STRATEGY CONSULTING GROUP

 
 
              SCG

DISTRESSED DEBT

The coming wave of distressed debt presents opportunities for investors to earn above-market returns through the acquisition of troubled debt situations or the acquisition and resolution of mortgage interests connected to real property ownership. Holders of distressed debt also need assistance in preparing for and executing loan sales to meet regulatory, capital ratio, cash need or other objectives. Our professionals provide both sell- and buy-side services to sellers and buyers of distressed debt interests in real estate, corporations, personal loans & assets, credit card debt, and bank debt.


Sell-Side

  • Organize/build database for bidders, conduct sell-side due diligence
  • Provide indicative pricing analyses to set bid expectations
  • Advise on configuration of loan pools to maximize bid interest and results
  • Advise on terms and conditions of loan sales
  • Verify information and assist with closing transactions


Buy-Side

  • Due diligence on loan documents, servicing histories and property collateral and markets
  • Develop pricing analyses and sensitivities
  • Analyze cost of servicing
  • Assist with bid formulation, closing transactions and transfer of servicing
  • Assist in loan resolution and related buyers tax consequences

 

SCG understands how to handle a distressed debt acquisition. SCG works with private investors, hedge funds, private equity firms, and real estate investment companies in the process of distressed debt acquisitions. Working with clients, we close transactions quickly through a proven due diligence process focused on the critical components of these transactions.

 

Our Distressed Debt Acquisition services include:

  • Loan Evaluation
    Attorneys with deep experience with the CMBS market provide a comprehensive structural and organizational analysis of the interests, rights and obligations of all parties to the loan (e.g., mezzanine vs. senior debt, interest of members within the borrower entity, etc.).

 

  • Loan Abstracting
    Comprehensive abstraction of loan documents and inter-creditor agreements with special attention paid to critical dates and affirmative borrower obligations.

 

  • Underlying Property Due Diligence
    Clients purchasing notes typically do not have full access to the underlying property's financial documentation or do not want to spend the time collecting the requisite information and conducting comprehensive due diligence on the property. SCG conducts comprehensive due diligence on the underlying property (as access to the documents will allow) and fashions a due diligence process that best suits each client.

 

  • Title Services
    SCG is affiliated with Madison Title Agency, one of the nation's largest title insurance agencies. Working with Madison Title, SCG orders a title search and review to ensure there are no encumbrances or violations of record on the property. Madison Title is authorized in each state to serve as an escrow agent offering a smooth transaction and transition as an insured on the property. We work with the existing/ outgoing lender to secure payoffs and, in the event of an assignment, prepare and coordinate assignment documents. Finally, if necessary, we secure the release of the existing loan and ensure recording of the lien.

 

  • Post Acquisition:
    For clients who purchase the note(s) and subsequently foreclose on the underlying property, SCG provides a host of services aimed at assisting with the organizational and logistical issues that arise when taking ownership of a property. These tasks are set forth in our Post Acquisition Due Diligence Bundle and Management/ Ownership Bundle. In short, SCG can help summarize, in fine detail and an easy-to-read format, all of the details (financial, legal, management, lease) related to the property.


 

Acquisition and Disposition

SCG has extensive experience in the non performing and sub performing loans market, supporting both the vendor or the investors side.

Our expertise covers all major asset classes ranging from residential to commercial mortgage loans and from corporate exposures to structured finance.  Our services comprise:

  • Advice on the sales process / best practice and suitable investor base.

  • Organising and managing the whole sales process including the set up of data rooms (virtual and physical).

  • Managing the underwriting process.

  • Support in the due diligence process / asset underwriting.

 

Project Management

  • Defining Portfolio Sample And Data Fields

In order to facilitate a comprehensive bidder due diligence, the portfolio datatape should contain all relevant data points (borrower, exposure and collateral related) and should be as up to date as possible. Also, bidders expect a representative portion of the total portfolio to be provided in form of documents – the physical loan file. Usually, the physical loan files represent a certain percentage of the portfolio value.

 

  • Preparation of data material

According to the selected portfolio sample, the physical loan files require duplication for the data room or a scan in case of a virtual data room. Even in the case of a physical dataroom, we suggest to use a scan/print method including a watermark for each print out, to ensure completeness of the material in each bidder dataroom. A comprehensive index for each file facilitates the file handling for bidders.

