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Cover design: Kora Reichardt Icons © Flaticon / Flaticon and xnimrodx / Flaticon. Used with the permission of Flaticon / Flaticon and xnimrodx / Flaticon. Further permission required for reuse. Contents 1 CONTENTS Abbreviations 3 Abstract 4 Preface and Acknowledgements 5 Executive Summary 6 CHAPTER 1. INTRODUCTION 8 CHAPTER 2. ASSET SALES: SERBIA’S EXPERIENCE 10 A. Background information 10 B. Governance and legal framework 11 C. Asset sale strategy 12 D. Management and improvement of assets 13 E. Asset valuation 13 F. Asset sales process 14 G. Lessons learned 14 CHAPTER 3. ASSET SALES: UKRAINE’S EXPERIENCE 15 A. Background information 15 B. Governance and legal framework 16 C. Asset sales strategy 16 D. Management and improvement of assets 19 E. Asset valuation 19 F. Asset sales process  20 G. Lessons learned 23 2 Contents CHAPTER 4. IMPORTANT ASPECTS OF ASSET MANAGEMENT AND DIVESTMENT  24 A. Governance and legal framework 25 B. Asset sale strategy  27 C. Management and improvement of assets 29 D. Asset valuation 30 E. Asset sales process 32 CHAPTER 5. KEY RECOMMENDATIONS FOR AGENCIES RESPONSIBLE FOR BANK LIQUIDATION 34 Annex 1. Overview of bank resolution and liquidation frameworks in CESEE  35 Annex 2. Asset management and divestment by NAMA, Sareb, and BAMC  37 A. Asset sales by the Irish national asset management agency  37 B. Asset sales by the Spanish asset management company  38 C. Asset sales by the bank assets management company in Slovenia  39 Abbreviations 3 ABBREVIATIONS AMC Asset Management Company BAMC Bank Assets Management Company (Slovenia) CESEE Central, Eastern, and South-Eastern European countries DIA Deposit Insurance Agency of Serbia DGF Deposit Guarantee Fund EU European Union EUR Euro FinSAC Financial Sector Advisory Center, the World Bank Group FROB Spanish Fund for Orderly Bank Restructuring GFC Global Financial Crisis IMF International Monetary Fund NAMA National Asset Management Agency of Ireland NPL Non-Performing Loan RSD Serbian dinar Sareb Spanish Asset Management Company SDZ Strategic Development Zone UAH Ukrainian Hryvnia USD USA dollar 4 Abstract ABSTRACT Effective and efficient management and sale of capacity. The examples suggest the following are distressed assets helps minimize risks to financial key factors that contribute to successful distressed stability and support economic growth. This paper asset management and divestment: (i) sound summarizes the asset management and divestment governance practices and clear legal frameworks, (ii) experience of deposit guarantee funds in Serbia comprehensive asset management and divestment and Ukraine. It also provides some examples of strategies, (iii) active asset management and practices from selected asset management companies improvement of assets with safeguards in place to in Western Europe. These could help inform maximize return, (iv) transparent and prudent asset policy decisions on the design of bank liquidation valuation, and (v) transparent and competitive asset frameworks aimed at improving operational sale. Preface and Acknowledgements 5 PREFACE AND ACKNOWLEDGEMENTS This report and accompanying materials, unless Fund), for their valuable input, comments, and otherwise attributed, were provided as part of the suggestions. Additional thanks to Susan Schroeder FinSAC technical assistance program funded by the and Kora Reichardt for their editorial and formatting Austrian Federal Ministry of Finance. assistance. The views, thoughts, and opinions expressed in the text belong solely to the authors, and The report was prepared by Karlis Bauze, Senior not necessarily to the authors’ employer, organization, Financial Sector Specialist, the World Bank and committee, or other group or individual. Gunhild Berg, Lead Financial Sector Specialist, the World Bank. The authors are grateful to Ognjen The Financial Sector Advisory Center (FinSAC), based Popovic (Assistant Minister of Finance of the Republic in Vienna, provides independent, confidential, of Serbia), Svitlana Rekrut (Managing Director, Deposit and tailored expertise, technical advice, and Guarantee Fund of Ukraine), and Olga Bilai (Deputy implementation support to client countries in the Managing Director, Deposit Guarantee Fund of Emerging Europe and Central Asia (ECA) region. Ukraine) for sharing their experiences. The authors FinSAC offers global knowledge to help develop and wish to thank World Bank colleagues Fernando disseminate good practices that can enrich regional Dancausa, Miquel Dijkman, Pamela Lintner, Cedric policy debates and cross-fertilize reforms. It promotes Musset, and Vahe Vardanyan for their input and the application of international benchmarks and review; and Jean Pesme (WB Global Director for standards with the support of global and regional Finance), Asad Alam (WB EFI ECA Regional Director), organizations. and Mario Guadamillas (WB, Practice Manager) for providing overall guidance and advice. The authors www.worldbank.org/finsac are also grateful to Maximilian Fandl (Joint Vienna Institute) and Jaime Ponce (International Monetary 6 Executive Summary EXECUTIVE SUMMARY i. Effective and efficient management and sale bank liquidation function is most often entrusted of distressed assets has an important role in to the central bank, with a few exceptions – Bosnia minimizing risks to financial stability and supporting & Herzegovina, Poland, Ukraine, and Serbia. Well- economic growth. High levels of distressed assets functioning bank liquidation frameworks can play an freeze capital from supporting new lending in the important role in increasing the expected recoveries economy and create a negative macro-financial of failed banks, thereby reducing the losses associated feedback loop. Debt overhang reduces borrowers’ with bank failures. A liquid market for distressed investments and influences consumption decisions, assets, where it exists, can further enhance the accumulating risks to financial stability and recovery value of assets and agencies responsible jeopardizing growth prospects. The timely disposal of for bank liquidation can play an important role in distressed assets is essential to return the assets back developing this market in countries where it is lacking. to productive use and free-up resources that can be used for fresh lending or repayment to bank creditors, iv. Insights from different country experiences thereby fueling rather than depressing economic can help bank liquidators to formulate or update development. their strategy and approach. The paper reviews the experience of DGFs in Serbia and Ukraine regarding ii. Countries have used different approaches asset resolution of failed banks following systemic to address the stock of distressed assets at a crises in the years after the global financial crisis (GFC). national level. Experience from Serbia and Ukraine Serbia and Ukraine have accumulated considerable illustrates that deposit guarantee funds (DGFs) with experience in dealing with liquidated bank assets bank liquidation functions can play a crucial role in which can inform strategies of other authorities with managing distressed assets. In other jurisdictions in bank liquidation mandates. In both countries, the Central, Eastern, and South-Eastern European (CESEE) DGFs played an important role in the development countries, central banks have a bank resolution and and deepening of distressed asset markets. Their liquidation mandate and manage performing and experiences could be beneficial to other authorities distressed asset resolution in administrative or court- with a bank liquidation mandate as they show pros based processes. Asset management and divestment and cons of different approaches that are often practices by asset management companies (AMCs) constrained by local legal and other specificities. from selected Western European countries also provide valuable insights for bank liquidators to v. The DGF bank liquidation mandate has much in inform their policy decisions regarding the asset common with the functioning of AMCs regarding management and divestment function. asset management and divestment and both are useful to learn from. The paper considers the iii. Agencies responsible for bank liquidation experience of several European countries that created can play an important role in distressed asset AMCs to clean their banking systems of distressed resolution and the development of distressed asset assets following the GFC. Consideration of both markets. Supervisory and regulatory frameworks approaches helps identify important aspects of asset aim to address distressed asset resolution in management and divestment functions, especially: (i) viable banks. For banks in liquidation, this task is in the preparation of the legal frameworks governing often the responsibility of either the central bank or bank liquidation; (ii) when drafting asset management DGF depending on the bank resolution/liquidation and divestment strategies; and (iii) during the process mandates in respective countries. In CESEE, the of selling assets. Executive Summary 7 vi. The successful sale of the distressed assets of legally allowed, it is commercially justified, and does banks requires a clear strategy and effective legal not unduly increase risks, and (iv) use different cash framework. Experience of AMCs managing the flow enhancement methods (i.e., rental, lease) if distressed assets of viable and unviable banks shows appropriate. A balance should be sought between the a need for a structured approach to the preparation proper improvement of assets and their sale within and actual sale of distressed assets that is based envisaged deadlines. In certain cases, distressed on clear legal grounds. Major components of this assets of “strategic defaulters”, borrowers that have approach include: (i) sound governance practices means to pay but choose not to pay using weaknesses and clear legal frameworks, (ii) comprehensive asset in judicial systems or loopholes in legislation, should management and divestment strategies, (iii) active be specifically addressed. The case of Serbia showed, asset management and improvement of assets for instance, that packaging assets into large pools can with safeguards in place to maximize return, (iv) maximize recovery values of very seasoned distressed transparent and prudent asset valuation, and (v) assets and that a pilot asset sales project is a good transparent and competitive asset sale. Each of these starting point in countries with limited experience in components are discussed in detail in the paper. The the sales of distressed assets. case of Ukraine showed, for instance, that transparent asset sales through an online asset sales platform ix. The founding law should provide guidance ensures adequate and equal information to all on active or passive asset management and the investors and high transparency in asset management divestment approach to be used. Active asset and divestment allows the bank liquidator to explain management (i.e., renting, leasing, and new financing and justify low recovery rates. to develop assets), with safeguards in place, can deliver results and increase the final asset sales vii. Distressed asset management and disposal price. But it requires resources and is a source of must be handled professionally and transparently. risk. Passive asset management might be warranted Legal mandates should: (i) list actions allowed for if the bank liquidators lack the necessary expertise, improvement of assets under management, (ii) experience, or resources for active asset management. establish the time frame for asset improvement and However, this strategy should include a minimum level disposal, (iii) set out general rules for asset valuation, of activity to preserve the asset and prepare it for sale. (iv) allow the potential option of new financing if this is value accretive, and (v) offer balanced protection x. Prudent and timely valuation of distressed assets to staff against legal claims, including cases of asset is critical. The founding law should provide the basis sale at low price (below acquisition price). Professional for the valuation framework to be used by bank and independent staff, including management, are liquidators. The following aspects should be clearly essential to discharge the tasks provided in the legal set out in the law or internal documents: (i) prudent mandate. Staff decisions shall be made purely on a asset valuation during acquisition and sale, (ii) commercial basis without external interference or valuation service providers (i.e., internal or external), lobbying. At the same time, management shall be (iii) valuation methods to be used, and (iv) sales price accountable to the stakeholders. determination. viii. Bank liquidators need to strategically plan their xi. A well prepared and conducted asset sale process activities, targets to be achieved, and resources is essential to maximize recovery values. The paper needed, based on the operational framework laid provides examples of how asset sales have been out in founding laws. Strategies should aim to organized in different jurisdictions. Key general optimize asset management and disposal with a goal principles include: (i) appropriate portfolio structuring to maximize recoveries within the specified time of assets for sale, (ii) proper marketing to broaden horizon and with safeguards in place. The following the investor base, (iii) detailed information of assets principles for bank liquidation can help remove sold to minimize “price gap”, and (iv) transparent ambiguity and increase transparency: (i) dispose of and efficient sales platforms. Transparent valuation assets in a phased and orderly manner, (ii) use both processes and disclosure of maximum information to individual and portfolio sales approaches if feasible, investors regarding assets facilitates price discovery. (iii) provide additional financing to certain assets if CHAPTER 1 INTRODUCTION 1. A high level of non-performing loans (NPLs) poses entrusted assets according to founding laws. While risks to financial stability and economic growth. the primary function of a DGF is to protect depositors, Elevated levels of NPLs in a financial system are a in some countries the DGF also has a bank resolution source of systemic risk and can threaten the long- and liquidation mandate. term stability of national financial systems. Financial 3. This paper summarizes the asset management stability and soundness of banking systems are two and divestment experience of two DGFs from the important preconditions for sustainable economic CESEE region and three AMCs from Western Europe. growth. As bank financing remains the main source It focuses on two recent country examples where of funding for economies in the CESEE region, banks DGFs played a crucial role in managing assets of must remain financially healthy to provide new liquidated banks (Serbia and Ukraine) and provides loans.1 Non-viable banks with asset quality problems insights on the asset management and divestment should be liquidated and stranded assets returned function from national AMCs created in Western to productive sectors as soon as possible to not Europe (Ireland, Spain, and Slovenia) to deal with the undermine credit growth. consequences of the GFC. These examples are the 2. Countries have applied different approaches to most relevant for the study due to the asset size and address the stock of distressed assets at a national depth of experience. The focus of the paper is on asset level. In many jurisdictions, central banks have the management and divestment functions. It does not bank resolution and liquidation mandate and manage aim to review bank resolution or liquidation strategies, distressed asset resolution in administrative or NPL management strategies, or other aspects of court-based processes. In some CESEE and Western AMC creation and operation, including mandates, European countries the DGF or an AMC has played governance, funding structure, and legal frameworks. a crucial role in managing distressed assets. The The paper does not discuss the allocation of bank primary function of an AMC is to manage and dissolve resolution and liquidation mandates among national  1  Ivan Huljak, Reiner Martin, Diego Moccero and Cosimo Pancaro. Do non-performing loans matter for bank lending and the business cycle in euro area countries? https://www.tandfonline.com/doi/full/10.1080/15140326.2022.2094668?src=recsys and Nir Klein, Non- Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance. https://www.imf.org/en/Publications/WP/ Issues/2016/12/31/Non-Performing-Loans-in-CESEE-Determinants-and-Impact-on-Macroeconomic-Performance-40413 Chapter 1. Introduction 9 authorities but provides a summary of national Management Company (Sareb), and the Bank Assets frameworks in Annex 1. Management Company (BAMC) respectively - to deal with turbulence in their financial sectors. All these 4. Agencies responsible for bank liquidation can play companies were mandated to manage entrusted an important role in the management and sale of assets and divest them to return initial investments NPLs, as evidenced by the experience of Serbia and to respective authorities (most often national Ukraine. The role of bank liquidators in rehabilitating governments) and are therefore informative for this the assets of non-viable banks is important, especially study. in countries where a significant proportion of banks were closed, as experienced in Serbia and Ukraine. 