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About PricewaterhouseCoopers
PricewaterhouseCoopers provides industry-focused Assurance, Tax & Legal and Advisory services
forpublicandprivate clients in four areas:
corporate accountability
risk management
structuring and mergers and acquisitions
performance and process improvement
We use our network, experience, industry knowledge and business understanding to build trust
andcreatevaluefor our clients.
Distressed Debt Group
Over the past decade, PricewaterhouseCoopers Distressed Debt Group has managed more than
150sell-side and buy-side engagements in over 25 countries. Overall the group has acted for more
than30internationalclients, 60 local buyers and various government agencies.
With dedicated staff located in Australia as well as Asia, Europe and Latin America we bring together
global experience with local capability, no matter where the deal is, to ensure a smooth and seamless
experience. Weare also uniquely positioned through our extensive relationships with the pool of global
investors,toensureany deal is marketed to the widest possible audience of buyers.
The Distressed Debt group is an integral part of PricewaterhouseCoopers Corporate Advisory
andRestructuringpractice which has a local presence in over 60 countries in the world.
Table of contents
Foreword Blake Dawson
Foreword PricewaterhouseCoopers
1. The who, the how and the why of buying distressed debt/assets
12
Who buys and sells distressed assets, and why? How big is the global market? What is Australias
place in this market, and what do potential investors think of Australia? What is the secondary debt
market, and how does it operate in Australia and offshore?
18
What determines the value of a portfolio of an individual credit or a portfolio of distressed debt?
What are the key steps in the administration of distressed assets? How do debtholders recover
assets in Australia?
3. Using secured debt to control outcomes and obtain ownership of the assets
28
What are the legal boundaries within which distressed asset investors must move? What are the
rights and responsibilities of secured debtholders? How can debtholders best protect the value
oftheir assets?
32
How can distressed asset investors recapitalise their assets? What are the differences between
listed and unlisted firms? How does the administration regime in Australia provide for companies
tobe reorganised?
36
If Australian banks have felt no need to sell distressed assets until now, why should they consider
it? Reasons include an increased number of buyers of distressed assets, the increasing drain
on management time and focus on workout, the constraints on capital created by Basel II,
andliquidityconstraints brought on by the global financial crisis.
40
What are the steps in selling a non-performing loan, or a portfolio of loans? How are they priced
and how do sellers achieve the best price. What are the mechanics of servicing the portfolio
duringand after the sale process? How can sellers best protect their interests?
46
How should banks and other sellers of debt structure their transactions? Options include outright
sale, a joint venture arrangement, or securitisation.
50
62
64
Useful websites
66
Contributing authors
68
Contact information
Back cover
James Marshall
Partner, Blake Dawson
Foreword PricewaterhouseCoopers
When one door closes another door opens; but we so often look so long and so
regretfully upon the closed door, that we do not see the ones which open for us
When Alexander Graham Bell wrote this world famous quote it is doubtful that he
hadinmind the financial crisis of 2008/09.
The Australian market is today facing a period of uncertainty like it has not faced
sincethe early 90s. Like then, globally banks today are facing a rapid build up
in nonperforming loans and companies are facing unprecedented pressure on
their top and bottom lines. However the market is also a very different one today
to thoseuncertain days. In todays market there are so many more options open
tobothdistressed companies as well as lenders.
There exists a very real opportunity for banks to unlock the hidden value tied up in
nonperforming loans. From freeing up management time to focus on newer more
pressing problems to releasing capital that needs to be set aside against all NPLs,
debt sales have a very real place in todays market as has been highlighted by the
American,European and Asian markets experience.
This is why, together with Blake Dawson, we have invested in this publication to further
develop the Australian market and to highlight some of the issues around the buying
and selling of distressed debt and assets and thereby encouraging the evolution
ofthisfledglingmarket in Australia.
Please read this with the open mind that Alexander Graham Bell advocates and
help us to help you realise this opportunity and in the end maximise recovery
duringtheseuncertain times.
