration outcomes being subject to disputes?|
|Alan Bainbridge||I would say not as much as I thought. Certainly we are seeing more principals disputing items of consideration structure, outcomes of true‑up mechanisms. But what we are tending to see is that's not translating into a lot of more referrals to expert determination. I think there's two reasons for that. One is, a lot of the time, people don't want to be subject to the vagaries of expert determination, unless you've got a clear cut case, and in most times, it's not clear cut. And I think secondly, there is a concern in the context of NPLs in particular, whether you might be brought into sharing more information with an expert process than you might otherwise want to. So for those reasons, not as much expert dispute as possible.|
Loan portfolio divestments, whether by way of sale or securitization, continue to make headlines and the prospect of increasing impairments in the coming year has drawn wide commentary regarding the impact on loan exposures in several key industries disproportionally impacted by the pandemic.
Drawing on our experience of several of the most high-profile disposals and acquisitions of performing and non-performing loans in such sectors, this video series will guide both sellers and buyers on the key areas to be considered in the context of preparing to sell or buy a loan portfolio in one of these sectors, together with some additional commentary on areas that will regularly be the basis for detailed negotiations.
In the first video in the series, Alan Bainbridge and Simon Lew discuss consideration structures when used in non performing loan portfolio sales.