7. The following four chapters focus on asset In cases of systemic financial stability problems in management and divestment practices in select such countries, bank liquidators often act as AMCs CESEE countries. While the agencies responsible that, according to national legal frameworks, (i) take for bank liquidation can have a wide range of over assets from liquidated banks, (ii) manage and functions, this paper focuses on distressed asset improve these assets, and (iii) divest them in allowed management and divestment practices of these timeframes set by the legislator. Bank failures in other institutions, including: (i) a case study of the Deposit CESEE countries in the region (e.g., Montenegro and Insurance Agency of Serbia’s experience with North-Macedonia) are not analyzed in this paper due 2 asset management and disposal (Chapter II), (ii) to the small size of assets. a case study of the Deposit Guarantee Fund of Ukraine’s asset management and disposal practices 5. The asset management and divestment practices (Chapter III), (iii) an overview of good practice and of DGFs in the region can be a source of good main aspects of the asset management and disposal practice information for other countries. A timely processes distilled from Serbia and Ukraine and other return of distressed assets to productive economic examples to provide guidance to bank liquidators on sectors can facilitate economic growth and develop how to set up these frameworks (Chapter IV), and the NPL market. Assets of liquidated banks are (iv) key recommendations for agencies mandated managed by the liquidators for value optimization to conduct bank liquidations (Chapter V). The and subsequent divestment. While some assets Annexes include an overview of bank resolution and can be perfected and sold in a short period of time, liquidation frameworks in CESEE countries to show other assets are not as liquid and might be difficult different frameworks for bank, and consequently to sell. Hence, additional improvements in assets NPL, resolution (Annex 1), and summarize asset might improve the chances of selling them and/or management and sales practices by NAMA, Sareb, and maximizing their sales value. This review of asset BAMC (Annex 2). management and divestment practices can provide policy input to support liquidators’ efforts to maximize 8. The paper aims to complement existing asset returns, with safeguards in place, within the legal international standards and good practices. The and operational frameworks defined by respective paper builds on international good practices described laws. in the following documents: (i) Financial Stability Board, Key Attributes of Effective Resolution Regimes 6. Agencies mandated to manage and divest assets for Financial Institutions,3 (ii) European Commission, of failed banks can learn from the experiences of Asset Management Company Blueprint,4 (iii) ECB, large European AMCs. National authorities in Europe Guidance to Banks on Non-Performing Loans,5 (iv) took different approaches to resolve the stock of World Bank, Public Asset Management Companies distressed assets and deal with failed banks following - A Toolkit,6 and (v) International Monetary Fund, the GFC. Ireland, Spain, and Slovenia established Issues in the Establishment of Asset Management asset management companies – the National Asset Companies.7 Management Agency (NAMA), the Spanish Asset  2  Eurostandard Bank’s license was revoked by the National Bank of the Republic of Macedonia and the bank was placed under insolvency proceedings in August 2020. Invest Banka Montenegro AD Podgorica was placed under insolvency proceedings in January 2019 and Atlas Banka AD Podgorica in April 2019. In the case of Montenegro, liquidation administrators were appointed to liquidate the banks.  3  https://www.fsb.org/wp-content/uploads/r_111104cc.pdf  4  https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018SC0072  5  https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf  6  https://documents.worldbank.org/en/publication/documents-reports/documentdetail/293361467996695247/public-asset- management-companies-a-toolkit  7  https://www.imf.org/external/pubs/ft/pdp/2004/pdp03.pdf CHAPTER 2 ASSET SALES: SERBIA’S EXPERIENCE ˆ A. BACKGROUND Working Group comprised the Ministry of Finance, the National Bank of Serbia, the Ministry of Justice, INFORMATION and Deposit Insurance Agency (DIA) with the World Bank, International Monetary Fund (IMF), and 9. Serbia needed a national NPL resolution strategy European Bank for Reconstruction and Development given high levels after the GFC. The level of NPLs in as observers. It prepared a study on impediments for Serbia peaked in 2015 at 21.6 percent (see Figure 1). resolving distressed assets that informed a national To address the stock and flow of distressed assets time-bound strategy for NPL resolution (the Strategy),8 Serbia formed the NPL Working Group in 2015. The approved by the government in 2015. Figure 1. NPLs against gross loans (in % over years) 25 21.4 21.5 21.6 19.0 18.6 20 16.9 17.0 15.7 15 11.3 9.8 10 5.7 4.1 3.7 3.6 5 3.0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: National Bank of Serbia  8  https://mfin.gov.rs/upload/media/qGkXCU_6016d5622cde9.pdf Chapter 2. Asset sales: Serbia’s experience 11 10. The Strategy introduced a holistic, system-wide approach to NPL resolution. The Strategy recognized ˆ B. GOVERNANCE AND that NPLs had become a source of systemic risk LEGAL FRAMEWORK and that they would prevent economic growth unless addressed systematically. The overall goal 13. The DIA has a broad mandate, based on a of the Strategy was to provide incentives, remove clear legal framework. The legal framework of DIA identified impediments, decrease the level of NPLs, operations is guided by the Law on the Deposit and prevent the buildup of future NPLs. The strategy Insurance Agency of 2015 (DIA Law),11 and the Law on encompassed (i) regulatory reforms, (ii) activities Bankruptcy and Liquidation of Banks and Insurance related to enhancing banks’ capacity to deal with high Companies of 2015 and 2018.12 The DIA Law clearly NPLs, (iii) reforms aimed at enabling the development stipulates that the DIA is an autonomous legal entity, of an NPL market, and (iv) reforms related to out-of- functionally independent from any state institution. court debt restructuring, in-court debt resolution, The DIA performs activities pertaining to statutory and the mortgage framework. After about three deposit insurance and payout of insured amounts in years of implementation there had been a substantial accordance with the law governing deposit insurance. improvement in the level of NPLs to below five In addition, the DIA (i) acts as the bankruptcy or percent. The Strategy was then extended to focus on liquidation administrator for bankruptcy cases of distressed claims of government-controlled financial banks, insurance companies, and leasing companies, creditors and prevention of NPL build-up, among (ii) manages the assets transferred in the process of other aspects. bank resolution and performs other activities related to bank resolution pursuant to the law governing 11. The DIA had an enhanced role in the banks, and (iii) serves as collector of government implementation of the Strategy. The Strategy claims based on distressed assets carved out of banks included two Action Plans, one prepared by the undergoing sale, restructuring, or transfer.13 government and the other by the National Bank. The Action Plan prepared by the government envisaged: (i) 14. The DIA Law stipulates clear governance boosting the operational and professional capacity of arrangements with proper legal protections. The the DIA to deal with distressed assets, (ii) developing Managing Board of the DIA consists of five members, internal procedures for asset management and asset three of which are required to be independent appraisal, and (iii) implementing a time-bound asset (c.f., DIA Law, Section IV). The Law also establishes divestment plan. minimum requirements for Managing Board members, the scope of the Board’s work, provisions 12. In 2017, the DIA oversaw asset management of for managing conflict of interest, and acceptable 209 banks10 and seven insurance companies which reasons for dismissal. Similar requirements are set were under bankruptcy procedures. The gross for the DIA’s Director. The DIA Law also establishes book value of these assets was around RSD 580.9 legal protections for its employees, members of the billion (approx. EUR 4.7 billion based on end-2016 Managing Board, as well as the persons who, by order exchange rates). In addition, RSD 433.7 billion (approx. of the DIA, perform duties determined by the Law (c.f., EUR 3.5 billion) of assets were managed as part of a Article 20). government claims collection, bringing the total DIA portfolio to RSD 929.47 billion (approx. EUR 8.2 billion) 15. To effectively implement the NPL resolution as of December 31, 2016. Since then, many assets strategy, the DIA introduced several organizational have been disposed of. The value of the total portfolio and operational changes. Those included a change in remained at EUR 2.65 billion in December 2022.  9  Four large banks went bankrupt in 2002, seven smaller banks went bankrupt between 2004 and 2012, and 5 larger banks went bankrupt in 2012-14.  10  In late 2016, 30 banks were operating in the Republic of Serbia with net value of assets at EUR 25.3 billion. Source: DIA. NPL and Asset Management Strategic Plan. April 2017.  11  https://nbs.rs/export/sites/NBS_site/documents-eng/propisi/zakoni/deposit_insurance_agency_2015.pdf  12  https://nbs.rs/export/sites/NBS_site/documents-eng/propisi/zakoni/bancruptcy_liquidation_banks_insurance.pdf  13  Legal framework for bank resolution. Source: DIA website. 12 Chapter 2. Asset sales: Serbia’s experience the operational structure of the DIA related to NPL and 18. The structure of the DIA’s asset portfolio was asset management to increase efficiency, and several complex.14 In December 2016, the structure of the changes to NPL and asset management procedures. DIA’s distressed asset portfolio was slightly tilted towards collection of assets for bankrupt banks – 54 percent – while 44 percent of assets represented collections on behalf of the state. Four major banks ˆ C. ASSET SALE STRATEGY alone accounted for 28 percent of total assets. Assets in bankruptcy procedures made up 62 percent of the total. The asset portfolio of bankrupt 16. The DIA’s Non-Performing Loan and Asset banks included the following asset types: accounts Management Strategic Plan (Strategic Plan), receivable from debtors (91 percent),15 real estate (4 developed based on the NPL resolution strategy, percent), time deposits (4 percent), and shares and was the backbone of asset management and stocks (1 percent). In total, 4,501 debtors made up disposal. The DIA prepared the Strategic Plan in 2017 the portfolio of bankrupt banks’ accounts receivable. in cooperation with the Ministry of Finance and based The asset portfolio of collecting accounts receivable on the 2015 national Strategy. It was supplemented for or on behalf of the state included 329 debtors. with annual Asset Management Operational Plans in These were mostly uncollectable or low recovery rate which short-term targets were spelled out. The DIA’s receivables.16 Of these, bankruptcy procedures were strategic objectives were to: (i) manage distressed initiated with 129 debtors. assets in an efficient and effective way, (ii) ensure maximum recovery, and (iii) frequently distribute 19. Real estate enforcement was problematic. The proceeds from asset disposal to creditors. As the DIA DIA’s real estate portfolio included 366 properties was one of the largest sellers of distressed assets in in total. Of these, 224 properties were not ready for Serbia, it was envisaged in the national Strategy that sale due to the following issues: (i) unregistered title, more active work of the DIA would stimulate and (ii) missing documentation, (iii) property located in deepen the hitherto underdeveloped NPL market. Kosovo and Metohija or former Yugoslav republics, (iv) debtor’s title in dispute, (v) restitution claims 17. The Strategic Plan set out the main challenges advanced, and (vi) property not registered. A lot of for smooth asset management and disposal. Asset work was needed to perfect these assets and in many seasonality (vintage) was one of most important cases it was very difficult or impossible to do so. parameters used to describe the DIA’s asset portfolio at that time. Some banks, and consequently assets, 20. Management of the DIA’s equity portfolio had been under bankruptcy procedures for over required specific skills. Financial institutions in 15 years. Delays in closing these proceedings were bankruptcy administered by the DIA owned equity in attributed to the complexity of selling the banks’ a total of 96 businesses (86 in Serbia and 10 abroad). outstanding loans. In addition, long court procedures, Of the 86 Serbian entities, 38 were either deleted costly bankruptcy procedures, inability to collect from the register or in bankruptcy and 48 were active claims from debtors in restructuring, lengthy and (36 joint stock companies and 12 limited liability complex insolvency and liquidation procedures companies). Specific skills were required to manage (including foreign jurisdictions), the under-developed active companies. NPL market, loss of value due to the vintage of loans and collaterals, and decline in collateral quality over 21. The DIA optimized information systems the long period of time were, among others, issues to improve collection efficiency and obtain a that implied low recovery values of these assets. comprehensive overview of all debtors. While initially, the portfolios were treated separately, it  14  DIA. NPL and Asset Management Strategic Plan. April 2017.  