Michael McCreadie
Partner, PricewaterhouseCoopers
Overview Distressed
investing in Australia
Australia is really attractive to us...
...says the manager of a billion dollar global fund dedicated
to investing in distressed assets, who was interviewed for
thepurposesof this publication.
Worldwide, distressed investment is a
US$50 US$100 billion industry. As the
consequences ofthe global financial crisis work
their way through the global economy, it is one
of the few areas that is set to grow significantly
in the years to come, as increasing numbers of
companies find themselves in difficult financial
circumstances and are unable to meet their
debt commitments. Distressed M&A in the
USaloneis set to grow by 93% this year.
Background
Australia has had little need for a distressed asset market
until today. A strong economy for well over a decade
has meant there have been relatively few bankruptcies,
non-performing loans on banks books have been well
withinmanageable limits, and investors have had a wealth
ofpositive, growth oriented opportunities to focus on.
Now, we are on the verge of a new market.
A market created by the rapid change in
economic circumstances, byinvestment
capital looking for opportunities in an
extremely difficult environment, and by
the need for Australian banks and other
financial institutions to find solutions
tonew problems.
2.5%
Impaired assets / gross loans & acceptances (left axis)
Bad debt charge / gross loans & acceptances (right axis)
6.0%
2.0%
5.0%
1.5%
4.0%
3.0%
1.0%
2.0%
0.5%
1.0%
0.0%
0.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Notes: 2006 onwards based on AIFRS
1998
1999
Total
2000
2001
Housing
2002
2003
2004
Personal
2005
2006
2007
2008
Business
Distressed assets
Capital questions
Over and above the pressure banks are likely to feel from
increasing volumes of distressed assets, regulators will have a
keen eye on banks management of capital. The introduction of
the Basel II regulations this year will increase scrutiny of banks
NPL portfolios. There is growing concern among the banking
community that both the banks and the regulators do not
yet appreciate the full impact of the new regulations as levels
ofNPLsincrease significantly.
Basel II requires banks to set aside up to 25% of the gross
loan value of NPLs as Tier 1 Capital, capital that could be freed
up to generate income for the bank in other ways if the NPLs
weresoldto another party.
Distressed corporates
The distressed market is not just
confined to the impaired loans of
Australian banks. Many listed and private
Australiancompanies and trusts are
experiencing severe liquidity problems
associated with looming refinancing dates
and a lack of replacement debt capital.
To date, some larger listed corporates
have managed to reduce gearing and raise
liquidity through cut price raisings on the
equity market which, whilst dilutive, is a
better option than the other alternatives.
However, for private companies and listed
companies with weak share prices, this
option is generally not available. Anumber
of off-shore and domestic funds and
lenders are now targeting distressed
corporates and offering them relatively
highly priced debt (usually with a right to
convert to equity upon agreed terms) to
fund liquidity gaps. Such funds will also
consider investing equity but will seek
assurances around the balance sheet
andmatters such as class action risk.
10
11
12
2. Financial institutions
(including investment banks,
commercial banks and financial houses)
Many financial institutions have special situation
groups focusing on distressed debt investing.
Typically these operations form part of the bank
andoften focus both internally and externally.
For example, a special situations group can helptheir
parent institution with their own nonperforming loans,
can help expand customer bases by purchasing nonperforming loans from other financialinstitutionsor
can invest their own funds.
Some of the more consistent investors here include
Morgan Stanley, JP Morgan, UBS, Goldman Sachs,
Merrill Lynch, Standard Chartered, Standard Bank,
Deutsche Bank, HSBC, Citibank and GE.
These investors tend to have higher investment size
preferences in the range of US$15 to 20 million plus.
3. Local buyers
Both categories 1. and 2. are generally foreign
investors, as typically their focus is cross border,
i.e.they will look to invest in multiple countries
withinaregion.
