Maximizing Recovery: Transparent and Strategic Approaches to Distressed Asset Management

The document highlights the strategies used by Serbia, Ukraine, and European AMCs to manage and sell distressed assets, emphasizing the importance of clear legal frameworks, transparency, and strategic asset management. Lessons from these countries show how effective governance and competitive sales processes can reduce financial risks and support economic growth.

The document, prepared by the World Bank staff as part of the Financial Sector Advisory Center (FinSAC) program, examines the management and sale of distressed assets by deposit guarantee funds in Serbia and Ukraine, while also incorporating lessons from asset management companies (AMCs) in Western Europe. It provides valuable insights into how these entities managed distressed assets to reduce risks to financial stability and foster economic growth. In particular, the paper focuses on the roles of the Deposit Insurance Agency (DIA) in Serbia and the Deposit Guarantee Fund (DGF) in Ukraine, highlighting their efforts to resolve non-performing loans (NPLs) after the global financial crisis. This analysis also extends to European AMCs like Ireland’s National Asset Management Agency (NAMA), Spain’s Sareb, and Slovenia’s Bank Assets Management Company (BAMC), drawing on their experiences in managing distressed assets during economic downturns.

Serbia’s Strategic Approach to Distressed Assets

In Serbia, the Deposit Insurance Agency (DIA) played a crucial role in addressing the significant levels of non-performing loans, which peaked at 21.6% in 2015. A working group comprising the Ministry of Finance, the National Bank of Serbia, and international financial institutions crafted a national NPL resolution strategy to address this systemic risk. This strategy, launched in 2015, introduced a comprehensive approach to tackling the stock of distressed assets, focusing on regulatory reforms, improving banks' capacities to handle NPLs, and developing a market for distressed assets. As part of this approach, the DIA was empowered to manage and dispose of distressed assets through a strategic plan to maximize recovery. One of the key steps taken was the packaging of assets into portfolios to make them more attractive to potential buyers. This method led to significant asset sales, with international companies specializing in distressed assets showing interest in the Serbian market. However, due to poor asset quality, the DIA faced challenges such as prolonged bankruptcy procedures, lengthy court processes, and difficulties in selling some assets. Despite these hurdles, the sale of larger portfolios achieved success, with notable reductions in the DIA’s portfolio value over time.

Ukraine’s Transparency-Driven Asset Sales

In Ukraine, the Deposit Guarantee Fund (DGF) undertook a similar role following the financial crisis and a severe currency devaluation between 2014 and 2017, which caused the level of non-performing loans to spike to 55%. The DGF was responsible for managing the liquidation of 94 insolvent banks and played a pivotal role in the resolution of distressed assets in Ukraine. Transparency was a cornerstone of the DGF’s approach, exemplified by the creation of the Prozorro.Sales electronic trading platform in partnership with Transparency International Ukraine. This platform facilitated public auctions of distressed assets, ensuring an open and competitive sales process. In the early years of asset liquidation, some valuable assets achieved relatively high recovery rates, but as the more desirable assets were sold, recovery rates dropped significantly, particularly between 2019 and 2021. Factors contributing to this decline included poor underwriting standards of loans, a constrained timeline for asset liquidation, and the long and costly enforcement of collateral. Nevertheless, the DGF's efforts demonstrated the importance of transparency and open competition in the sale of distressed assets. The DGF's mandate was constrained by a three-year limit for asset liquidation, extendable to five years in the case of systemically important banks, which further pressured recovery rates by forcing quicker sales of distressed assets.

Western Europe’s Lessons from AMCs

The document also draws on lessons from asset management companies in Western Europe, specifically Ireland’s NAMA, Spain’s Sareb, and Slovenia’s BAMC. NAMA, established to address Ireland’s real estate crisis, was given the mandate to manage and enhance the value of distressed commercial real estate assets. The NAMA Act allowed the agency to avoid forced sales during a weak property market, giving it the flexibility to invest in assets, complete unfinished projects, and improve planning permissions to increase future asset values. Similarly, Sareb, created in the aftermath of the Spanish financial crisis, focused on managing and divesting distressed assets from Spanish banks. Although privately owned, with the state holding a minority share, Sareb faced challenges in managing a diverse portfolio of loans and real estate assets but succeeded in divesting a significant portion of its portfolio over time. Slovenia's BAMC, though initially intended to operate for only five years, had its mandate extended due to the complexity of the asset management process and the poor state of the market. BAMC employed an active asset management strategy to maximize recovery, focusing on loan restructuring, legal enforcement, and asset sales.

Key Components for Successful Distressed Asset Management

The analysis emphasizes that effective governance, clear legal frameworks, strategic asset management, prudent asset valuation, and transparent and competitive sales processes are essential components of successful distressed asset resolution. The experiences of Serbia, Ukraine, and the European AMCs offer valuable lessons for other countries seeking to manage distressed assets, reduce risks to financial stability, and support economic growth through more effective liquidation and asset management frameworks.

Balancing Legal Mandates and Strategic Sales

One of the key takeaways from these case studies is the need for bank liquidators to balance their legal mandates with strategic asset management decisions. While the overarching goal is to maximize returns through asset sales, this must be done within the constraints of local legal frameworks, time limits, and market conditions. Countries looking to implement or improve their distressed asset management strategies can benefit from the experiences in Serbia, Ukraine, and Western Europe, tailoring the approaches to suit their unique economic, legal, and institutional environments. These case studies demonstrate that strategic planning, transparency, and sound legal frameworks are critical to ensuring the success of distressed asset sales and the recovery of value from non-performing loans.