15  Most accounts receivable from debtors were held by the four major banks in bankruptcy. These were primarily receivables from other financial institutions and subsidiaries abroad.  16  Most often these were fully provisioned when they were transferred to DIA from banks’ balance sheet. Chapter 2. Asset sales: Serbia’s experience 13 was identified that consolidation of information together certain groups of debtors and loans to make about a debtor or debtor group provided a more them more attractive to prospective investors and comprehensive overview of exposures and allowed increase competition. This approach was facilitated for a more analytical approach to restructuring where by investment in information systems (see para it was feasible. For this reason, a new database was 21) that allowed for a consolidated view of debtors created to allow better-informed strategic decisions to across bankruptcy estates. The packaging approach be made about how to recover receivables. also lowered expenses compared to a loan-by-loan approach. ˆ D. MANAGEMENT AND IMPROVEMENT OF ASSETS ˆ E. ASSET VALUATION 25. A new valuation framework applied consistently 22. The DIA’s founding laws are not explicit about across assets led to considerable downward the principles to be applied for asset management; adjustments. The Law on Bankruptcy and Liquidation however, the DIA’s Strategic Plan emphasizes of Banks and Insurance Companies stipulated clear maximizing recovery value. In its Strategic Plan, requirements regarding the valuation of assets. As the DIA established its objectives as (i) managing the bankruptcy administrator for financial institutions assets efficiently and effectively, (ii) ensuring in bankruptcy, the DIA was required to provide an maximum recovery for creditors including the state, inventory of assets and compile an initial bankruptcy and (iii) distributing proceeds more frequently. The balance sheet within 60 days of taking possession of Bankruptcy Law allows the DIA to cover the costs of the assets in accordance with International Financial managing its assets and the bankruptcy proceedings Reporting Standards (c.f., Article 16). The DIA was also from its own resources, while maintaining the right to required to publish quarterly updates on the state of recover these costs from the bankruptcy estate. each bankruptcy estate. However, the Law only came into effect after many bankruptcies had already been 23. Asset management and improvement follow the opened. Hence, a re-valuation of assets was required, principles of maximizing recovery within an optimal for which the DIA established a new methodological period of time. The DIA’s Strategic Plan describes framework to be applied consistently across assets. that collection activities depend on (i) the form of This led to a considerable downward adjustment to incorporation of the debtor (trading businesses, the valuation of accounts. sole proprietorship, legal entities in reorganization, bankruptcies, private individuals), (ii) the amount of 26. As of end-2016, assets of financial institutions in the outstanding receivables, and (iii) the quality of bankruptcy or liquidation administered were valued collateral posted. at RSD 580.9 billion (EUR 4.7 billion). Loans issued to debtors constituted 91 percent of the total (RSD 529 24. To accelerate payments to creditors and billion or EUR 4.3 billion). Of the remainder, about RSD maximize recoveries, the DIA and Ministry of 22 billion (EUR 0.2 billion) were in cash, RSD 22 billion Finance decided to package certain distressed assets (EUR 0.2 billion) in movable and immovable property, in portfolios for sale. Work began on packaging and RSD 6 billion (EUR 0.05 billion) in units and a so-called “pilot portfolio” in 2018. This aimed to shares. Property and units and shares appraised by package a small portion of the total NPL portfolio an authorized valuer were carried at their appraised for sale to gain experience on how best to market liquidation value, while property that had not been NPLs. After the successful sale of this portfolio in subject to appraisal by an authorized person or was in 2019, a so-called “large portfolio” was offered for dispute was carried at book value. sale in 2020, embedding the lessons learned from the first sale (see paras 27-30). The portfolios tied 14 Chapter 2. Asset sales: Serbia’s experience ˆ F. ASSET SALES PROCESS claims of the state and eight bankrupt banks and closed in 2021. Following these sales, the DIA began work on a so-called Remaining Portfolio for sale. This 27. The sale of the pilot portfolio and the large portfolio comprised about EUR 318 million of claims portfolio of NPLs consisted of four steps. First, and was publicly tendered in December 2022. At the the DIA, supported by international consultants, time of writing this report, the deal has not yet been assessed the collectability of the portfolio, valued completed. the collateral, prepared an indicative valuation of the portfolio, and drafted a Process Letter for the sale and 30. The asset sales reduced the value of the DIA’s relevant sales documents. The second step included portfolio significantly. As of end-2022, the DIA’s preparatory activities for the sale, including preparing portfolio stood at EUR 2.65 billion, about 30 percent advertisements, agreeing on the data tape, preparing of its 2016 value. In addition, the DIA collected EUR the draft binding offer, and developing data room 273.59 million from debtors between January 2016 rules. Third, the tender for sale was issued through and December 2022 and closed 22 bankruptcy/ public advertisement, requesting potential investors liquidation cases. to submit their expressions of interest. Interested investors were, in the fourth step, invited to undertake their due diligence by visiting the data room. This led to the submission of binding offers for review and evaluation by the DIA. Based on the review, the DIA ˆ G. LESSONS LEARNED went into negotiations with the successful bidder and closed the sale. 31. Three important lessons can be learned from the Serbian experience: 28. The DIA decided to set a minimum reserve price i. A systematic analysis of distressed assets for the portfolios at sale to set expectations, provide from banks in liquidation, identifying similar transparency, and signal commitment to sell. The characteristics and opportunities for packaging reserve price was set at the median valuation of assets in portfolios, can increase the probability of claims assessed as collectible within the portfolio. The a successful sale and the recovery value as larger reserve price was expected to prevent possible hold- portfolios attract the interest of more potential out behavior by one or a minority of sellers at the final investors. To allow for such systematic analysis, stage of binding offers. The DIA was open to disclosing IT upgrades and staff upskilling may be needed. the reserve price to interested investors to signal A critical assessment of the value of portfolios is commitment to sell, understanding however that this necessary for successful sales. could imply lower offers than potentially possible (as investors would target an offer around the reserve ii. In countries where experience with NPL portfolio price). However, the DIA expected competition to be sales may be limited, starting with a pilot portfolio high, in which case such behavior was less likely. of NPLs for sale can be useful to gain experience before aiming to sell larger portfolios. This can 29. Multiple bids were received for each portfolio, increase recovery value and save time, including and both were sold to international companies through avoiding unsuccessful tenders. specialized in the recovery of impaired assets. The iii. Resolving NPLs is complex and requires a two portfolios together consisted of EUR 2.04 billion comprehensive approach, working across in claims. This equaled 32 percent of the aggregate institutional boundaries and addressing legal and nominal value of the combined portfolio managed operational obstacles as they are identified. The by the DIA as of end-2018. The pilot portfolio of EUR national NPL resolution strategy and the DIA’s 242.4 million consisted of claims of the state and strategic plan were fundamental for the successful five bankrupt banks and successfully closed in 2019. asset sales that followed. The large portfolio of EUR 1.8 billion consisted of Chapter 3. Asset sales: Ukraine’s experience 15 CHAPTER 3 ASSET SALES: UKRAINE’S EXPERIENCE ˆ A. BACKGROUND up, the World Bank conducted a study on the NPL resolution framework in Ukraine. This revealed good INFORMATION practice gaps in the framework and recommended bank supervisory and regulatory reforms and judicial 32. The high level of NPLs were becoming and legal reforms to streamline insolvency and increasingly concerning following the GFC and a collateral enforcement frameworks. After part of these substantial currency depreciation from 2014 to reforms were implemented in 2017 and 2018, the NPL 2017. The level of NPLs increased sharply, reaching 55 rate started to decrease, mostly due to substantial percent in 2017 (see Figure 2). To address the build- NPL write downs by banks. Figure 2. NPL rate (%) 60 54.82 54.41 50.53 50 43.47 38.95 40 35.39 38.12 31.72 30 23.32 20.37 20 15.27 14.73 16.35 13.70 10 3.88 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: IMF FSI 16 Chapter 3. Asset sales: Ukraine’s experience 33. The DGF of Ukraine plays a key role in NPL from the National Bank of Ukraine, one representative resolution. Since 2012, the DGF is the legally 17 from the Parliament, and one DGF Managing Director. designated bank resolution and liquidation entity in The Executive Board consists of seven members,20 Ukraine and is mandated to manage and sell its assets who satisfy the requirements specified in the Law.21 under management. During the currency depreciation crisis (2014-2017), the DGF carried out the resolution 36. Organizational and legal changes were made of 94 insolvent banks. Hence, a large part of bank to optimize the DGF’s work to deliver on the NPLs were transferred to the DGF for resolution. As of mandate. Several organization improvements August 2023, the DGF was in the process of liquidating were implemented to reflect the dynamic changes 54 banks with only 15 still having assets.18 The DGF in workload. An asset management strategy was continues to play a major role in NPL resolution and prepared (see Section C below) and the Fund remains a dominant player in the NPL market in introduced two new governing bodies – (i) the Ukraine. Committee on Consolidation, Management, and Sale of Bank Assets and (ii) the Property Management Committee. These two committees were merged in 2019 after the volume of assets decreased due to ˆ B. GOVERNANCE AND aggressive sales. In parallel, the Fund partnered with a domestic electronic trading platform, Prozorro. LEGAL FRAMEWORK Sales, to optimize asset sales and to ensure maximum transparency (see para 42). 34. The DGF has a broad mandate that is anchored in 37. The DGF Law provides legal protection for staff the Law “On Deposit Guarantee System” (DGF Law) who work in good faith. The Law clearly states that from February 2012. The DGF is an economically DGF staff and management, including retrospectively, independent public law entity. The Law specifically are not liable for any acts or omissions if they acted states that it is independent from government based on, within the authority of, and in the manner agencies and the National Bank of Ukraine provided for by the Constitution of Ukraine and laws (responsible for banks’ regulation and supervision). of Ukraine.22 The legal protection of DGF employees The DGF has a key role in the financial architecture of and related costs are covered by the DGF. the Ukrainian financial system and has many functions including: (i) paying agent for the insured depositors of failed banks, (ii) bank resolution authority, and (iii) management of assets of liquidated banks. The DGF is accountable to the Verhovna Rada of Ukraine ˆ C. ASSET SALES STRATEGY (Parliament), the Cabinet of Ministers, the Ministry of Finance, and the National Bank of Ukraine.19 38. The asset sales strategy has evolved over time. The main pillars of the DGF asset sales strategy were 35. The DGF Law sets the framework for governing originally: (i) professional asset management process bodies and operational arrangements. The two-tier and (ii) transparency during the sales process. In administrative system includes two bodies: (i) the April 2016, the Department of Consolidated Sales Administrative Board and (ii) the Executive Board. The and Management of Assets was created to improve Administrative Board consists of five persons – one the asset management process.23 At the same time, from the Cabinet of Ministers, two representatives a policy of maximum information disclosure during  17  Between 2008 and 2010, 24 banks were declared insolvent and liquidated by the National Bank of Ukraine. DGF only paid out depositors guaranteed compensation.  18  As per July 2023, there were 64 banks with valid licenses.  19  Article 5.1 of the Law “On Deposit Guarantee System”.  20  According to the law there are seven Executive Board members. However, the Executive Board has operated with six members.  21  Article 11 of the Law “On Deposit Guarantee System”.  22  DGF Law. Article 16.3.1.  23  DGF Annual Report 2016. Page 7. Chapter 3. Asset sales: Ukraine’s experience 17 the asset sales process was initiated. Under this This time constraint forces the DGF to come up with policy all available information regarding assets for innovative approaches to asset management but sale, including rights to claim on loans, is publicly at the same time it limits the potential to maximize disseminated and is available to potential investors. asset returns.26 The DGF Law provides for a possible Data rooms were created and public asset passports extension of the time limit in some exceptional cases, were developed and introduced. This addressed such as if there is no access to assets or records or if long-standing issues of lack of transparency and there is a court decision to overrun the DGF decision corruption risks. In the following years, the strategy on the bank liquidation procedure. The time constraint was finetuned to address problem areas identified on asset sales is one of the reasons for low recovery in the work process, including improving the auction rates of disposed assets, see Table 1. process during the sale and optimization of cash flows from assets using leasing and renting tools. 41. The complexity of the asset portfolio under management requires special approaches. While 39. The strategy envisages maximization of return there are some changes in the structure of the assets on assets. The main goal of the DGF during the bank portfolio from year to year, claim rights against loans liquidation process is to maximize proceeds from the remain dominant. For example, in January 2018, 94 management and sale of the insolvent bank’s assets banks were under the DGF’s management with a total towards satisfying the bank’s creditors’ claims. 