Interesting report – 56 pages – easy to read!
In early 2009 Ashurst and PwC partnered to produce Distressed Investing in Australia – A guide for buyers and sellers. We followed that publication with a market update supplement in 2010. Since then, the secondary market in Australia for distressed debt has grown exponentially. As market leaders in restructuring and distressed investing, we are committed to further developing this promising market. We are confident that in 2011 the market will continue to expand and present many opportunities for buyers and sellers. We have based this prediction on our observations and involvement in Australia’s major debt asset trades over the last few years, our interviews with key participants in the distressed investing market and the capital constrained financial markets. This guide represents the second, full edition of Distressed Investing in Australia. As with the previous edition, our partnership has enabled us to give you a guide that covers the key legal and accounting issues facing investors wishing to participate in the market. Our continued aim is to arm you with the requisite knowledge and understanding to participate in and take advantage of this market.
Page 18
The impediment that is most frequently encountered is section 420A of the Corporations Act 2001 (Cth) (Corporations Act). Receivers must obtain market value or the best price obtainable in the circumstances. Many cases have come before the courts on this section. Many insolvency firms have their own stories of an adverse finding. The courts have been strict on the receiver’s duties. Their focus is on process, not outcome. Practitioners will therefore understandably insist on following an appropriate process when conducting a receivership sale.
Page 30
Prior to the GFC, Australian banks had little need to sell debt. The economy had experienced uninterrupted growth since the early 90’s and what few distressed assets they did have were managed and worked out internally. Any debt sales that did occur were limited to unsecured consumer debts. However, the fallout from the GFC significantly changed banks attitudes to capital and debt sales. The rapid increase in bad debt expenses (BDE) for the big 4 banks – from 0.12% of gross loan value in 2006 to 0.6% at the peak in 2009 – forced them to reconsider their workout options. Debt sales were increasingly seen as an effective strategy for dealing with distressed and impaired assets, albeit mostly in the context of single credits. So with BDE in the major banks decreasing 40% from 2009 to 2010 – and set to return to pre-GFC levels in 2011, barring a double dip global recession (probably originating in Europe) – does this mean debt sales are already a thing of the past? The answer is likely to be no. The decision to sell an NPL comes down to a number of interwoven factors, both internal and external to the bank, many of which look set to remain a feature of the Australian banking sector for years to come. These are discussed in more detail below.
Page 40
When we first published the Distressed Investing in Australia Guide in early 2009, we predicted that there was a very real opportunity for banks to unlock the hidden value tied up in nonperforming loans. Well it has taken some time but we are now starting to see the banks in Australia taking their first real steps to loan sales through the sales of single credits. However, the same cannot be said for portfolio sales.
If the debt is forgiven instead of being written off, more complex provisions will apply to determine whether a deduction in respect of a debt is allowed
Page 46
The parties may choose to renegotiate the debt agreement to provide for a change in the payment schedule. These changes may result in a debt for tax purposes being converted into an “equity interest”, return from which will be deemed to be a f