Given the growth in distressed debt opportunities
in Asia over the last 10 years, a number of local
operators have been established to focus on specific
country based opportunities. A good example of
these are government supported entities established
to resolve local bank non-performing loan problems
such as the Asset Management Companies (AMCs)
established in China, Thailand, India and Vietnam.
In Australia a number of local servicing companies
have also looked to purchase NPLs mainly focused
on the consumer credit card space and generally
onaforward flow basis.
13
17
Indonesia 49
23
Australia 38
22
South Korea 36
India 25
25
Vietnam 21
Japan 12
Malaysia 14
Taiwan 9
Hong Kong 12
New Zealand 3 14
Singapore 8
0%
29
15
13
5
7
18
32
34
54
10%
19
47
20
19
43
21
17
43
17
16
37
21
2
4
17
41
24
13
36
18
Philippines 17
16
31
27
4
11
22
16
Thailand 16
8
15
2
26
36
20%
28
30%
40%
50%
15
60%
70%
80%
90%
100%
Percentage of respondents
Significant
Very High
High
Low
None
Source Debtwire: Asia-Pacific Distressed Debt Outlook 2009, December 2008. Survey canvassed 100 hedge fund
managers and proprietary trading bankers.
14
Deal types
Assessment approaches
Key elements
15
16
Perspective
17
Corporate loans
For corporate loans the first question
is whether or not the loan is secured,
and if so, what is the realisable value
ofthe underlying security. The key issue
hereishow current is the appraisal.
Once a floor has been set on the loan
value the next question to be addressed
is whether the borrower is likely to seek
to restructure the loan. Issues that need
tobetaken in to account include:
18
When will
I collect?
Servicing
and
Management
Costs
Discounted
for return
requirements
(incorporating
leverage)
Valuation
Consumer loans
For consumer loans the questions
aresimilar:
Australian
insolvencyprocedures
Administration
Voluntary administration is the most
common formal corporate rescue process
used in Australia. It is most often initiated
by the directors of the company because
the appointment of an administrator
will relieve the directors from any risk
of personal liability for insolvent trading
in relation to debts incurred following
the appointment of an administrator.
An administrator can be appointed by
the directors (by resolution), a liquidator
of the company, or the holder of a fully
securedcharge over the company.
19
20
Timeframe
Administration and
Chapter 11 compared
Overseas investors are often interested
to compare Australias voluntary
administration regime with the
UnitedStates Chapter 11 procedure.
The table on page 22 highlights the key
similarities and differences between
Australias voluntary administration
and the United States Chapter 11
regimes, based on the Australian
Governments, Corporations and Markets
Advisory Committee, Discussion Paper,
Rehabilitating large and complex
enterprises in financial difficulties,
September 2003.
21
US Chapter 11 procedure
Prerequisites
The directors.
Benefits in appointing
Committees or creditors
Information to creditors
Moratorium on claims
against the company
Ability of contract
counterparties to
enforceipso facto clauses
Yes.
No.
Ability of creditors to
exercise set-off rights
Yes.
No.
Liability for
goodsandservices
Ability to
disclaimcontracts
Who devises
rehabilitationplan
Approval of
rehabilitationplan
Majority required to
approve the plan
Yes, provided:
Rehabilitation plan
discriminating between
creditors
22
Receivership
Financers typically require a debtor
company to provide security, usually a
mortgage debenture, containing a fixed
and floating charge. The debenture usually
allows the financier to appoint a receiver
to the debtor upon default under the
instrument. A receiver is appointed to
thecompany for the purposes of realising
company assets to discharge the debt
owing to the secured creditor. Receivers
enjoy sweeping powers under both the
debenture and statute, including the power
to take possession of the companys
assets, realise those assets or carry
onthebusiness of the company.
The terms of the security govern the
appointment. The secured creditor decides
the identity of the receiver and, in doing
so, is under no obligation to consult with
the debtor company. Usually the receiver
isaprofessional insolvency practitioner.
