FAIR DISCUSSION PAPER

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FAIR DISCUSSION PAPER Maximising Value of
Non-Performing AssetsSESSION III AMCs in Asia
Experiences and Current Challenges Seoul,
South Korea10-11 November 2003
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DANAHARTAS OBJECTIVES

• Remove non-performing loan (NPL) distractions
• Maximise recovery value of acquired assets
• FUNDAMENTAL PRINCIPLES
• System-wide carve-out of NPLs
• Market driven approach
• True asset management company
• CHALLENGES
• Effective collection of recoveries currently
  73 of total expected recovery already in hand
• Unpredictable property market and volatile
  capital market dampening recovery
• Redeeming bonds on schedule
• Closure by end-2005

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TIMELINE - DANAHARTA
Receive share capital from Government
Issue government guaranteed bonds
June 1998 - March 2000
Acquire NPLs
Receive NPLs to be managed
Sep 1998 - Dec 2001
NPL Portfolio
Nov 1998 - Sep 2002
Determine recovery strategies
Implement recovery strategies
Receive non-cash assets - securities, properties
and restructured loans
1999 - on-going till 2005
Receive cash
Convert to cash/ residual assets
Cash/ residual assets
Distribute to government/ surplus recovery to
respective financial institutions
End Dec 2000 - on-going till 2005
Dec 2000 - on-going till 2005
Redeem bonds. Any shortfall will be borne by
Government
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ACQUISITION OF NPLs

• LEGAL ASPECTS
• Statutory vesting process
• Danaharta steps into the shoes of the selling
  institution
• Clear title vs. clean title
• Third party claims preserved
• ACQUISITION APPROACH
• NPL gt RM5 million (gross value)
• Secured loans are valued according to collateral
  value
• Market value of property collateral determined by
  professional valuers
• Unsecured loans are acquired at 10 of
  outstanding loan
• Profit sharing - 20 (Danaharta) 80 (FI)
• PAYMENT
• Financial Institutions (FIs) receive government
  guaranteed bonds from Danaharta as consideration
  for the purchase of NPLs except non-BAFIA FIs
  and Islamic facilities which require cash
• BAFIA Banking And Financial Institutions Act
  1989

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RESOLUTION OF NPLs

• STRATEGIES
• Viable loans are restructured using Danahartas
  published Loan Restructuring Principles and
  Guidelines
• informal restructuring, via rescheduling,
  redemption and settlement of loans or
• formal restructuring, via schemes of arrangement
  or Special Administrators schemes
• Non-viable loans are restructured using assets
  restructuring options, i.e. via sale of
  collateral and/or sale of business
• Foreign loan assets are sold via a bidding
  process
• LOAN RESTRUCTURING PRINCIPLES
• Shareholders take a proportionately larger
  haircut than creditors
• Fair treatment to secured and unsecured creditors
• No dilution of inadequate security
• Only one opportunity given
• Make borrowers work for lenders
• Detailed guidelines are published

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KEY STATISTICS
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KEY POINTS

• Danaharta given special powers, by virtue of the
  Pengurusan Danaharta Nasional Act 1998
• Ability to acquire NPLs via statutory vesting
  process
• Ability to foreclose on collateral quicker than
  banks by giving 30 days notice to borrower
• Ability to appoint Special Administrators over
  corporate borrowers to facilitate restructuring
  and recovery of NPLs
• Building up virtual organisation
• Small permanent staff
• leveraging on professional community, e.g.
  lawyers, accountants, valuers
• Strong political will
• Design
• International precedents
• Market based approaches, e.g. surplus sharing
  arrangements with FIs as incentive to sell NPLs
  to Danaharta
• Focussed scope of work
• Danaharta to only deal with NPL problem in
  banking system. Other entities address other
  banking problems, e.g. recapitalisation of banks
  was done by Danamodal. Steering Committee
  coordinates activities of all entities chaired
  by Central Bank Governor.
• NPL resolutions vs mere NPL disposal