24 book value of assets of UAH 526.39 billion27 (USD 18.75 billion). 83.1 percent of total assets were claim rights 40. The DGF’s asset sales strategy is constrained against loans (see Figure 3). The diversity of assets by a time-bound limit on asset sales. The DGF Law requires specialized skills for asset management requires the DGF to sell assets within a three-year and divestment. The large share of the loan portfolio period from the initiation of the bank liquidation requires special approaches to borrowers’ depending procedure.25 This limit is extended to five-years in on their viability, debt servicing capacity, and legal the case of a systemically important bank liquidation. status of the loan (i.e., under legal procedures or not). Figure 3. Structure of assets under management (2018) 0.3% 0.5% 0.8% Loan porfolio 4% Other assets 7.5% 3.7% Real estate Securities 83.1% Interbank loans Highly liquid assets Fixed assets  24  DGF Annual Report 2018. Page 55.  25  Article 44.5 of the Law “On Deposit Guarantee System”.  26  International experience shows that distressed asset investors might benefit from forced asset sales at a discount when public asset managers are forced to liquidate assets in a certain time period. This was a serious concern for the NAMA and for this reason the legislation did not envisage the time cap on asset sales but instead required an overall asset management and liquidation plan that provided steady loan repayments to the lender (the state in the case of Ireland). Otherwise, investors might wait till the end of the asset disposal period and buy assets at a discount when the seller is compelled to sell them.  27  Annual Report 2017. Page 63. Exchange rate UAH/USD=28.07. 18 Chapter 3. Asset sales: Ukraine’s experience 42. An online asset sales platform is used to provides a summary of recovery rates during the widen the potential investor pool and ensure period 2016-2022. In 2016 and 2017, average recovery transparency for asset sales. Given the large volume rates were relatively high – 43 and 24 percent of assets of failed banks, the DGF, in partnership respectively. However, in consecutive years these with Transparency International Ukraine, created the rates were below 5 percent (2019-2021). This can be electronic trade system Prozorro.Sales in 2016 to sell explained by the sale of more valuable assets in the the assets of the banks being liquidated. Since 2017, initial years and the sale of more difficult assets at almost all DGF auctions have used this trade platform, later stages, including the sale of portfolios. Other ensuring openness and transparency of the process. factors that contributed to the low recovery rates In 2018, as part of a pilot project, a small number during asset sales include: (i) poor underwriting of large asset pools were sold on the First Financial standards of loans in banks under insolvency, (ii) Network (USA) and DebtX (USA) platforms. However, limited time for improvement and sale of assets these volumes were not large and Prozorro.Sales (see para 40), and (iii) the long and costly collateral remains the dominant sales platform for the DGF.28 enforcement and insolvency process in Ukraine that is All funds received from the sale and management reflected in low offer prices by investors. The volume of banks’ assets are used to satisfy the claims of the of sales decreased substantially after Russia’s full-scale creditors of the banks being liquidated. war and the introduction of martial law in Ukraine in February 2022. The high recovery rate in 2022 was 43. The sale of some valuable assets achieved mostly due to the sale of the good and liquid assets of reasonably high recovery rates but generally two closed subsidiaries of Russian banks.29 proceeds from asset sales have been low. Table 1 Table 1. Asset sales by DGF (UAH thousand, %)30 Book value of assets Sales price of assets in Ratio of sales price (property) sold auctions and direct sales Year of assets to the book value of assets, % UAH thousand USD thousand UAH thousand USD thousand 2016 6,964,386 258,036 3,013,321 111,646 43.3% 2017 24,186,555 855,970 5,797,598 207,576 24.0% 2018 62,793,498 2,289,227 6,278,121 228,878 10.0% 2019 237,726,370 10,238,000 7,977,141 343,546 3.4% 2020 283,210,975 10,014,532 3,693,155 130,592 1.3%31 2021 73,636,168 2,692,364 2,415,250 88,309 3.3% 2022 2,001,174 54,188 1,535,200 41,571 77.0%  28  Annual Report 2018. Page 9.  29  After the invasion in February 2022, the National Bank of Ukraine decided to liquidate two subsidiaries of Russian banks. The balance sheets of these banks included a lot of liquid assets since licenses for these banks were withdrawn for non-insolvency reasons. Source: https://www.epravda.com.ua/cdn/cd1/2023/yak_prodaie_fond_harantuvannia_vkladiv/  30  UAH/USD exchange rates used: 2016 - 26.99; 2017 - 27.93; 2018 - 27.43; 2019 – 23.22; 2020 – 28.28; 2021 – 27.35; 2022 – 36.93.  31  In 2020, the ratio was particularly low since it coincided with the final “clean up stage” for the banks liquidated in 2014-2015 under a 5-year sunset clause. During this year many assets were sold in the so called “one bank – one pool” auctions. In particular, assets of two systemic banks – Delta and Nadra – consisting of FX mortgage loans that suffered four-fold UAH devaluation and had 10 years of accruing interest were sold contributing to the low recovery rate. Chapter 3. Asset sales: Ukraine’s experience 19 ˆ D. MANAGEMENT AND ˆ E. ASSET VALUATION IMPROVEMENT OF ASSETS 47. The DGF Law provides for basic asset valuation principles. The Law requires the DGF to prepare 44. The DGF founding laws allow for active asset an inventory of a bank under liquidation’s assets, management. The main goal of the DGF bank including property, within six months from the date liquidation function, as defined in the DGF Law, is to of the decision to liquidate the bank.33 The valuation maximize proceeds from insolvent banks to meet of these assets should be done in accordance with bank creditors’ claims. This legal basis allows the DGF the procedure established by the DGF. The DGF has a to optimize cash flows of assets under management right to involve external appraisers and expense these and minimize operating costs. This includes active services to the liquidation asset pool of the bank. asset management by (i) leasing or renting tangible assets, (ii) offering loan restructuring options to 48. The DGF conducts appraisal according to internal borrowers, and (iii) actively enforcing collaterals. methodology. The Law requires the DGF to prepare and use internal methodology for the appraisal of 45. Operational reforms have optimized the asset assets at different stages of the process (i.e., at asset management function. With the growth of assets acquisition and disposal). Internal regulation for asset under management, a new Asset Management valuation builds on the local valuation standards Department was established in 2017. The main aim that are adjusted for the DGF’s needs. The DGF may of this reform was to improve the asset management decide on re-evaluation of assets for sale in cases of process and make the decision-making process more significant changes in asset characteristics. transparent. Internal procedures were streamlined and operational manuals prepared. 49. The DGF uses both internal and external valuation services. Internal valuation is often used 46. Leasing of property generated additional cash only for advisory purposes. External appraisal services flows for the DGF. In 2018, the DGF approved a new are used for all actions related to bank resolution and Regulation on the lease of insolvent banks’ property. asset liquidation. The DGF aims for high transparency This provided a transparent way to lease much of and hence publishes a list of valuers with whom they the tangible asset portfolio and improve revenues. work on their website. This list is reviewed every two- The DGF operated a specialized rental site to allow years, but the DGF has the right to arrange an ad-hoc interested parties to find and rent property. This procedure if needed. Specific qualification criteria for site operated as part of the DGF website. It provided valuers are published on the DGF website. information, including presentations and photos, about all tangible assets that the DGF offered for rent 50. Quick sales discounts are applied to certain and collected indicative offers from interested parties. transactions. Due to legal constraints on the asset The biggest interest in this segment was related to liquidation period, the DGF uses quick sales discounts property complexes and office space in central city on assets that are not sold at the first attempt. These areas. In December 2018, the DGF had leased non- discounts are applied to regular market price as assets residential premises with a book value of UAH 0.29 near the deadline for asset liquidation. Advanced billion, that generated UAH 0.10 billion revenue.32 In market players are aware of this nuance and seek to January 2019, 346 properties were leased by the DGF. use it in their favor. Since 2019, all rental and lease properties have been auctioned on the Prozorro.Sales platform to attract more investors.  32  Annual Report 2028. Page 9.  33  Article 50.4. The DGF Law. 20 Chapter 3. Asset sales: Ukraine’s experience 51. Different valuation approaches are allowed for including days-past-due, (ii) borrower’s indebtedness, asset valuation. In line with international valuation and (iii) basic information on collateral. The DGF standards, local valuation standards allow the use uses a standardized assets for sale passport for each of three main valuation methods: (i) comparative – asset class to ensure consistent and comparable market approach, (ii) capitalization or discounting information. When investors have particular interest – income approach, and (iii) depreciated replacement in a specific asset or pool of assets, they sign a non- cost – cost approach. The DGF allows use any of the disclosure agreement with the DGF and then receive three approaches when external valuers prepare their access to an on-line data room where more granular appraisal reports. Often, a mixture of approaches is information is available. used. 55. The DGF sets the initial sales price for each asset 52. The DGF conducted a study on historical asset using publicly available manuals. Asset sales auctions sales that will inform future asset valuations. The begin from the higher of either nominal book value or study on pricing factors and price prediction models appraisal value. As the largest share of assets sold are for sales of failed bank assets was conducted with the loans, of which most are NPLs, nominal book value is support of the World Bank in 2023.34 It analyzed asset usually the highest and therefore the starting point sales data from 2017 to February 2022, and identified for the auction. For the first auctions, the DGF used a specific factors that influence the sales price. Based market price determined internally based on external on these findings, the DGF will improve its internal appraisal reports but uncertainty regarding some valuation models. inputs (e.g., discount rate, valuation method) led to the change to the highest of two values approach. 56. Assets are advertised via multiple channels to ˆ F. ASSET SALES PROCESS 35 maximize investor awareness. The DGF uses multiple marketing channels to inform potential investors about assets for sale. These channels include: (i) 53. The asset sales process is organized to achieve Prozorro.Sales website, (ii) social networks (for retail high transparency and maximum return on assets. assets), (iii) press releases and media announcements, Since 2017, almost all asset sales auctions organized (iv) direct contacts with investors (usually for pools by the DGF are conducted on the Prozorro.Sales of assets to inform institutional investors), and (v) electronic trading platform to access the widest range information posts in specialized media (e.g., real of investors and maximize sales prices. Each asset estate portals, journals). class traded on the platform has its own information template (called “passports”) that is available to any 57. A four-stage sales scheme begins by offering interested party prior to the auction. The platform is individual assets and then moves on to package a well-recognized distressed asset trading platform in pools of assets that have not sold initially. Over Ukraine because the DGF, the biggest distressed asset time, the DGF has developed an advanced asset seller in the country, exclusively uses this platform for sales scheme to maximize returns given the time its operations. constraints. This scheme has four stages: the first two stages allow assets to be sold on an individual basis 54. The DGF has detailed procedures regarding and the next two stages are envisaged for packaging information that is available on assets for sale. Key assets to be sold in pools. Each stage has different information about assets is usually disclosed to all auctioning parameters and price move intervals: interested parties including: (i) basic loan information,  34  https://www.fg.gov.ua/en/about-dgf/study-on-pricing-factors-and-price-prediction-modelling-for-sales-of-the-failed-banks-assets-was- conducted-with-the-support-of-the-world-bank  35  Information collected from: (i) annual reports, (ii) DGF presentation “DGF Sales Process”, and (iii) the World Bank. “Asset Sale Practices and Use of Electronic Debt Trading Platforms by Public Asset Management Companies and Deposit Insurance Funds”. 2022. Chapter 3. Asset sales: Ukraine’s experience 21 Figure 4. Four stages of asset sales auctions Individual Assets 100% 1 90% 2 1 80% 3  Ascending dynamic auction 70% 4 60%  Higher bidder wins 5 rounds ASSET 50% 6  Gradual price decline -10% between auctions 40% 7 ENGLISH  Maximum 10 rounds 8 30% AUCTION 20% 9 10% 10 rounds 1 2 3 4 100% 2  Assets not sold at stage 1 are resold at Dutch 70% auction ASSET  Descending clock auction 50%  4 rounds DUTCH AUCTION 20% 10% Pool Assets Individual sales 3  Assets not sold at stage 2 are put for resale in pools by type of assets ASSET  Descending clock auction  Initial price is 10% of initial individual price DUTCH 20% Pools AUCTION 4% 0.8% Individual sales 4  Assets not sold at stage 3 are put for resale in pools by bank: one bank - one pool ASSET  Descending clock auction  Initial price is the minimum at previous auctions DUTCH 20% Pools AUCTION 4% 0.8% 22 Chapter 3. Asset sales: Ukraine’s experience i. Stage one. The first stage of the asset sales types (i.e., loans to individuals, loans to legal process (for assets such as real estate, cars, and entities, real estate, land plots, and fixed assets). loans less than two-years overdue) uses an English This is done to attract the interest of institutional auction with four to ten consecutive rounds. 