A receiver owes duties principally to the
secured creditor, not to the debtor or its
unsecured creditors. However, a receiver
is subject to statutory duties in exercising
his or her powers, including a duty of care
in exercising a power of sale to achieve a
market price. The receiver is also subject
to the supervision of the court and the
corporate regulator, Australian Securities
and Investments Commission (ASIC).
The appointment of a receiver offers
considerable advantages in terms
of immediate control (particularly of
commencement, which may take only
1to 2 days), cost and flexibility. However,
it does not create a moratorium on
the initiation or commencement of
proceedings against the debtor.
In a very limited number of cases
acourt is given the statutory power
toappointareceiver.
Usually a deed of indemnity is provided
bythe secured creditor to the receiver.
Liquidation
Winding up may be initiated by court
order (winding up in insolvency) usually
upon a creditors petition, or by the
creditors (creditors voluntary winding up).
A simple creditors voluntary winding up
takes between 6 to 8 weeks and entails
various notices and meetings. A complex
winding up, which may involve recovery
actions being pursued through the courts,
couldtake considerably longer.
The liquidator winds up the company
and applies the assets to satisfy the
liabilities and distributes any surplus to the
shareholders. The directors powers cease
upon the appointment of the liquidator.
There is a stay on proceedings against
the company. Liquidators have extensive
forensic recovery powers, can recover
voidable transactions and bring
claimsagainst directors.
Set out on page 24 is a table that
outlines the liquidation priority regime
for secured creditors for both fixed
andfloatingchargeassets.
23
Priority waterfall
Priority waterfall
Employee entitlements
Employee entitlements
Unsecured creditors
Unsecured creditors
Shareholders
Shareholders
24
Timeframe
First step
25
26
Perspective
27
28
Voting ability
In a receivership, the receiver realises
assets for the benefit of the secured
creditor and there is no process for
unsecured creditors to vote. Therefore
unsecured creditors have limited formal
input into or influence over a receivership.
In a voluntary administration, the future
of the company is decided by a vote of
creditors. Resolutions are passed by a
majority in number and value. Ifthere
is a deadlock, the chairman of the
meeting (the administrator) has a casting
vote. Thecasting vote may (but will
notalways) be exercised in accordance
with the vote of the majority of the value
of the creditor pool. Thus, a party that
controls more than 50% of the liabilities
of a company inadministration, both
in valueand number, may have control
of the outcome of voting and thereby
control thecompanys destiny. Employees
typically form the majority of creditors in
number and thus are an influential voting
block. Secured creditors can vote in full
withoutvaluing their security.
29
Pre-pack appointments
A pre-pack appointment occurs in
areceivership or an administration when
the sale of an insolvent company, or its
assets, is negotiated by stakeholders
(including creditors, shareholders, key
customers and key trade suppliers)
andagreed beforetheformal
procedureiscommenced.
The key advantage of a pre-pack is to
maximise the chances of a rescue for
the company while it remains a going
concern without the loss of goodwill
usually associated with an unplanned
insolvency announcement. Pre-packs
are commonly used on companies with
contractorservice based businesses.
The process begins with negotiating the
pre-pack arrangement. Once agreement
is reached, an administrator (or receiver)
is appointed, and the pre-ordained sale
of the company or its assets is executed
expeditiously. Because the pre-pack
sale occurs without the business or
its assets being offered on the open
market, the sale could be impugned as a
breach of the administrators or receivers
duty of care inselling the company or
assets (discussed above). To avoid this,
administrators are required to show
that due enquiries were made regarding
the real value of the asset or business
during the pre-pack process before the
administration, and that the sale continues
to be reasonable and in the best interests
of creditors afteradministrationbegins.
30
Control strategies
A party looking to invest in a distressed
company or its assets will often seek to
acquire secured debt in the company as
a first step to gain control and then drive
through a sale or recapitalisation.
Perspective
31
4. Recapitalising distressed
listed/unlisted companies
32
33
Liability management
through deeds of
company arrangement/
schemesofarrangement
The voluntary administration regime in
Australia provides a way for companies
in financial distress to be reorganised.
