SB Thai NPL

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number

28691

Company name

Standard Bank PLC

Country

Thailand

(IDA)

Sector

Commercial Banking - Distressed Assets

Environmental category

Department

Reg Ind, Financial Markets, ASIA

Status

Active

Date SPI disclosed	September 30, 2009
Projected board date	November 15, 2009
Previous Events	Invested: December 21, 2009 Signed: December 15, 2009 Approved: December 11, 2009

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The Project is well-aligned with IFC’s Debt and Asset Recovery Program (DARP), a crisis response initiative that aims to create a programmatic and strategic response to the increasing DA in financial systems and thereby have a systemic impact on cleaning up the financial systems where build up of DA will occur. Board Approval for utilizing US$600mn of economic capital under DARP globally has been obtained. The East Asia Region (CEA) has been identified as a target for the initial implementation of DARP. The proposed investment will further mobilize investments by Standard Bank in partnership with IFC. In CEA, IFC plans to work with a group of select servicing companies and investors (Fanny Yang Tai, ACAP, Standard Bank) and provide financing currently not available due to traditional investors either exiting the market or facing liquidity constraints.

The project would consist of a series of Senior Loan, Equity and Quasi Equity investments by IFC in pools of distressed assets located in emerging markets in the East Asia Region. It is anticipated that this exposure would be diversified across 3 to 5 transactions that would occur over a one year period. This exposure would be counted as part of the exposure approved to be taken under the Distressed Asset Recovery Program approved by the Board. The pools of distressed assets to be acquired and resolved under this Facility would be identified jointly by IFC and Standard Bank and would be required to meet certain objective criteria and their resolution would have to be carried out on the basis of servicing arrangements and standards that are acceptable to IFC. The details of these arrangements would be spelt out in a Memorandum of Understanding with Standard Bank that would serve as framework for this partnership. The commercial terms and its compliance with the agreed criteria of each transaction would be evaluated on a case to case basis. All transactions under this Facility would be consistent with the overall approach established for the DARP program.

Project sponsor and major shareholders of project company

Sponsor – Standard Bank: Standard Bank (SB) is a leading African banking group focused on emerging markets globally. Its headquarters are in Johannesburg and it is listed on the Johannesburg Stock Exchange. Standard Bank Plc in London is the bank's principal international subsidiary. Key facts and figures:

· Standard Bank Group assets of approximately $162 billion (December 2008)
· Market Capitalization of approximately $14 billion (December 2008)
· Present in 33 countries around the world
Employs more than 50,000 people world-wide (including Liberty)

Outside Africa, SB’s operations span 16 countries, with an emerging market focus. SB has been involved in distressed debt business in Asia since 1999, since the Asian financial crisis. Till 2005, the business was focused more on liquid distressed debts like bonds and loans, where SB also became involved in the debt restructuring process. In 2006, the bank ventured into NPL business by acquiring some retails/SME loans from Thai bank and also entered into a partnership with ACAP Advisory for the servicing platform. In 2007, the Malaysia and Philippines platforms were set up. SB also established a monitoring team in Thailand in 2008, in the process of acquiring the Kasikorn Bank portfolio. The China NPL investments are managed through the DAC Fund. SB is a key strategic partner of IFC particularly in trade finance and has expressed an interest to be a strategic partner in the NPL business.

Total project cost and amount and nature of IFC's investment

The project would consist of a series of Senior Loan, Equity and Quasi Equity investments by IFC in pools of distressed assets located in emerging markets in the East Asia Region for a cumulative, initial amount of US$ 75 million. It is anticipated that this exposure would be diversified across 3 to 5 transactions that would occur over a one year period.

Location of project and description of site

The project would finance NPL pools across the Asian Region, predominantly in East Asia.
The key counterpart is Standard Bank Plc, headquartered in London, and a subsidiary of Standard Bank Group. The Singapore branch of Standard Bank will work jointly with IFC in investing in NPL pools in Asia.

Anticipated development impact of the project

Well-structured distressed asset transactions improve the stability of the banking system by:

- encouraging transparency in balance sheets as the true value of distressed assets is determined by the market value paid by the buyers of NPLs;
- Active recovery efforts of NPL servicers, who have different incentives from the typical workout departments of commercial banks, help contribute to the economy by redeploying assets pledged as collateral by defaulting borrowers which can lie idle once the loan is in default. The ability of NPL investors and servicers to make settlements with the borrowers also helps many borrowers to de-leverage their balance sheets to sustainable debt levels thereby aiding/reviving companies, and
- Improvement of credit culture in emerging markets by creating disincentives for willful default

IFC's expected development contribution

Through this project:

IFC would play its counter-cyclical role in the current financial crisis by supporting a reputable investor and servicer of distressed assets. Partnering with investors such as SB and entities like ACAP will significantly increase the likelihood of mobilizing much needed market liquidity for distressed assets;
The Project builds on the Strategic investment made by IFC in various servicers in East Asia in the last couple of years, including ACAP Advisory Public Company Limited (ACAP) in 2008, which was intended to support the availability of professional and efficient distressed asset resolution services in Thailand and other markets of the Region. IFC’s investment in pools managed by ACAP is expected to strengthen ACAP’s commitment to international best practices in distressed asset resolution, including due regard to collections practices and social and environmental standards.

Is envisaged as a broader partnership to co-invest with SB in more transactions in East Asia. SB has historically been an active participant in the DA market with total investment of around $406mn in East Asia, of which $96mn is in Thailand. With this investment, SB can free up scarce capital (in the current context) to acquire more such pools. Absent this investment, SB would continue to fund these pools through equity – thus limiting their ability to expand the DA business. In addition it is anticipated that IFC will introduce Standard Bank to its commercial banking and other financial institution partners as sources of distressed asset pools and in turn offer its clients an integrated distressed asset resolution solution that encompasses both resolution services and financing and potentially obviates the need for an uncertain and long drawn out auction process in the current, difficult markets.

IFC’s investment in this, and other transactions, under the project will give comfort to other investors, both commercial as well as multilateral who have been very restrained in providing capital to this market particularly after the recent financial crisis.

Environmental and social issues - Category FI

The project involves IFC support for reworking a known distressed asset pool and considering the nature of activities supported, classified as a Category FI project according to IFC’s Environmental and Social Review Procedure. During Appraisal, the Asset Management Company will need to provide information pertaining to the pool regarding exposure to excluded activities on IFC's FI Exclusion List as well as information on any known unresolved social and environmental issues or high risk projects in the pool.

If the review indicates that the pool is broadly in compliance with the above requirements, the Asset Management Company will be required to establish a Social & Environmental Management System (SEMS), relevant to its business process, that is satisfactory to IFC, to work with the assets being restructured to ensure that the companies are operating in compliance with the IFC Exclusion List and the applicable national environmental and social laws and regulations and where necessary IFC Performance Standards, or have an action plan to achieve the same within a reasonable time frame.

The servicer to the Asset Management Company, ACAP (an existing client under project #26284), has recently implemented an SEMS and received a satisfactory rating based on a review of its latest annual report. This new project may adopt a similar SEMS to achieve the required compliance. The Asset Management Company and/or the Asset Service Company are also required to submit a periodic report to IFC as per a format to be prescribed by IFC.

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