Effective Asset Management in a Time of Crisis
Banks of non-core asset have been successfully operating in many regions of the world for several decades
The most large-scale creation of banks of non-core assets began about 20–25 years ago in Europe and Asia, when the first Asian crisis began. In principle, they still exist to this day. There is demand for them because crises are regular. They constantly lead to the build-up of bad loans and non-core assets, and they need to be dealt with. The state is always involved in this, but in different forms [...] Usually it starts with additional capitalization, as was the case in our country and in other countries [...] This is actually so-called first aid from the state. It helps to withstand prudential norms, and banks continue to function — Vadim Khrapun, Partner, Head of Business Restructuring and Financial Recovery Practice, PwC Russia.
Both governments and private structures can work effectively with problem assets
I believe that the economy has room for any model [of working with distressed and non-core assets]: both for a properly organized private model, and for a properly organized state-run model. It’s a question of an effective model of state planning, or, conversely, an exclusively capitalist model. But if we analyse, let’s say, the differences a little, I would probably note the following [...] It’s a motivational structure [...] When a private company is engaged in this part of the business, it has a different motivation because it has to return what it has in any way. It doesn’t matter how, it has to be done as quickly and efficiently as possible — Andrey Elinson, Managing Partner, A1 LLC .
Distressed asset managers have little time to make decisions
Such [crisis] situations in which we periodically find ourselves really mobilize all our resources. Banks deal with various claims that they have to resolve. In these situations, you don’t have enough time to solve this problem. You only have 4–5 days to stabilize a difficult situation. How should we approach these issues? These are tactical tasks and, naturally, strategic tasks [...] The tactical tasks are related to the following questions: ‘Is there enough capital to meet the necessary needs?’ and ‘Has a board of directors granted permission or a mandate that allows you to work with these assets freely?’ As for the strategic approach, it’s a general plan for the development and planning of the asset sale stages — Grahame McGirr, Managing Director, Naissance.
Managers are unable to fully prepare for crises
Yes, this project [of a bank of non-core assets] was insanely complicated. It still remains difficult, although it has already moved from the area of insane complexity [to another category] [...] When is it difficult? When there are too many challenges and too little time to find solutions and implement them […] [TRUST] bank has amassed a huge amount of assets over a very short period of time – more than RUB 2 trillion at nominal value and RUB 233 billion at fair value, with more than 500 projects [...] We held 17,000 court sessions in 2.5 years [...] So, if we’re talking about complexity, I think this is actually a feature of this business because any crisis [...] is, of course, unexpected as always [...] You expect them in theory, but their actual occurrence always happens extremely quickly. It’s impossible in principle to be 100% prepared for crises — Alexander Sokolov, President, Chairman of the Management Board, Bank of Non-Core Assets (NB TRUST Bank).
Special management companies and banks are being created to manage distressed and non-core assets
The problem of [a non-core or distressed] asset isn’t going way. Something needs to be done with it. There are two methods, two ways. There is a model whereby a division is created in a bank itself to work with distressed assets [...] There are examples, quite a few of them, when special banks or management companies are formed. There are different firms that are already professionally engaged in this. As you can understand, when you do something professionally, it usually turns out better — Vadim Khrapun, Partner, Head of Business Restructuring and Financial Recovery Practice, PwC Russia.
Managers are selling distressed portfolios in parts
The first time I started working with distressed banks, I believe there was a very serious portfolio that was impossible to sell. We looked at what we could do. We wanted to blow up everything and break out of this terrible, vicious circle. We didn’t want to take on these bad assets. This was truly the wrong approach. We found out very quickly that we need to extract value from this, i.e., get rid of it according to the ‘asset by asset’ [principle], one at a time. Sometimes a big transaction emerges, but you can’t get rid of the entire portfolio. So, we wanted to preserve some value, i.e., extract something from it [...] It needs to be approached from an economic point of view. There must be some justification for the transaction, an economic justification. Indeed, the buyer must have some kind of economic advantage. Some people try to attract a buyer through arbitration, through tax issues and so on — Fredun Mazaheri, Expert in Distressed Assets.