A deed of company arrangement is
a mechanismincorporated within
the voluntary administration regime
and allowsa company to enter into
compromise arrangements with its
creditors toavoid goingintoliquidation.
The law provides for extensive flexibility
when dealing with a deed of company
arrangement so the deed can be drafted
to meet the particular circumstances
of the company and its creditors. The
passing of a resolution to implement a
deed binds all of the companys unsecured
34
Perspective
35
36
2.0%
1.5%
1.0%
0.5%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0.0%
1989
BDE % of Assets
2000
2001
2002
No. of Funds
2003
2004
2005
2006
AUG YTD
2007
Source: Preqin Special Research Report: Distressed Debt and Special Situations Aug 07
37
120
100
$m
80
60
40
-45.0
-11.3
100
-2.8
-8.5
55
20
32
Source: PricewaterhouseCoopers
38
Cost of deferring
the tax benefit
Cost of deferring
the recovery
Loan value
Perspective
The main reasons for Australian banks to consider selling debt are:
39
6. How does a
nonperforming loan
portfolio sale work?
For the sale of a portfolio of NPLs to be viable,
financialinstitutions will need to examine their objectives,
understand the nature of the product they are selling,
andbecome familiar with the way the market operates.
Determining what to sell, the method of
sale, the information about the portfolio
and how to present it are all key aspects
that need to be considered to ensure that
the seller maximises return. Establishing
External workout
Loans remain on
the balance sheet
Workout by in-house
collection department
Outsourcing of the
servicing/workout
40
Asset class
Reason
Secured corporate
Secured consumer
Real estate
ownedassets
Unsecured corporate
Unsecured retail
Delinquent
receivables portfolios
(telco and utility
debts, store cards,
etc.)
41
1. Private placement
deal structuring
speed of sale
price maximised
one-off process
3. Securitisation
42
maximum profile
SALE PROCESS
Notwithstanding the sale type, the sale process often involves the following four work phases, with each phase
being interconnected:
Project
Planning
Phase 1
Portfolio
Identification
& Valuation
Phase 2
Strategy
Development
Phase 3
Sale
Preparation
Phase 4
Execution
Development of bid
documents and SPA
Investor and
sale management
Due diligence
review and validation
Establish due
diligence and data
room procedures
Negotiation
support
Valuation
Marketing of the
sale transaction
Closing
Portfolio identification
and classification
Finalise
work program
Develop overall
sale strategy
Project Management
43
44
Perspective
45
selling loans
Quantitative benefits
46
Qualitative benefits
Option 2: JV arrangement
Buyer
Buyer
[Investor]
[Investor]
Debt
DebtSeller
Seller
[Bank]
[Bank]
Buyer
Buyer
[Investor]
[Investor]
Debt
DebtSeller
Seller
[Bank]
[Bank]
NPL
NPL
NPL
NPL
Cash
Cash
Equity
Equity
Cash
Cash
SPV
SPV
Cash
Cash
Cash
Cash
Equity
Equity
SPV
SPV
Equity
Equity
Option 2: JV arrangement
The second option involves forming a joint
venture (JV) between the selling bank and
the buyer. In this scenario the selling bank
typically holds an equity stake in the SPV
47
Trustee
SPV
Asset
transfer
Cash
Servicer
(could be selling bank)
Option 3: Securitisation
Securitisation is the process by which
assets with generally predictable cash
flow and similar features are packaged
into interest-bearing securities with
marketableinvestment characteristics.
The key to securitisation is the
predictability of cashflows and supporting
loan documentation, and history to
verifythese cashflows.
Unlike other bulk sales, the focus of the
investor group in this instance is usually
on the rating of the special purpose
vehicleand the coupon payable.
Selling bank
48
Perspective
50
Acquisition of debt
An acquisition of debt may be effected by
way of a purchase, transfer, assignment,
novation or a similar transaction. This
guide does not cover acquisitions which
are conditional and part of a larger
arrangement (e.g. securities lending).
