Non-performing loans: Transferring derivatives linked to non-performing loans
United Kingdom | Video | May 2021 | 02:12
Video Details
| Victoria Birch |
Welcome. I am joined today by Daniel Franks, who is going to talk about some of the common issues that arrive when transferring associated hedges and swaps books. So Daniel, derivatives often give rise to a number of distinct issues compared to the loans being hedged. Why is that? |
| Daniel Franks |
I think there’s two aspects to this. One is the fact that derivatives, typically involve both rights and obligations. So we're not just creating an assignment, or perhaps declaring that trust over the rights under a contract, we also need to make sure that the obligations are being transferred. So that gives rise to lots of novation questions and consent will always be required as a result. And the second is, it's not uncommon to have synthetic transfers, before you have the full legal novation, and synthetic transfers themselves create a whole host of issues. |
| Victoria Birch |
So what would you say is the most significant issue that can arise from synthetic risk transfers? |
| Daniel Franks |
The most difficult thing is identifying which risks are being transferred and which risks and not being transferred. In particular it's likely that the buyer will be taking a combination of credit risk on the borrower and market risk on the derivative, but what they're probably not willing to take is credit risk on the seller. And when you have a synthetic risk transfer because there is a derivative between the borrower and the seller, that derivative itself is subject to the credit risk of the seller, and trying to isolate that risk is phenomenally difficult. |
| Victoria Birch |
So are there any issues which are specific to non-performing loans? |
| Daniel Franks |
Well, if the loan is non-performing, it's likely that the swap counterparty already has termination rights where it could close out the swap. And so the issue will be determining whether or not those termination rights will survive transfer, or making sure that they do not survive and that the termination rights are waived so that the swap could perhaps be restructured, so that there are no longer any needs for any termination rights. |
| Victoria Birch |
Thank you, Daniel. |
| Daniel Franks |
Thank you very much. |
Loan portfolio divestments, whether by way of sale or securitization, continue to make headlines and the prospect of increasing impairments in the coming year has drawn wide commentary regarding the impact on loan exposures in several key industries disproportionally impacted by the pandemic.
Drawing on our experience of several of the most high-profile disposals and acquisitions of performing and non-performing loans in such sectors, this video series will guide both sellers and buyers on the key areas to be considered in the context of preparing to sell or buy a loan portfolio in one of these sectors, together with some additional commentary on areas that will regularly be the basis for detailed negotiations.
In the second video in the series, Daniel Franks and Victoria Birch discuss some of the common issues that arrive when transferring associated hedges and swaps books.
