Oct 2009, Issue 11 A review of what is happening in the Asian non-performing loan ("NPL") market Since our last issue, global financial markets have continued to fluctuate and the effects have been felt increasingly by the Asian economies, although it would appear to a lesser extent than the US and European economies. Most countries are however reporting greater NPL numbers and this trend is expected to continue throughout 2009.
Increasing NPL numbers should result in increased opportunities, but the overall economic situation and the resulting impact on pricing has made deals harder to consummate, especially from a portfolio perspective. In turn, the volume of portfolio transactions has slowed notably in 2009, though transactions have still occurred in Taiwan, Thailand, Korea, India, Japan, China and Australia (primarily single credit commercial paper). This is a contrast to the much higher level of activity in Asian NPL markets over the past two to three years, with numerous portfolio transactions in Thailand, Malaysia, Taiwan, India and the Philippines to name a few.
Clearly, one of the biggest challenges to doing deals in today's climate is the differential on price expectations. This has led to markets dominated by domestic buyers and buyers demanding significant concessions from sellers. For example, it has been widely reported that the recent Thailand TMB deal was on a seven-year deferred payment basis, supported by promissory notes. This is a stark departure from the typical Thailand deal of 25 per cent deposit payable upon sale and purchase agreement ("SPA") signing and the balance within 90 days. Whether this type of sale structure becomes the norm remains to be seen, but it is likely that sellers will be more flexible when it comes to NPL portfolio sale structures.
Our market research also indicates there is an increasing trend to partial sales or "cherry picking" of portfolios to achieve a sale. The number of portfolios withdrawn from a sales process is also on the increase. Notwithstanding this, a number of banks we have spoken to across the region still view NPL sales as a key loan management tool and indicated a willingness to sell. We are also likely to see portfolio transactions in countries which have previously had little activity, including Australia, Singapore, the United Arab Emirates ("UAE"), Pakistan and Hong Kong.
Furthermore, we are seeing a more active market in the secondary trading of NPL portfolios, albeit to date this has generally been in single or small groups of credits. This is an area of likely growth given the progressive sale of the Asian Lehman assets and various other offshore banks with non-core loan portfolios in the region.
Looking to the remainder of 2009, it is likely that Asia will not experience the same level of NPL sale activity that it has in recent years. However, with growing NPLs across the region, especially in the smaller retail and consumer areas, banks are likely to need to consider more aggressive NPL management plans, especially as the full effects of Basel II come into play. In addition, as the levels of return achieved in Europe and the US start to fall, this is likely to lead to an increased propensity by global investors to look at Asian based investments. Countries where domestic buyers are already present, such as Taiwan, Thailand, Korea and India, are expected to continue to be relatively active. Markets to watch closely include Australia, India and Vietnam, while transactions are also expected in Hong Kong, Malaysia, Singapore, UAE and Pakistan.
The information contained in NPL Asia has been obtained from numerous sources in the market and is believed to be accurate at the time of going to print. We trust that you will continue to find this publication useful and welcome any comments you may have.
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