Acquisition of shares of a
company holding the debt
Instead of acquiring debt directly, the
investor may acquire shares in a company
that holds the debt. In this case, the
taxation consequences will depend
on whether the acquired company
experiences a more than 50% change in
its shareholders and whether the company
joins the investors tax consolidated group.
51
Example
On 1/7/01, an investor acquires all shares in
Company A holding debt acquired on 1/3/01.
Company A has income year ending on 30 June.
On 1/9/03, Company A ascertains the debt as
non-recoverable and writes it offforaccounts.
Company A did not maintain the same
shareholders during the period from 1/3/01
(when the debt was acquired) to 30/6/04 (the
end of the income year in which the bad debt
deduction is claimed). This is because all shares
in the company were acquired by the investor on
1/7/01, resulting in a 100% shareholder change.
Unless Company A carries on the same
business during the entire 02/04 income year
(i.e. from 1/7/03 to 30/6/04) as it was carried
on 30/6/01 (immediately before the ownership
test was failed), no deduction will be available
toCompanyA for the debt write-off.
52
Interest income
Generally, interest paid by the issuer
of the debt is included in assessable
income of the holder on a due and
receivable basis (but see the comment
onthe Taxation of Financial Arrangements
(TOFA)rulesbelow).
There are two main exceptions to this rule:
53
Converting debt
The holder may choose to convert the debt to another
instrument, normally equity in the issue of the debt,
ifthe debt agreement allows such a conversion.
Briefly, the tax cost of shares received from the
conversion will be equal to the cost of the debt
and incidental expenses related to the conversion
andnogain orlosswill generally arise.
54
Overseas matters
Generally, the above rules apply to debts where a
debtor or creditor is a non-resident. However, the
following considerations should be kept in mind:
Where all or some of the beneficiaries are nonresidents, and the trust qualifies as a managed
investment scheme, income from collection and
disposal of Australian debts (but not interest) to which
foreign beneficiaries are entitled to, may be subject
toa reduced rate of final Australian withholding tax.
55
56
GST
The GST treatment of the supply of distressed assets
will be determined by the seller. In general, the supply
of distressed assets by a GST-registered seller
will be a taxable supply subject to GST unless the
supply is a GST-free supply (e.g. a going concern)
oraninputtaxed supply (e.g. financial supplies).
57
Debt restructuring
In general, the sale of distressed assets by an entity,
likely to be undertaken to raise funds to enable
debts to be repaid, will give rise to either gains or
losses for income tax purposes. Any gains made
on the sale of distressed assets will be assessable.
Losses made on the sale of distressed assets will
generally be deductible. Losses made on the sale
of non-depreciating assets held on capital account
canonlybe deducted against capital gains.
Entities should be aware, however, that in certain
circumstances amounts may be included in
assessable income where assets have been acquired
under limited recourse financing arrangements
and, upon termination of that debt (which may be
expected to occur in conjunction with the sale of
the asset), theamount owing is not fully repaid.
Broadly, assessable amounts may arise where
capital allowance deductions (such as depreciation)
are considered to have been claimed excessively
overthelife oftheasset.
Further, amounts may also be included in
assessable income in respect of the sale of leased
plant by anentity, again in circumstances where
depreciation has been deducted in respect of the
asset. Broadly,this may occur where a liability of the
entity is reduced as a result of the sale of the asset,
forexample, onthe entity receiving a benefit in the
formofbeing relievedof a debt.
It is important to consider the tax impact of these
recoupment type provisions when determining how
best to deal with distressed assets, as their application
may result in an entity receiving significantly less
value than first anticipated on the sale of an asset,
therefore potentially affecting the entitys course
ofdealingwiththat asset.
58
Equity restructuring
Selling a subsidiary member
ofaconsolidated group
Where the shares of a subsidiary member of a
consolidated group are sold, the subsidiary member
will leave the consolidated group (leaving subsidiary).
This will trigger a number of tax consequences for the
head company of the consolidated group as follows.