36 investors that focus on specific asset classes. The starting price is set on the first round at the Packages are auctioned under hybrid Dutch/ higher of gross book value (aggregated amount English auction rules using a descending clock. of principal and accrued interest) or independent The initial price is set at 10 percent38 of the initial appraisal value. It is an ascending dynamic auction individual asset price. Often these pools include where the highest bidder wins. At this stage the some good assets and mostly assets that are price can decline by 10 percent between rounds. difficult to sell on an individual basis. ii. Stage two. The second stage is used if sale iv. Stage four. The same principles as in stage three attempts in stage one were not successful and are applied here except that assets are pooled also immediately for loans that are more than by a principle: one bank - one pool. All remaining two-years overdue (which are not included in assets on the balance sheet of a liquidated bank stage one auctions). Stage two uses a hybrid not sold in the previous stages are included to Dutch/English auction37 where the price decreases clean up the balance sheet of the bank. by 1 percent every 5 minutes. There are four Figure 4 provides a summary of the four auction rounds usually each once a week: (i) in the first stages. round the price can decrease from 100 percent to 70 percent of the initial value, (ii) in the second 58. Auctions results are publicly available. To ensure round from 100 percent to 50 percent, (iii) in highest transparency, all auction results, including the the third round from 100 percent to 20 percent, “live” auction process, are publicly available through and (iv) in the final round from 100 percent to 10 different media outlets: (i) DGF website www.fg.gov.ua, percent. (ii) Prozorro.Sales website, and (iii) other media and iii. Stage three. If the sale of individual assets is not social networks. successful, they are packaged together by asset Table 2. Assets sold by type Loans* Tangible assets Number of assets, Amounts, in UAH Number of assets, Amounts, in UAH Year Year in thousands thousands in thousands thousands 2016 more than 1 1,693,115 2016 more than 18 1,320,206 2017 more than 129 3,703,063 2017 more than 65 2,094,535 2018 more than 790 4,236,331 2018 more than 114 2,041,790 2019 more than 395 4,806,841 2019 more than 153 3,170,300  36  Bidders are not identified to each other during the auction, they see only “Bidder 1”,” Bidder 2” (no names).  37  Hybrid Dutch/English auction. The starting price is the higher of gross book value (aggregated amount of principal and accrued interest) or independent appraisal value (usually it is gross book value for loans). After the auction has been stopped by one of the bidders, other bidders can place higher bids only once and the bidder who stopped the auction has the final say. Bidders do not see each other’s bids, only the bidder who stopped the auction sees the maximum bid before their final say. The final say is optional, in this case the maximum bid of the English part wins. In practice, most often only the descending Dutch auction part is used.  38  Until mid-2022, when the DGF renewed asset sales after a short suspension immediately after the full-scale invasion), the minimal price was set at 20 percent. Changes aimed to reflect on (i) further UAH depreciation, (ii) increased amount of interest that continues to accrue, and (iii) shortage of investment appetite for pools of loans. Chapter 3. Asset sales: Ukraine’s experience 23 Loans* Tangible assets Number of assets, Amounts, in UAH Number of assets, Amounts, in UAH Year Year in thousands thousands in thousands thousands 2020 more than 808 2,469,825 2020 more than 42 1,223,330 2021 more than 23 748,607 2021 more than 17 1,666,643 2022 More than 30 118,446 2022 more than 13 1,417,394 * Securities (shares) and receivables from customers. 59. Loan sales dominate in terms of number of platform improved transparency and facilitated assets and volumes sold during auctions. Due to the opening of the NPL market in Ukraine. the structure of asset portfolios (see para 41), loan ii. High transparency in the asset management and sales have dominated DGF conducted auctions. divestment process allows the DGF to explain Table 2 provides an overview of amounts and and justify the low recovery rate on assets under numbers of assets sold from 2016-2022. During management. this period, more than 2.2 million loans and 0.4 million tangible assets were sold through auctions. iii. The flexibility provided in the DGF Law to improve In absolute amounts, UAH 17.7 billion of loans and assets while under the DGF’s management has UAH 9.8 billion of tangible assets were sold, with the provided additional cash flows during the asset highest intensity in 2018-2020. management process and maximized the return to insolvent banks and other stakeholders. iv. While the three year period set by the DGF Law to divest assets under management in a standard ˆ G. LESSONS LEARNED case is understandable, it limits the DGF’s ability to maximize recovery rates on assets for two reasons: (i) it may not allow enough time to 60. Four important lessons can be learned from the improve assets and maximize cash flows from Ukrainian experience: the asset and (ii) it may encourage professional i. A transparent asset sales process that ensures investors to run down the clock before offering adequate and equal information to all interested low prices knowing the DGF has to sell by a certain investors builds trust between the DGF and deadline. buyers. The use of a dedicated online sales CHAPTER IMPORTANT 4 ASPECTS OF ASSET MANAGEMENT AND DIVESTMENT 61. The sale of distressed assets of banks requires a companies were mandated to manage entrusted structured approach to preparation and a process assets and divest them to return initial investments based on clear legal grounds. The experience of the to respective authorities (most often national DGFs in Serbia and Ukraine in managing distressed governments) and are therefore informative for this assets of banks demonstrate the importance of: study. Annex 2 provides background information on (i) sound governance and a clear legal framework, the establishment and operation of these three AMCs. (ii) an asset sales strategy, (iii) management and improvement of assets, (iv) independent and prudent 63. The creation of an AMC is not a silver bullet asset valuation, and (v) a transparent and competitive to resolve a financial crisis and there are many asset sales process. Each of these components play differences with DGFs. Authorities may consider the an important role in the successful sale of distressed creation of an AMC as part of NPL resolution options in assets. a systemic financial crisis, but international experience of this approach is mixed.39 The establishment of an 62. Beyond the cases discussed above, valuable AMC requires many conditions to be met, such as lessons learned in terms of asset management systemic financial crisis, a large pool of distressed and sale can be drawn from European AMCs. Asset assets, adequate funding, analysis of potential impact transfer to an AMC is one option available to help on public finances, and good governance practices resolve a systemic financial crisis. National authorities in the country, among others. An AMC is created in in Europe took different approaches to resolve response to a systemic crisis as a tool to alleviate the stocks of distressed assets and deal with failed banks banking system from distressed assets, this is different as a consequence of the GFC. Ireland, Spain, and to the mandate of bank liquidation which is focused Slovenia established asset management companies on higher asset recovery for the benefit of the failed – NAMA, Sareb, and BAMC respectively – to deal bank’s creditors. The purpose of this paper is not to with turbulence in their financial sectors. All these analyze these aspects but to focus purely on the asset  39  International experience shows that the risks and costs associated with establishing and operating an AMC are often underestimated, resulting in high fiscal costs. The key risks are: (i) high uncertainty around transfer pricing, (ii) high vulnerability to downside risks, (iii) high set-up costs, and (iv) operational risks (including the lack of skilled professionals, efficient NPL servicing industry, among others). Chapter 4. Important aspects of asset management and divestment 25 management and divestment function, that has many i. Improvement of assets and collateral common characteristics for both types of entities. perfection often bring additional value to the portfolio. Assets transferred to bank liquidators 64. A balanced approach may yield the best results. often do not have proper information in credit files To generate returns on transferred distressed assets, or are missing certain pieces of documentation the bank liquidators need to ensure that all five (see regarding collateral. Perfection of collateral and para 61) of the above-mentioned components are gathering information for a complete credit file addressed in a timely and professional manner. The can maximize the recovery value of the asset.40 failure to address any one of these components can In addition, transferred assets might be leased bring suboptimal results during the asset divestment or rented to generate additional cash flows. For process. For example, failure to value assets prudently example, if assets include a commercial real estate prior to the sale can lead to multiple failed auctions property, the liquidator could rent it out (or hire which may discourage investors from participation in a professional company to do this on its behalf). the sale process as a waste of time and money (see The legal framework needs a clear provision the case of Ukraine – paras 47-52). This section builds establishing which actions are allowed to maximize on analysis of the experience of the DGFs in Serbia recovery value. and Ukraine and AMCs in Ireland, Spain, and Slovenia ii. A balance between maximizing additional cash to highlight key aspects relevant to agencies with bank flows and the ultimate sale of the asset needs liquidation mandates. to be achieved. This will depend on the asset sale strategy and “sunset clause” of asset management operations. While it is good practice that asset ˆ A. GOVERNANCE AND management companies have a “sunset clause” for their operations to avoid “mission creep”,41 LEGAL FRAMEWORK this should not result in fire sales of assets at low prices. Experience in Ukraine (see para 43) was that investors offered low prices during auctions, 65. Clear mandates play an important role in bank knowing that the DGF had to sell assets within a liquidation operations. To discharge their duties, three-year period of acquisition. In Ireland, NAMA agencies responsible for bank liquidations need a found that optimizing the time horizon of the asset clear legal framework to use optimal instruments (see sale42 provided a higher recovery value than a more in para 72) to manage, improve, and prepare forced asset sale. the sale of assets under management. The founding laws governing the process of asset management of iii. Asset valuation plays a crucial role in failed banks need to provide a clear and unambiguous measuring the success of asset management. legal framework for them to operate including: (i) list Clear rules related to asset acquisition (in the case of actions allowed for improvement of assets under of a “bad bank”) and prudent asset valuation are management, (ii) time frame for asset improvement needed to measure the initial and sale values of and disposal, (iii) general rules for asset valuation, assets. Good practice requires that asset values are (iv) potential option of new financing if this is value reviewed after the initial transfer and real market accretive, and (v) balanced protection against legal values are recorded (even if the initial transfer was claims against staff, including cases of asset sale at low done at above market prices).43 Often the agencies price (below acquisition price). responsible for bank liquidation have internal  40  The remedy of legal errors in existing loan documentation could be done in the following ways: (i) by obtaining missing documentation and permits or (ii) by ensuring access to the property.  41  Sunset clause is a termination date of asset management and divestment operations. Source: The World Bank. Public Asset Management Companies - A Toolkit. 2016. A special paragraph on page 49 discusses aspects related to sunset clauses.  42  Article 10 c) of the NAMA Act sets out the duty to protect, or otherwise enhance the value of entrusted assets, in the interests of the State. This meant NAMA could avoid forced sales of assets during a shallow property market. Instead, assets were managed to enhance their future disposal value, most notably by (i) working with debtors and receivers to complete unfinished projects, (ii) funding viable commercial and residential developments, and (iii) obtaining planning permissions and removing other obstacles to development. Source: The World Bank. Asset Sale Practices and Use of Electronic Debt Trading Platforms by Public Asset Management Companies and Deposit Insurance Funds. 2022.  43  IMF. Managing Systemic Banking Crisis. New Lessons and Lessons Learned. No. 20/05. February 2020. (Box 10). 26 Chapter 4. Important aspects of asset management and divestment valuation guidelines or regulations that build on 66. A conducive enabling environment, including or compliment international or national valuation balanced creditor rights and efficient legal standards. enforcement systems, is essential for bank liquidation agencies to discharge their duties. Clear iv. An ability to provide additional financing to and effective frameworks for the transferability of complete projects can be value accretive, claims and tax regimes play an important role. with safeguards in place. Legislators may consider allowing agencies with bank liquidation 67. The management of assets must be professional mandates, as part of their asset management and transparent. To maximize returns, agencies function, to provide new financing to existing with a bank liquidation mandate need professional borrowers or projects under condition that this staff capable of managing different asset classes. The is value accretive on net present value terms. operational independence of institutions, including Additional financing to complete projects needs independence of staff (management and supervisory to be carefully assessed, with all operational and board members and experts), is important to ensure financial costs weighed against the risk appetite decisions are made purely on a commercial basis of the asset manager, and in full congruence with without political interference or lobbying interests of the long-term liquidation strategy. It might entail certain groups. Proper governance arrangements are significant risks, both operational (in the absence crucial. Professional and independent asset managers of qualified professionals), financial (additional need a proper remuneration scheme in place (this is funding costs), and credit (increased exposure to often a problem due to the status of those agencies as borrowers). For example, if the DGF acquired a public entities with respective caps on compensation loan with an unfinished shopping mall as collateral, packages). Outsourcing of certain functions may be there are at least two options: (i) to keep the considered in the event of a shortage of specific skills collateral as it is and sell the loan after some time or a better return on investment. The employees and or (ii) hire a developer, provide financing (from managers of the bank liquidation agencies should be internal resources) to complete the shopping mall, held accountable for their actions through internal find renters, and sell the property as a solid cash and external audit reviews and appropriate reporting flow generating asset. Sales prices for these two and disclosure. options will be substantially different. However, the availability of both the financial resources 68. The skill set of asset managers should be aligned and necessary professional expertise would need with the structure of the asset portfolio. Legal to be considered and the decision should favor skills dominate in the management of (i) loan and returning financial resources to investors as soon asset enforcement and (ii) borrowers in insolvency as warranted. procedures. Financial skills are needed to restructure v. Protection against legal claims. A core principle liabilities of semi-viable borrowers or prepare a of an effective deposit insurance system is legal financial and/or operational restructuring plan for an protection for DGF staff in the discharge of their exposure. Real estate management skills are needed work duties,44 however this may not be the same in cases of a large share of assets under management for other agencies responsible for bank liquidation. in land, commercial, and retail real estate projects. The liquidator’s staff should be protected from The structure of assets under management differs any liability arising from their decisions, actions, in each individual case depending on whether the or omissions in good faith in the normal course of balance sheets under liquidation are treated as their duties. This protection should be enshrined 45 “bad banks” or liquidators are mandated to manage in legislation to avoid ambiguity. Without this all performing and non-performing loans of failing protection, staff might be afraid of maximizing the banks. The need for legal skills will dominate in the recovery value of assets under management. former case as these assets most probably consist of  44  The DGFs reviewed in the paper had to deal with legal cases. However, specific information is confidential.  