 

  • Data Quality

The data quality is the key element of a successful transaction and guarantees the maximum sales price. We strongly recommend to validate data downloads from the vendor‘s systems with the physical loan files. The higher the consistency the more credible is the data material for any bidder.

 

  • Data Room Management

An efficient data room management relieves the involved vendor staff to a substantial degree from the extra work load of a dataroom. We place a strong emphasis on a professional Question / Answer management and a clear bidder communication.

  

Due Diligence

  • Loan Exposure Analysis

This comprises the analysis of the loan exposure as such including the types of collateral, the collateral position, the terms and conditions of the loan and the loan documentation. It takes into consideration if the loan is terminated or not, if the borrower is cooperative or not and at what stage of the work-out process the exposure is currently.

  • Financial Review

Depending on the asset class, and on the situation of the borrower, a financial review on the borrower is performed, taking into account the financial situation, the borrower‘s industry, market position, involvement of other lenders and the possibility of a potential successful restructuring or other intelligent solutions (debt to equity swap etc.).

  • Cash Flow Review

Analysis of the size of the potential cash flow, the stability and the timing forms an important part of pricing the asset. The cash flow analysis is to be seen in combination with the financial review. Also, the review determines if any cash flow waterfall exists and if the exposure is possibly subordinated to a third party.

  • Roll Up

Comprehensive presentation of findings and recommendations in an agreed format. In depth discussions of individual loan exposures together with the investor or the investor‘s credit committee. The roll up discusses legal, financial and real estate matters distinctively.

 

Pricing

  • Determination of Resolution Strategies

The resolution strategy determines the timing, costs and potential cash flow / return assumptions of the individual exposure and is one of the most important factors when competitively pricing the assets. The more accurate the strategies are, the more successful is the subsequent work out servicing.

 

  • Timing and Costs Approach

Timing assumptions require comprehensive market experience and transaction experience. Especially in the residential mortgage npl market, the timing assumptions are crucial and decide if a transaction is successful or not and generates the desired return. Cost tables for each resolution strategy complement the pricing process.

 

  • Type of Cash Flow

Determine if there is a recurring cash flow from the borrower or if this cash flow stems from the resolution of collateral at some point of time in the future.

 

  • Individual Underwriting

In order to provide a competitive pricing, the top exposures of a portfolio are underwritten individually and analysed in detail. This includes the financial analysis of the borrower data and the valuation of the collateral. 

 

Securitisation

  • Selection Process Structuring Banks

The success of a securitisation transaction hinges on finding a financial institution with relevant structuring and market experience, a powerful distribution side and a well reputed securitisation research department.

 

  • Data and System Requirements

For each asset class in the securitisation process, Rating Agencies have a set criteria catalogue. The data requirements are split in two major sections. Inventory date and more importantly, data representing the work out and resolution progress and success. These data requirements are also relevant for co-investing banks in a sub participation or sub portfolio-sale.

 

  • Data Quality

The best possible data quality enhances the Rating Agencies confidence in the seller‘s systems and procedures and helps to structure an efficient transaction with a minimum of credit support. Good data quality is also an instrument to persuade investors and a basis for adequate transaction reporting.

 

  • Exit Solutions

In addition to the traditional work-out / resolution process, investors have the option of other strategies. For example the on-sale of sub portfolios may help the investor to concentrate on the core assets. Sub participations from third parties help to manage the credit risk to the desired level.

 

Servicing

  • Rules and Procedures

Well defined servicing rules and procedures for each asset class plus an adequate IT System are the prerequisites for an efficient servicing. Investors with an above average servicer enhance the portfolio performance. Together with a major third party servicer, Silverton has developed rules and procedures.

 

  • Investor Reporting

Detailed and timely investor reporting enable investors to control the original underwriting assumptions and to check if the portfolio performance is still adequate. Silverton has experience with numerous reporting templates and mechanisms.

 

  • Portfolio Prioritisation

When allocation a newly acquired portfolio to a servicer, it is of the utmost importance to prioritise the exposures within the portfolio. This strategy secures the fastest possible cash-flow. Silverton has successfully performed such prioritising for various portfolios and asset classes by means of applying certain filter functions.

 

  • Public Rating

Servicers with a public servicer rating are viewed favourably by investors. Rating Agencies perform a rigorous due diligence during the rating process, including a review of the IT Systems and security, Rules and Procedures, training programmes, investor reporting, work out controlling and benchmarking. Silverton has supported and managed the rating process for a major third party servicer for the rating of a primary and special serving.