59
Indirect tax
The GST treatment of supplies of distressed assets
will depend on a number of factors including:
60
Perspective
61
Appendix A
Economic outlook
Global economic outlook
The current global economic landscape bears little
resemblance to this time last year. With in excess of
US$1 trillion lost in write-downs to date, and the IMF
revising forecasts of total losses upwards to US$2.2 trillion,
it appears that a return to normality is still a way off. What
we are currently witnessing is a massive adjustment in the
global economy, from an environment of cheap and plentiful
debt to one of debt scarcity. The impact of this adjustment
has now flowed from Wall Street to the main street economy.
The IMF has subsequently slashed its
average global growth forecasts, down
from 1.75% in November 2008 to 0.5%
by January 2009. But averages hide the
sizable diversity in growth rates between
countries. The economies of developed
nations are forecast to contract by
an average 2.0% during 2009. Much
therefore hinges on China and India, the
worlds 3rd and 12th largest economies
respectively. The IMF forecasts 6.7%and
5.1% respective annual growth for
these economies, hence the positive
global average. However even these
forecasts have been revised downwards
over the course of the last four months,
withmuch now resting on their ability to
show agility in developing new export
markets and growing their massive,
butunderdeveloped, domestic economies.
62
Australian
economicoutlook
The outlook for the Australian economy
has deteriorated in line with global trends
and now faces the prospect of entering
a recession in the first half of 2009.
Consensus has moved away from a soft
landing to a rockier landing and periods
ofsustained distress for certain industries.
Our Australian Economic Outlook sees
GDP growth slowing from the 2.1%
during 2008 to between 0 - 0.5%
during 2009. Therefore, Australias
position is relatively bright in relation to
other developed countries. Theprime
reason for this is a stronger financial
sector that has resulted from superior
credit policies and risk management
strategies. The recent Government
move to guarantee bank deposits
has further strengthened the sector
andensuredthatconfidenceremains.
63
Appendix B
Summary of Australian
Big4Banks Basel II disclosures
The following provides a summary of the ANZ, CBA, NAB and Westpacs Basel II disclosures (also known
as Pillar 3 or APS330 disclosures). The figures for ANZ, NAB and Westpac are as of 30 September 2008,
whilstCBA is as of 30 June 2008.
The table below provides a summary of the carrying value of defaulted assets which is defined as being 90 days
past due or unlikely to pay.
Exposure
Risk-Weighted
Assets
Exposure
Risk-Weighted
Assets
A$m
A$m
porportion of
porportion of
2,131,013
655,947
99.5%
95.9%
6,741
16,891
0.3%
2.5%
4,382
11,407
0.2%
1.7%
2,142,136
684,244
100.0%
100.0%
Non-defaulted assets
Total
Source PricewaterhouseCoopers
Based on the above the big 4 banks in Australia are carrying a total of A$6.7 billion in corporate loans that
areatleast 90 days past due and A$4.3 billion of consumer related loans.
The following table provides a summary of the total lending, defaulted loans, impaired loans and specific provisions
on the balance sheets by industry for the Big 4. The total write-offs represent loans written off to the profit and loss
for the respective year ends collectively for the big 4 banks. These write-offs are typically taken as either a charge
to the specific provisions or a charge to the collective provisions for credit losses. The big 4 banks have written
offatotal of A$1.4 billion in consumer and A$1.0 billion in corporate loans for the 12 month period.
As can be seen in the table below Specific Provisions are considerably lower than the value of Impaired Loans. In many
cases a bank may not be able to accurately estimate the Individual/Specific Provision, in which case it will estimate the
credit risk provision on a collective basis. The collective provisions for the Big 4 banks were approximately A$8.0 billion.
By far the largest exposure for defaulted loans is the Personal sector, which includes a considerable volume
of residential mortgages. On the Corporate side the largest exposure is in the property and business services
sector with total of A$2.1 billion in defaulted loans.