45  International Association of Deposit Insurers (IADI). IADI Core Principles for Effective Deposit Insurance Systems. November 2014. Principle 11 – Legal protection. Chapter 4. Important aspects of asset management and divestment 27 loans to borrowers in financial difficulties where legal iv. principles used in asset management and disposal, intervention is needed. Experts with these skills can be and retained from the liquidated banks, hired or trained v. timebound milestones for asset divestment. internally, or the functions outsourced. Plans should be updated from time to time to adjust 69. An optimal caseload leads to better results. It is for changes in internal (e.g., unexpected inflow or important to ensure a balanced workload per expert outflow of assets, use of new approaches to asset to avoid unrealistic expectations and insufficient management and disposal) and external (e.g., changes time to properly prepare, manage, and liquidate in the real estate market, economic cycle, changes in an asset. International experience shows that the46 legal frameworks) aspects. optimal caseload in terms of size and complexity per expert is as follows: 5-7 large/complex cases, 10-15 71. Clear and transparent rules of engagement medium cases, and 20-30 small cases. It is appropriate with relevant stakeholders contribute to successful for these cases to be handled by experienced, asset management and disposal. Depending on intermediate, and junior experts accordingly. the structure of asset portfolios, bank liquidation agencies are advised to identify key stakeholders and define principles of engagement with them. A policy related to dealing with debtors, potentially ˆ B. ASSET SALE STRATEGY disclosed to the public, should provide clear rules of engagement which will create a level playing field. For example, the strategy could envisage working only 70. A well thought through and timebound strategy with co-operative and viable or semi-viable debtors. To of asset improvement and disposal is the backbone define the debt servicing capacity of retail borrowers, of successful operations of bank liquidation regulators might issue guidance on what is considered agencies. Based on the operational framework “reasonable lifestyle”.47 In addition, it could elaborate laid out in the founding law and thorough portfolio on the following aspects: (i) enforcement of personal analysis (that often takes a lot of time) the agencies guaranties if in place, (ii) rules for injection of new responsible for bank liquidations should prepare financing (i.e., creditor hierarchy), (iii) consolidation a strategic operational plan including targets to be and restructuring of loans of an individual borrower achieved and resources needed to achieve them. or borrower’s group, and (iv) use of standardized It should aim to optimize asset management and legal documents in dealing with debtors. This would disposal with a goal to maximize recovery of acquired be used as an input in estimating the distressed assets (loans and tangible assets) with safeguards in borrower’s repayment capacity for the purposes of place. Strategic plans need to include: loan restructuring. Active, strategic, and transparent i. a mix of sale, investment, or holding strategies communication with distressed asset investors is of that best fit the agency’s risk appetite and its paramount importance to mobilize purchasing power operational constraints (mandate, financial costs, during the asset disposal phase. lifespan, type of assets), 72. Bank liquidators need a wide range of available ii. transparent rules of engagement with all tools to use as appropriate in dealing with debtors. stakeholders (including debtors and interested International experience in distressed asset resolution third parties such as NPL investors), identifies the following tools:48 (i) debt recovery iii. tools to be used in managing different segments of (continued collection of loans), (ii) restructuring the asset portfolio, of loans,49 including potential debt forgiveness (e.g., accrued interest rate or principal), (iii) debt  46  World Bank and Bank of Slovenia. Handbook for Effective Management and Workout of MSME NPLs. March 2017. Box 1 on page 28.  47  After the GFC, Ireland and Greece issued national regulations regarding “reasonable lifestyle”, used as input in defining and calibrating debt restructuring plans for retail borrowers.  48  The World Bank, FinSAC. COVID-19 and Non-Performing Loan Resolution in the Europe and Central Asia region. December 2020.  49  Restructuring of loans usually includes financial restructuring of the loan. Sometimes this can be complimented with operational restructuring of the debtor’s business (in cases of corporates or small & medium enterprises). 28 Chapter 4. Important aspects of asset management and divestment enforcement through legal procedures, (iv) insolvency on demand, or for price maximization purposes, of debtor, and (v) sale of assets. As a rule of thumb, the liquidators could use two strategies in their (i) and (ii) could be used for viable or semi-viable co- disposal operations – individual sales or sale of operative debtors, and (iii) and (iv) for non-viable or asset pools. Often there is retail client demand non-cooperative debtors. The sale option - (v) - could for smaller tangible assets (e.g., vehicles, garages, be used in both cases. Depending on the structure land plots) and there is institutional (i.e., asset of assets under management, the liquidators should managers, funds, investors) demand for portfolios apply the most appropriate tools. A mixture of tools of assets with similar parameters (e.g., cash can be utilized. flow generating commercial or retail real estate property, mortgage loans, land for development). 73. In many jurisdictions, a special group of The liquidators can mix these approaches if they borrowers — “strategic defaulters”50 — warrant fail to sell assets under one strategy (see the case special attention. Often these borrowers default of Ukraine, para 57). on payments in the hope of debt discharge or the iii. Provide additional financing to certain possibility to buy back debt at a discount when the assets if this is commercially justified, with loan is auctioned during the asset sale process. In safeguards in place. For example, in the case of some countries this group of borrowers is relatively large commercial real estate concentration in a large. The two approaches that could be used to portfolio, agencies responsible for bank liquidation tackle this problem are: (i) strengthened judicial and can apply individual solutions to unfinished real legal systems that could be used as a credible threat51 estate projects subject to robust cost benefit against them and/or (ii) a new and enforced rule that analysis. Often, this could lead to a more appealing a borrower or their representatives (e.g., lawyers, final product for investors and could generate related parties) are prohibited from participation in higher recovery value on a net basis. If agencies the auction of that borrower’s loan(s) or assets.52 do not have internal expertise to manage such 74. Pre-determined principles of asset management projects, a joint venture project with a reputable and disposal remove ambiguity and increase real estate developer might be considered. In transparency. Bank liquidation agencies are advised cases where large corporate loans are acquired to prepare and publish the main principles of their and restructured with new financing, the liquidator operations. For example, the following principles could might assign “monitoring trustees” to the corporate be considered: supervisory board to ensure the agency’s interests are represented.53 i. Dispose of assets in a phased and orderly manner. In case assets under management iv. Adopt an individual policy to deal with assets represent a large share in real estate or distressed in other jurisdictions. In case loans are issued asset market total volume in a country, sales or pledged collaterals are registered in other decisions should be carefully planned to avoid jurisdictions, the liquidator could pool these assets market disruptions or market price distortions together and resolve them separately. due to oversupply and/or limited capacity for the Publication of the main principles is beneficial from a market to absorb it. transparency and accountability perspective, but the ii. Conduct sale of assets under management on detailed procedures should be prepared and kept for a case-by-case or portfolio basis. Depending internal use.  50  Borrowers that have means to pay but choose not to pay using weaknesses in judicial systems or loopholes in legislation.  51  The portfolio manager can argue that the liquidator will initiate insolvency procedure for corporate borrowers if they do not cooperate and service their debt properly. Experience shows that this is effective only in countries with strong legal and judicial systems (Ireland).  52  BAMC (Slovenia) obliged all bidders in auctions to disclose their beneficial owners. Failure to do this would eliminate them from auction participation. NAMA Act, Chapter 6, para 172 stated that auction participants should sign a declaration that they are not acting on behalf of former debtors. Legal sanctions were envisaged for auction participants if this relationship was established.  53  As practiced by BAMC in Slovenia, usually as part of a loan restructuring package. It took over large corporate loans and nominated “monitoring trustees” or “procurators”. They served as a link between BAMC and the debtor. Chapter 4. Important aspects of asset management and divestment 29 75. Consider timebound milestones for divestment i. Servicing retail unsecured loans requires the of assets to allow for better internal planning and least resources – a call center infrastructure that clear guidance to investors. Often, legal frameworks nowadays could be almost fully automated.55 of AMCs include “sunset clauses” for the termination Often, these services are provided by third parties, of their asset management and divestment activities. where competition is usually fierce. In some cases, legal frameworks prescribe timelines ii. Leasing and renting of property can provide for asset divestment (see the case of Ukraine). additional cash flows. In cases of repossession Both the liquidating agency and investors benefit of movable assets (i.e., cars, equipment) the from short- and medium-term plans for asset sales liquidators can lease these assets to the same during an institution’s life span. The aim should be borrower or a third party. In cases of large for granularity in terms of time and asset classes. properties, the liquidators can rent out these However, terms should be kept under review, there assets to generate additional revenues. For are examples of legal extensions (see Annex 2) to example, a liquidator manages the ownership optimize asset disposal or due to a new inflow. of a hotel or an office building. Renting out this property can be considered if this brings net revenue (after deducting all internal and external ˆ C. MANAGEMENT AND expenses related to these activities). The timing of these activities needs to be aligned with the asset sales strategy and any “sunset clause” in place. IMPROVEMENT OF ASSETS iii. While more sophisticated expertise is required to successfully provide additional financing to 76. The founding law should establish the main develop assets it can maximize the recovery principles for asset management. There are different value, with safeguards in place. This might include mandates for the bank liquidators in terms of asset to: (i) prepare and get permission for a new management: for example, preserving value of assets building plan to develop a land plot, (ii) develop (passive management); maximizing recovery value54 infrastructure for existing real estate assets (e.g., (active management); or achieving at least break- roads, water, electricity), (iii) undertake renovation even price (sales price not less than acquisition price). work (e.g., repaint, refurnish, install a fire- Founding laws should clearly set out the mandate and extinguishing system) if needed, or (iv) complete the liquidating agencies should build their strategies unfinished phases of building or furnishing and operational plans based on this. In cases where processes. Improvements to assets, including the active asset management is mandated or allowed, the completion of buildings, may be financed from agencies should ensure that they have the internal internal resources (e.g., proceeds from assets capacity to deliver. The agencies should be allowed, if sold and not yet returned to beneficiaries). A warranted, to use external expertise to achieve their cost-benefit analysis should be performed and mandate. the additional investment weighed against the 77. Active asset management requires resources, company's risk tolerance. In addition, in case DGFs delivers returns, and is a source of risk. Depending are responsible for bank liquidation, they should on the complexity of assets under management, active be mindful of potential conflict of interest between asset management might require additional resources DGF’s primary mandate to protect depositors and and expertise. a mandate to maximize returns on assets under management.56  54  The maximization of recovery value should be analyzed on a net present value basis. While active asset management may add value to the final sale price of the asset, this must be considered together with the time value of money and the administrative costs associated with these activities.  