Non-performing loans: The increasing role of technology in distressed loan transactions

Simon Lew
Hello, today we're going to be talking about the role of technology in management of NPLs and in closing NPL transactions - I'm joined by Victoria Birch, Victoria, how is technology, able to assist in NPL management.

Victoria Birch
Well Simon, one of the main benefits of technology is its ability to assist in the monitoring and management of data. Over the last couple of years a number of regulators, including bodies such as the European Banking Authority, have introduced more stringent requirements for loan portfolio management. Now, one of the key areas of emphasis with these new requirements are things like strategic management, and also enhanced reporting obligations.

Effective data management is key to comply with these enhanced obligations. The quality of the data available can carry from portfolio to portfolio, and may depend on the quality of the underlying book and its assets. In some cases, the underlying documentation may be of varying age, and it may be on different terms which, if that documentation is held in paper form, can be difficult to manage and monitor.
Technology can be a key help in this regard, not only as a more secure means of storing that data, but also providing a mechanism by which that data, and the underlying information, can be updated in real time. Having up to date secure information can help companies to be better informed when it comes to decision making. It can help them to identify when assets are at risk of falling into distress, and it can also help with these enhanced reporting obligations.

Simon Lew
Victoria, what about when it comes to the sale of a portfolio.

Victoria Birch
Now when it comes to a transaction, data is often key again. Technology can help by providing a secure data set which can then be used to help attract buyer and investor interest. That information and data set can then in turn be used to inform things like valuation methodologies and assessing the condition of the underlying book to help identify any potential commercial terms or difficult negotiation points later down the line, which will make the transaction much more efficient.
For this reason, we are often seeing technology used as part of your due diligence processes. Now, as we all know, due diligence is often one of the most expensive and time-consuming parts of an NPL transaction. Technology, when it is used appropriately, can help to cut those timelines, and the resulting costs. It's probably fair to say that, at present, the technology tools on the market are better suited to portfolios where the book is on common terms. However, as technology develops, it will be able to review and assess much more bespoke provisions and we would expect due diligence technology tools become much more prolific.

Simon Lew
How else can technology assist in transaction management?

Victoria Birch
We’re starting to see technology being used in a number of different ways. There are technology tools out there that can do things like document automation, particularly when it comes to things like first drafts. We're also seeing increasing use of legal project management tools. Now, this cannot only help to cut timelines, but also it can help to keep key stakeholders better informed about the current process of the transaction.

However, it's probably fair to say that the one area that where we're increasingly seeing technology being used is actually in the implementation of the transaction, particularly when it comes to things like procuring and understanding third party consents, and also satisfying completion formalities. Now, NPL transactions will commonly have a number of transfer procedures that need to be satisfied in order to transfer the interest of the underlying book. Those processes, depending on the number of connections, the number of assets, can be s particularly paper heavy exercise. If you think about something like the issuing of notices to the underlying borrowers, those borrowers could be in their hundreds, they could be in their thousands, there could be a significant number which, if you have to issue a paper notice to every single borrower, is going to take a considerable amount of time. On the transactions that we have been working on more recently, however, we've been able to use technology tools in order to automate this process. This has enabled us to cut timelines, and again, cut the costs associated with that process.

It's probably fair to say that we are increasingly seeing technology being used in a number of areas, and this is only going to get more prolific as the technologies themselves develop. I think this is going to remain a fundamental part of the transaction marketplace in the coming years.