64
Exposure
Defaulted
Loans
Impaired
Provisions
Specific
Write-Offs
A$m
A$m
A$m
A$m
A$m
24,975
177
120
33
16
111,223
434
320
91
46
30,996
453
365
83
40
377,898
1,100
939
290
209
98,263
666
608
305
150
Personal *
983,996
4,382
1,411
614
1,442
230,363
2,113
1,659
249
192
Trade
93,771
815
488
211
196
46,146
145
112
46
37
Energy
17,611
-6
Sovereign
22,897
Other
103,997
836
600
300
103
Total
2,142,136
11,123
6,682
2,222
2,425
Industry
Source PricewaterhouseCoopers
65
Useful websites
BLAKE DAWSON
www.blakedawson.com
The Blake Dawson website includes information about the firm, updates on recent legal developments,
partnerprofiles and contact details.
PRICEWATERHOUSECOOPERS
www.pwc.com/au/car
PwCs Corporate Advisory & Restructuring division is a dedicated team of specialists with extensive
skills in diagnosing, advising on and deploying commercial solutions for underperforming, inefficient
ordistressedorganisations and thoseconfrontedwithunexpectedevents.
AUSTRADE
www.austrade.gov.au
The Australian Trade Commission (Austrade) is the Australian Governments trade and investment
developmentagency.
CORPORATE REGULATION
www.asic.gov.au
The Australian Securities and Investments Commission regulates Australias companies.
66
DEBTWIRE
www.debtwire.com
Debtwire is a commercial information provider to the fixed income markets. It publishes regional surveys
ofdistressed debt markets.
FOREIGN INVESTMENT
www.firb.gov.au
The Foreign Investment Review Board examines proposals by foreign interests to undertake direct
investmentinAustralia.
GOVERNMENT INFORMATION
www.gov.au
The Government Entry Point provides access to Australian Federal, State, Territory and Local
Governmentwebsites.
www.business.gov.au
The Business Entry Point is a government resourceforbusiness.
PROPERTY
www.propertyoz.com.au
The Property Council of Australia is the peak industry body for the Australian commercial real estate sector.
TAXATION
www.ato.gov.au
The Australian Taxation Offices website includes information for business, largecorporatesandmultinationals.
TMA
www.turnaround.org.au
The Turnaround Management Association is the only international non-profit association dedicated
tocorporaterenewal and turnaround management.
67
Contributing authors
Blake Dawson
Michael Sloan
Partner, Restructuring & Insolvency
Duncan Baxter
Partner, Tax
Carl Della-Bosca
Partner, Corporate
Jemaya Barlow
Senior Associate, Restructuring & Insolvency
James Marshall
Partner, Restructuring & Insolvency
Matthew May
Partner, Restructuring & Insolvency
Stephen Menzies
Partner, Corporate
Paul ODonnell
Partner, Tax
Paul Pyanic
Senior Associate, Tax
David Ryan
Partner, Corporate
Marcus Ryan
Senior Associate, Tax
Steve Smith
Partner, Banking & Finance
Natasha McHattan
Senior Associate, Restructuring & Insolvency
Sanjay Wavde
Senior Associate, Tax
68
PricewaterhouseCoopers
Michael Codling
Partner, Financial Assurance
Nick Colman
Manager, Distressed Debt Group
Melissa Humman
Director, Corporate Advisory and
Restructuring
Frank Janik
Director, Distressed Debt Group
Paul Kirk
Partner, Corporate Advisory and Restructuring
Scott Lennon
Partner, Economics and Strategy
Steven Lim
Partner, Actuarial Services
Michael McCreadie
Partner, Distressed Debt Group
Rob Spring
Partner, Financial Assurance
Tom Toryanik
Senior Manager, Tax and Legal Services
Rob Tyson
Manager, Economics and Strategy
69
Contact information
PricewaterhouseCoopers
Michael McCreadie
Partner, Melbourne
Distressed Debt Group
T 61 3 8603 3083
michael.mccreadie@au.pwc.com
www.blakedawson.com
www.pwc.com.au