55  The main function of a call center is to reach out to retail borrowers and remind them about their existing obligations.  56  DGF’s broader mandates, such as depositor protection, bank resolution, or development of other public policies (social protection for weak borrowers or housing, for example) may generate serious conflicts of interest and jeopardize the objective of maximizing value within the time frame. 30 Chapter 4. Important aspects of asset management and divestment Box 1. Development of the Dublin Docklands Strategic Development Zone by NAMA. The Irish asset management company The Dublin Docklands territory, 22 hectares of – NAMA – was mandated to maximize developable land acquired as security for NPLs recovery of acquired loans from banks after from the banks, received the status of a SDZ in the GFC. NAMA's focus was to protect and December 2012, after active work by NAMA and enhance, where possible, existing assets by other stakeholders. The planning scheme of the working with competent and cooperative area was approved by respective authorities debtors to complete unfinished projects, in May 2014 and then underwent major if commercially justified. NAMA provided development of commercial and residential new financing for viable commercial and properties. The previously undeveloped residential developments where needed. territory of the North and South Docks, A substantial value improvement could be consisting of a kilometer-long waterfront site, achieved by enhancing planning permissions was transformed into a large commercial and removing other impediments to real estate (Grade A office and retail) and residential in development. One example of value added property space. As of the end of 2022, 99 from planning permission management was percent of NAMA’s original interests in the SDZ the Dublin Docklands Strategic Development were sold. The remaining 1 percent related to a Zone (SDZ). site in which NAMA had a leasehold interest. Usually, the above-mentioned active asset to limitations in experience and expertise. The management measures positively contribute to the main aim under this approach is to preserve the final sales price of assets under management, but value of assets and dispose of them when warranted. they are not immune to asset price cyclicality. Box 1 However, this strategy should include: property provides a value accretive example from Ireland.57 This services and preparation for sale in the case of example focuses on maximizing value, as required foreclosed assets; and restructuring of viable and by law, not a full assessment of NAMA. However, cooperative borrowers, legal action (i.e., seizure of active asset management is also a potential source collateral or bankruptcy proceedings), and realistic of risk including but not limited to (i) accepting bribes write-offs of bad debts in the case of loans. As bank or other benefits by managers and staff, (ii) granting liquidators often receive overvalued distressed assets or receiving advantages, privileges, or position to (not properly provisioned) from banks, a passive relatives, and (iii) making non-commercial decisions approach often leads to loss recognition after the sale based on political influence. Hence, the agencies of assets. responsible for bank liquidations should ensure that governance frameworks are well established and operate smoothly. 78. Passive asset management can be justified ˆ D. ASSET VALUATION in certain cases. In countries where the bank liquidation agencies have not played an active 79. Prudent valuation of assets is critical. Asset role in distressed asset resolution, passive asset valuation should be done at least two times – on management could be a more suitable option due acquisition of assets and prior to disposal – or more  57  Information from NAMA website and annual reports 2018-2022. Chapter 4. Important aspects of asset management and divestment 31 often according to local valuation frameworks, 81. Different bank liquidation agencies have founding laws, internal guidelines, or when new different valuation practices but it is important that market information becomes available. This can be this task is undertaken by certified professionals. done either by internal or external certified valuation Some agencies rely on internal valuers, which is experts. International standards provide guidance often a cheaper option but does not provide for on valuation methods to be used. The liquidators independent views. Some agencies hire external are encouraged to disclose valuation methods and valuation services due to the lack of internal resources the value of assets under management at least once and to get independent reviews. Some may use both a year to improve transparency and accountability. external and internal valuations, for example the Extensive public disclosure could help build public DGF of Ukraine. For a large asset valuation, asset trust and confidence and improve accountability. managers may hire two independent valuers to provide valuations, for example NAMA. In addition 80. Valuation of assets sets a benchmark at to the international or national valuation framework acquisition and informs the sale price at disposal. applied, the liquidators often also use internal Prudent valuation of assets during acquisition (to valuation guidelines or methodologies to provide for a determine the asset transfer price) plays an important more calibrated application of discounts and valuation role in setting a benchmark for bank liquidator’s methods. performance evaluation.58 Hence, it is crucial that assets are prudently valued at acquisition and that 82. Income and market approaches are best these values should be confirmed by an independent for valuation of distressed assets. International external valuer. Prudent valuation before the sale 59 valuation standards allow for three approaches in of assets is critical to succeed in the process and to asset valuation – income, market, and cost.61 Good avoid repeated sales attempts (often with lowering practice for the valuation of assets in distressed prices). Prudent valuation and recording of these situations recommends using only the first two values on an individual loan or asset basis will allow approaches.62,63 International experience shows the bank liquidating agencies to track individual that using the replacement cost method as a main asset performance. Analysis of this information tool can significantly overestimate collateral value in should inform future policy decisions related to asset distressed conditions. Hence, preference should be management and sale. Local valuation frameworks given to the income approach for assets with cash or founding laws may require more frequent asset flows (e.g., commercial and residential real estate, valuation – at least annually. A proportionality businesses, toll roads) and the market approach approach could be introduced for valuation purposes: for assets where groups of similar assets exist (e.g., (i) larger assets need valuation more often than standardized apartments, land, cars) and can be used smaller ones or (ii) assets above a certain threshold for comparison. For example, BAMC in Slovenia has need valuation by external certified experts. The an internal equity valuation methodology that uses European Commission introduced a special term “real the discounted cash flow method or enterprise value/ economic value” for the purposes of asset valuation in EBITDA (Earnings Before Interest, Taxes, Depreciation public AMCs as part of the state aid concept.60 and Amortization ratio), depending on enterprise size.64,65 A mixture of various valuation methods is supported as well.  58  This may be complicated by information asymmetries and the need to rely on assumptions about the future value of the distressed assets. However, if the transfer price is not based on a prudent valuation of assets—which estimates real economic value and incorporates the significant costs and risks entailed—the liquidator will only serve as a mechanism to defer losses to the stakeholders, rather than minimize them.  59  IMF. Managing Systemic Banking Crises. New Lessons and Lessons Learned. No 20/05. 2020. Pages 71-74.  60  EC AMC Blueprint. Section 4.4. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018SC0072  61  The World Bank. FinSAC. Collateral Valuation in the CESEE region. 2018.  62  IMF. Managing Systemic Banking Crises. New Lessons and Lessons Learned. No 20/05. 2020. Box 5.  63  European Central Bank. Guidance to banks of NPLs. March 2017. Section 7.4. Valuation methodology.  64  BAMC website and BAMC Annual Reports 2016-2019.  65  The World Bank. Asset Sale Practices and Use of Electronic Debt Trading Platforms by Public Asset Management Companies and Deposit Insurance Funds. 2022. 32 Chapter 4. Important aspects of asset management and divestment ˆ E. ASSET SALES PROCESS ii. Direct channel. Direct marketing is most often used to sell complex and prime assets. The target audience for these assets are usually medium- 83. A well prepared and conducted asset sale sized investors, specialized asset managers, or process is essential to maximize recovery values. developers. Extensive preparatory actions should be taken to optimize the sale object and mobilize maximum iii. Institutional channel. This is reserved to service interest from potential investors. This includes: (i) professional investors. Large and specialized portfolio structuring of assets for sale, (ii) marketing portfolio buyers often prefer to buy large portfolios of assets, and (iii) investors’ access to relevant of assets, which needs a different marketing information. An advanced auction platform can play approach. Relationships with these investors may an important role in the success of the sale (see para be nurtured over time to gain trust. In addition, 53 on Ukraine’s experience). marketing can be done at investor conferences or forums. 84. Careful portfolio structuring of assets for sale A separate budget allocated specifically for marketing is important. A clear vision of market demand for of assets for sale usually leads to better results during distressed assets will reduce the risk of the asset sale the divestment process. failing. Bank liquidating agencies should conduct market analysis of the demand for distressed assets 86. Detailed information about the asset for sale and use this to plan the supply flow. This is especially is critical for price maximization. Investors need important if the bank liquidating agency is a key player to know all critical aspects about the asset for sale in the market, to avoid supply and demand shocks (e.g., information about the borrower, loan servicing that may distort price maximization. For example, as it patterns, collateral, and potential guarantees)67 to was a large market player in the Irish commercial real offer the best possible price. Anything that is unknown estate market, NAMA planned the size and structure or undisclosed could result in an investor pricing at of assets to sell in each period and communicated maximum risk, meaning a lower offer price. Hence, the this to the market. Market analysis should also inform bank liquidating agencies should strive to disclose as whether assets are sold on an individual basis or in much information as warranted to mitigate perceived pools. The DGF of Ukraine pooled unsold individual risks from investors’ side. During the first years of assets using two distinct parameters and auctioned operations, asset managers often fail to provide them in packages (see para 57). adequate and detailed information on assets for sale but it improves over time. Detailed information should 85. Good marketing of assets is essential. Targeted be provided to investors only after a non-disclosure marketing of specific assets to appropriate audiences agreement between institutions has been signed. will help maximize price tension during the sale. After signing this agreement, investors will get access Channels that can be used include:66 to the data tape, where detailed information about the i. Retail channel. Assets targeted to retail investors asset is provided. (i.e., land, houses, cars, storage places) are usually sold on an individual basis. These assets can 87. Electronic auction platforms provide a be marketed and sold on different information convenient way to sell assets. While direct sales to platforms, including agencies’ websites, servicer one or targeted investors can be done using a sealed- platforms, and interactive media. envelope principle or another convenient method, assets are often sold on auction platforms.68 These  66  A similar marketing strategy was used by Sareb in Spain.  67  For example, the European Banking Authority issued updated NPL templates (December 2022) to guide banks on information needed to deepen the NPL market. The templates include 129 data points – out of which 69 data points are mandatory. Different data points are mandatory for retail and corporate loans and depending on whether loans are secured or not.  68  Examples of largest auction platforms around the world: Debitos, NPLMarkets, DebtX, First Financial Network, Credantial, Debexpert, Bidx1. Chapter 4. Important aspects of asset management and divestment 33 platforms can be internally or externally managed. (Korea and Ukraine) out of eight70 surveyed used External platforms often provide services in addition electronic debt trading platforms for asset sales. The to auctions, such as due diligence, transaction Ukraine DGF successfully used a state-owned platform advisory, data extraction and normalization, document Prozorro.Sale to divest most of its assets (see para imaging, valuation of assets, marketing, virtual data 53). In 2017, Sareb launched a new internal online rooms, and reporting. A 2022 World Bank study69 on distressed asset sales platform, but it was terminated online distressed asset trading platforms showed that soon afterwards due to lack of trading volume. only two asset management companies and DGFs  69  The World Bank. Asset Sale Practices and Use of Electronic Debt Trading Platforms by Public Asset Management Companies and Deposit Insurance Funds. 2022.  70  Countries included in the survey – Korea, Ireland, Thailand, Philippines, Japan, Ukraine, Spain, Slovenia. CHAPTER KEY RECOMMENDATIONS 5 FOR AGENCIES RESPONSIBLE FOR BANK LIQUIDATION 85. The following key recommendations are 6. Good marketing can broaden the investor base. suggested for regulators and legislators of bank 7. Detailed information on assets for sale can liquidators, as well as the bank liquidating agencies minimize “price gap”. themselves, to optimize the distressed asset management and sales process: 8. A balance should be sought between the proper improvement of assets and their sale within 1. Sound governance practices and clear legal envisaged deadlines. frameworks are key to the successful operation of a bank liquidation agency. 9. A pilot sales project is a good starting point for less experienced bank liquidating agencies. 2. Comprehensive asset management and sales strategies, updated from time to time, provide 10. Packaging assets into large pools can maximize a clear roadmap for actions. Synchronization recovery values of very seasoned or poorly of these strategies with national NPL reduction collateralized distressed assets. strategies can bring better results. 