Role of Appraisal Services in Evaluating Lender Security Interests

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Role of Appraisal Services in Evaluating
LenderSecurity Interests

• Michèle Shuey
• Special Operations Officer
• Istanbul Regional Hub Office

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IFC Part of the World Bank Group
IFC is owned by its 176 member countries, which
collectively determine policies.
International Finance Corporation, 1956
Multilateral Investment Guarantee Agency, 1988
International Bank for Reconstruction and
Development, 1945
International Development Association, 1960
3
IFC Mandate

• Promote Sustainable Private Sector Development
• Provide loans and equity for viable projects
• Mobilize capital from other sources
• Provide advisory services

4
Defining Characteristics

• Participates only in private sector ventures
• Shares same risks as other investors
• Invests in equity
• Has market pricing policies
• Does not accept government guarantees
• Is profit oriented

5
IFC Portfolio
Total IFC Portfolio 16.78 billion IFCs own
account only. An additional 6.6 billion is held
and managed for participants.
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Distribution of Portfolio byGeographic Region

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As Investor IFC Looks for

• Competent sponsors and management
• Commercially strong/cost-competitive projects
• Robust financing plans/appropriate financing
  structure
• Sound environmental and social practices
• Appropriate sharing of risks and rewards
• Market-related fees and rates
• Completion guarantees and security

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Typical Forms of Security

• Project/Financial Support Arrangements
• Sponsor/Personal Guarantees
• Share Pledges
• Mortgages (Immovables)
• Commercial Enterprise Pledges
• Floating Charge

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Financial Distress

• COMPANY
  ISSUES

Focus on core business
Controls and Discipline
Operational restructuring
LENDER ISSUES
Internal and External Pressures
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Context for Commercial Confidence
Monetary Fiscal
Governmental Political
Tax other laws
State
Mortgage laws
Secured Creditors
Bank Regulators
Collateral laws
Environmental, Company, Tariff others
Creditors
Contract/Commercial
Employees
Labor laws
Appraisals
Professionals
Regulatory
Enterprise
Legal
Company laws
Insolvency System
Shareholders
Securities laws
Administrative
Directors etc
Others laws
Institutional
Economic Commercial
Cultural Social
Courts Bankr., Civil Commercial
Corporate Governance
Agency
Accounting Auditing
Source World Bank
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Decision-Making Matrix

Character and Good Faith
Adequacy of Collateral and Viability

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Increasing Significance ofCollateral and
Appraisals

• Important backdrop for negotiation and resolution
• Provides foundation for apportionment of
  risk/losses amongst creditors
• Basis for debt-asset swaps, asset disposals and
  liquidation
• Support reschedulings by providing greater
  assurance of recovery
• Protective mechanism against other creditors

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Observation of TurkishAppraisal Practices

• Depreciated replacement cost prevailing method
  used for building and equipment
• Market comparables not adjusted for various
  critical factors including location, visibility,
  size, scarcity, etc.
• Court appraisals able to fluctuate widely during
  various rounds
• Inconsistent/incomplete interpretation of zoning
  regulations

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Negative Impact of InadequateAppraisals on Lender

• Inflated values block efficient transfer of
  assets
• Long delays provide wrong incentives to borrowers
• Unpredictable results lead to increased risk
  assessment and higher cost lending
• Distract lenders from central issues
• Artificially postpones negative impact of eroding
  or obsolete collateral