3. Active asset management and improvement of assets with proper governance frameworks and safeguards in place help to maximize returns. 4. A clearly defined, prudent, and transparent asset valuation policy helps to optimize the sales process. 5. Transparency and high competition in the sales process maximizes a successful outcome. Online sales platforms have proved to be an efficient channel to sell distressed assets. Annex 1. Overview of bank resolution and liquidation frameworks in CESEE 35 ANNEX 1. OVERVIEW OF BANK RESOLUTION AND LIQUIDATION FRAMEWORKS IN CESEE71 Many CESEE countries72 have introduced or in Serbia, the court appoints the DGF as liquidator/ amended their bank resolution frameworks in the bankruptcy administrator. A detailed analysis of these period since the GFC. These frameworks are usually frameworks is provided in FinSAC’s policy note “A centered around two pillars: (i) Financial Stability harmonized framework for [Sm]All bank resolution in Board Key Attributes,73 and (ii) European Union (EU) FinSAC client countries”. bank resolution rules. However, each national 74 framework is tailored to local specifics and there are Bank liquidation frameworks76 differ among significant differences among them. Figure 5 provides countries. Legal proceedings are based on more detailed information on bank resolution administrative procedures in many countries. Often frameworks in certain CESEE countries. the central bank, as resolution authority, has control of the liquidation process and leads the appointment Central banks lead on bank resolution in most CESEE of the liquidator (Albania; Moldova; Georgia). Some countries. This function is complementary to the countries have a mixed court and administrative- financial sector supervision mandate assigned to the based process (Armenia) or have court-based bank central bank. However, there are some exceptions: (i) liquidation regimes (Bulgaria, Croatia, Romania, North the Banking Supervision Agencies75 are the resolution Macedonia). In Ukraine, administrative procedures are agencies in Bosnia and Herzegovina, (ii) DGFs are the used by the DGF as a responsible authority. resolution agencies in Poland and Ukraine, and (iii) Figure 5. Bank resolution and liquidation frameworks in certain CESEE countries (January 2023) Country Resolution authority Liquidation framework FinSAC EU countries Bulgaria Central bank (CB) Court-based, free-standing Croatia Central bank Court-based, modified insolvency  71  FinSAC’s policy note “A harmonized framework for [Sm]All bank resolution in FinSAC client countries”, on a harmonized resolution framework for big and small banks is used as input for this chapter.  72  For the purposes of this study, countries are assigned to one of three groups – FinSAC EU countries, FinSAC EU aligned countries, and FinSAC other countries.  73  Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions, October 2014.  74  EU, Bank Recovery and Resolution Directive (BRRD).  75  The Banking Agency of the Federation of Bosnia and Herzegovina (FBA) and the Banking Agency of Republika Srpska (BARS).  76  The two main parameters in these frameworks are (i) insolvency regimes and (ii) lead institutions in proceedings procedures. Insolvency regimes can be divided into two categories: (i) free-standing insolvency regimes, where the bank insolvency regime is regulated by a separate act compared to a general insolvency framework and (ii) modified regimes, where the general insolvency framework is applied to banks with specific modifications. Legal proceedings can be done either by (i) an administrative authority, without the court’s involvement or (ii) the court, where proceedings are led by a liquidator who is a court officer. 36 Annex 1. Overview of bank resolution and liquidation frameworks in CESEE Country Resolution authority Liquidation framework Romania Central bank Court-based, modified insolvency FinSAC EU aligned countries Albania Central bank Administrative (CB appoints and controls liquidator) Administrative (Supervisory Agencies appoints and BiH Banking Supervision Agencies controls liquidator) Moldova Central bank Administrative (CB appoints liquidator) Montenegro Central bank Administrative (CB appoints liquidator) Court based (court appoints DGF as liquidator/ Serbia Central bank bankruptcy administrator) FinSAC other countries Armenia Not formally identified Court-based (upon CB referral) Georgia Central bank Administrative (CB appoints liquidator) Kosovo Not formally identified Not formally identified North Macedonia Not formally identified Court-based (CB proposes to appoint liquidator) Ukraine DGF Administrative (DGF) Annex 2. Asset management and divestment by NAMA, Sareb, and BAMC 37 ANNEX 2. ASSET MANAGEMENT AND DIVESTMENT BY NAMA, SAREB, AND BAMC77 ˆ A. ASSET SALES BY THE the UK and Northern Ireland, and 7 percent from the USA and Europe. IRISH NATIONAL ASSET The valuation of acquired assets was based on the MANAGEMENT AGENCY long-term economic value of the loan. According to NAMA’s 2010 Annual Report, the asset transfer NAMA was established to deal with problem loans was done at the long-term economic value of the in Ireland after the GFC. It was established by the loan, which was determined by the NAMA Act and NAMA Act in 2009, to address a serious threat to 78 the Valuation Regulations.81 This method allowed the economy and preserve financial stability in the correction of the current market value using a long- system. The Act provided the legal framework for (i) term economic adjustment component.82 NAMA’s asset acquisition, management, and sale, and (ii) the definition is very close to the real economic value enhancement, protection, and valuation of assets. It definition83 introduced by the European Commission gave certain powers in respect of land or an interest to address the state-aid issue within the EU in the in acquired land, including powers related to the aftermath of the GFC. development of land. The Act allowed NAMA to take necessary steps to protect, enhance, and better realize The assets transferred and managed by NAMA the value of assets transferred to it.79 were mostly commercial real estate. The loans that were transferred to NAMA were mostly secured by NAMA acquired assets from five Irish banks at a assets concentrated in the commercial real estate substantial discount. By the end of 2011, NAMA and land for development sectors. This was unlike the acquired assets from five participating Irish banks in two European AMCs discussed below, whose assets the amount of EUR 74 billion, consisting of loans to were more diversified and included, among others, 800 debtors. In exchange for these asset transfers, it 80 a substantial part of smaller residential real estate paid EUR 31.8 billion consideration to the participating (Sareb) and SME loans (BAMC). From this perspective, banks: EUR 30.2 billion in the form of senior bonds the portfolio of assets acquired gave NAMA an guaranteed by the Irish State and EUR 1.6 billion in advantage as it could apply a more focused strategy. subordinated bonds. NAMA acquired these assets at a The structure of the EUR 21.5 billion property value discount of 57 percent at a portfolio level. 61 percent (in 2010) that secured transferred loans84 is shown in of acquired assets were from Ireland, 32 percent from Figure 6.  77  Annex 2 builds on the World Bank technical note “Lessons learned from European AMCs for asset sale in Kazakhstan”. March 2020.  78  http://www.irishstatutebook.ie/eli/2009/act/34/enacted/en/pdf  79  NAMA Act, Article 1, para 11.  80  NAMA 2010 Annual Report and results presentation. https://www.nama.ie/uploads/documents/ NAMA2010AnnualResultsPresentationByCEO.pdf  81  NAMA 2010 Annual Report (page 17).  82  NAMA Act, Part 5 – Valuation methodology, para 72.  83  Non-Performing Loans and State Aid Rules. July 2017. European Commission, DG COMP. https://european-economy.eu/2017-1/non-performing-loans-and-state-aid-rules/  84  NAMA 2010 Annual Report. 38 Annex 2. Asset management and divestment by NAMA, Sareb, and BAMC Figure 6. Property type (in %) 4% 12% Investment prop Land 12% 48% Residential prop Hotels 24% Development prop One of NAMA’s tasks was to protect and enhance the value of assets. Article 10 c) of the NAMA Act ˆ B. ASSET SALES BY defines its role to protect or otherwise enhance THE SPANISH ASSET the value of entrusted assets in the interests of the state. This enabled NAMA to avoid forced sales of MANAGEMENT COMPANY Irish assets during the shallow property market in Ireland in 2010-2013, after the GFC. Instead, the Sareb was established to deal with problem loans focus was on asset management to enhance the in Spain after the GFC.87 Royal Decree-Law 9/2012 future disposal value of Irish assets, most notably by of November 14, 2012, provided the legal basis to (i) working with debtors and receivers to complete found Sareb. The Law entrusted the Fund for Orderly unfinished projects, (ii) funding viable commercial Bank Restructuring (FROB) to create an AMC to help and residential developments, and (iii) enhancing clean up the Spanish financial system from excessive planning permissions and removing other obstacles to exposures to the real estate sector. This was one of development. the preconditions for the country to receive financial aid from international donors. The NAMA Act allowed for new financing to acquired borrowers. NAMA was able to provide additional Private shareholders owned majority shares of funds, typically debt, to cooperative and competent Sareb. Sareb’s shareholding structure was different borrowers whose loans were transferred to NAMA. 85 from NAMA and BAMC, which were fully government- This capital injection was meant to maximize the owned companies. The majority shareholders of Sareb ultimate sales value in the future. Most non-enforced were private investors, with a 55 percent share of NAMA debtors had financial monitors in place, which capital, and the state owned 45 percent through the enabled effective reporting of debtors. NAMA required FROB. that this financial monitoring was provided by an Sareb acquired assets worth close to EUR 51 billion. adviser,86 independent of the debtor. Often, NAMA According to the legal framework, Sareb acquired was a minority shareholder in commercial real estate close to 200,000 loans valued at EUR 50,8 billion. development projects, playing a passive role. These assets were purchased at an average 55 percent discount88 (EUR 107 billion nominal). Figure 7  85  Good developers and strong managers that NAMA trusted to maximize return on its assets.  86  Typically audit and property advisory companies. Service fees varied but typically EUR 15,000-20,000 a month for a large debtor (above EUR 50 million asset value), or EUR 1,000-2,000 a month for a small debtor covered by the borrower. This is a similar arrangement to the one the European Commission DG COMP uses to monitor state aid in the banking sector.  87  Information from Sareb’s website.  88  The acquisition price was determined by the Bank of Spain (central bank). Source: Sareb Annual Report 2013. Annex 2. Asset management and divestment by NAMA, Sareb, and BAMC 39 Figure 7. Discounts for acquired assets by SAREB ˆ C. ASSET SALES BY Asset Discount THE BANK ASSETS Developer loans MANAGEMENT COMPANY Completed housing 32.4% IN SLOVENIA Projects under construction 40.3% BAMC was established in March 2013 to deal with financial instability in Slovenia. BAMC was fully Urban land 53.6% owned by the Republic of Slovenia and its main Other land 56.6% task was to facilitate the restructuring of banks with systemic importance that were facing severe solvency Other guarantee 33.8% and liquidity problems in the aftermath of GFC. Its statutory framework was established by the December No guarantee 67.6% 2012 Law “On the Actions of the Republic of Slovenia Real estate assets for Strengthening Bank Stability”.89 New building housing 54.2% BAMC acquired problem loans from six banks in Slovenia. In 2013, BAMC acquired problem loans Projects under construction 63.2% from two systemically important banks90 worth EUR 1,008 million at the price of 27 percent and 37 Land 79.5% percent of the gross exposure.91 Acquired assets were almost exclusively in the form of loans from corporates (including SMEs, micro enterprises, and provides more details on the average individual asset sole entrepreneurs) with a very small amount of discounts. 78 percent of these assets were developer equity. In 2014, additional problem loans from (i) two loans and 22 percent were real estate assets (finished large banks92 worth EUR 550 million (at the price of and unfinished residential and ancillary properties, 48 percent of the gross exposure)93 and (ii) two small e.g., storage units, parking lots). Developer loans were banks worth EUR 40 million, were purchased. secured by close to 400,000 properties. Assets were transferred from nine distressed Spanish banks to Acquired loans were collateralized by various clean their balance sheets from non-viable assets. collateral types. The total amount of 1.617 units Most exposures were with companies. of real estate pledged as collateral against the transferred loans were scattered among different The legal framework envisaged divestment of real estate types, primarily in the industrial and assets over a period of 15 years. Sareb was tasked undeveloped land sectors. Figure 8 provides further to optimize the value of assets under management in information on this distribution. The wide range of order to repay debt guaranteed by the Spanish state. real estate collaterals made the asset management To achieve this goal, Sareb pursued an active asset process more complicated than in NAMA where assets management strategy to maintain and increase the were more homogeneous. value of its assets.  89  Published in Official Gazette of the Republic of Slovenia, No. 105/12 of 27 December 2012.  90  NLB and NKBM.  91  BAMC Annual Report 2013.  92  Abanka and Banka Celje.  93  BAMC Annual Report 2014. 40 Annex 2. Asset management and divestment by NAMA, Sareb, and BAMC Figure 8. Number of collateral real estate by type 4% Land 5% 27% Industrial 11% Residential 12% Retail Office 21% Tourism 20% Other BAMC was set to operate for only five years but its BAMC pursued an active asset management lifespan was extended. The statutory framework strategy. While BAMC’s initial task was to facilitate established in 2012 envisaged a five-year period of the restructuring of banks with systemic importance, operations. This “sunset” clause was meant to deal it was mandated to maximize returns to the State. with NPLs quickly and close the fund to avoid “mission To pursue this, BAMC (i) implemented a proactive, creep”.94 However, the poor market situation, lengthy cooperative, and holistic approach to the restructuring asset management process, and the aim to maximize of companies, (ii) actively managed assets, and (iii) returns to the state led to an extension of the fund’s handled its assets to maximize the exit price.96 lifespan till the end of 2022. 95  94  The gradual addition of new tasks or activities to a project so that the original purpose or idea is diluted.  95  Amendments and supplements to the Law “On the Actions of the Republic of Slovenia for Strengthening Bank Stability, approved on 18 December 2015.  96  BAMC Business Strategy 2019-2022. 42 Annex 2. Asset management and divestment by NAMA, Sareb, and BAMC