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Taiwan Begins to Clean Up its NPLs

Taiwan Begins to Clean Up its NPLs. M ay 24, 200 2. Y AMATO S ERVICING K.K. Table of Contents. Introduction to Yamato Servicing K.K. Outline of Cerberus Group Comparison of NPLs Precedent in USA and in Japan Necessity for Taiwan to Quick Resolve NPLs How to Liquidate NPLs?

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Taiwan Begins to Clean Up its NPLs

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  1. Taiwan Begins to Clean Up its NPLs May24, 2002 YAMATO SERVICING K.K.

  2. Table of Contents • Introduction to Yamato Servicing K.K. • Outline of Cerberus Group • Comparison of NPLs • Precedent in USA and in Japan • Necessity for Taiwan to Quick Resolve NPLs • How to Liquidate NPLs? • Benefit of 3rd Party Servicer • Role of Servicer • Work Flow of Servicer • Resolution Method of Servicer • Market Volume of Servicing in Japan • Comparison of Japanese Servicer Rating • Outline of Yamato Servicing K.K.

  3. Introduction to Yamato Servicing K.K. • Leading special servicer in Japan • Servicing portfolio • UPB JPY2.3 trillion (US$18 billion) • Clients • Cerberus, overseas private equity funds and Japanese mega financial institutions. • Staffs/Offices • 50 staffs, with 10 to 25 years’ servicing experience. • Servicer Rating • CSS2-Yamato Servicing K.K. is at the top of the rated servicers in Japan. • History • Incorporated in April 1999. • Shareholder • Yamato is one of the Cerberus Group companies.

  4. Outline of Cerberus Group • The leading long-term fund in the world in the niche market of corporate restructuring and distressed asset management. • It has approximately $8 billion under management and has invested over US$ 25 billion during the last 10 years • Cerberus is one of the largest managers of NPLs in Japan and Korea (approximately $30 billion of NPLs in Asia alone) • In Taiwan, Cerberus acquired the first pool of distressed debt sold through public auction. • Cerberus is in active discussion with the Government about how Cerberus can further contribute to financial sector recovery.

  5. Investment In Asia Corporate Recovery Corporate Reorganization Property Performing Loans Equity Financing Bad Loans ＭＢＯ ＭＢＩ Outline of Cerberus Group 2 Cerberus Fund Fund Investors Cerberus Capital Management L.P. Cerberus Asia Capital Management LLC, etc. 【Investment in Taiwan, Japan and in Asia】 ＾ Banks Insurance Companies Pension Funds Fund of Funds Consign Institutional Investors Wealthy Individuals Recovery Fund Financing Fund Capital Financing Company Property Fund Asia Fund Amount;USD 8 Billion Investment • Cerberus Group • Cerberus, established in USA in 1992, is one of the largest private equity fund in the world specializing in corporate restructuring. • Cerberus family of funds currently consists of 11 different funds and separate accounts. • Funds under its management is USD 8 bill, of which USD 3 billion is for Asia including Taiwan.

  6. Comparison of NPLs (Taiwan vs Japan) • Taiwan (as of Sept 2001) • Total Bank Lending : NT$14 trillion (US$412 billion ) • Bad Assets : NT$ 1.1trillion (US$32 billion) • Bad Assets Ratio : 7.8% (MOF base) vs • Japan (as of Sept 2001) • Total Bank Lending : JPY485 trillion (US$3.7 trillion) • Risk Control Assets : JPY35.7 trillion (US$275 billion) • Risk Control Asset Ratio : 7.4% • Some source estimates that real bad asset ratio is 10 times higher than the ratio stated above. NPLs: Non performing loans

  7. Precedent in USA and in Japan • What happened in USA? • By 1989, 750 S&Ls were bankrupted due to high NPL ratios. • In 1990, RTC was incorporated to purchase S&L’s NPLs. • RTC was dissolved in 1995 when its mission was over by selling NPLs to investors (who then consigned servicing to servicers). • It is widely believed, that major reason of quick resolution of S&L problem was utilization of private equity funds and servicers who are specialists of investment and collection.

  8. Precedent in USA and in Japan • What happened in Japan? • 12 years since bubble economy burst. • In the past 8 years, JPY68 trillion yen (US$523 billion) bad assets were resolved, according to Japanese Government’s statistics. • Bulk sale of "Category 4" loans (bankrupted borrowers) started in 1997, then proceeded to bulk sale of "Category 3“. • Resolution of "Watch list" borrowers has just started. • Since 1998, series of new legislations were promulgated to resolve NPLs, of which Servicer Law is one of the most important. • Even today, as much as JPY35.7 trillion (US$275 billion: it is believed to be understated) bad assets are still booked at Japanese banks’ balance sheets.

  9. Necessity for Taiwan to Quick Resolve NPLs • What if resolution on NPLs will be postponed? • Banks’ unable to extend new loans • High bankruptcy rate • More bad assets • Higher unemployment rate • Economic downturn • Weaker currency • Lose creditworthiness to foreign investors • Advantage of Taiwan in resolving NPLs • Low public sector debt – 30% of GDP (2000.12)(Japan’s ratio is 125%), strong fundamentals. • Injecting public money is not a heavy burden for Taiwan Beneficial to taxpayers in the long term.

  10. How to Liquidate NPLs? • Method • Nationalization followed by Government’s • Sale of banks, bulk sale of loans, and sale of individual loans • Private sector’s conducting the same as above • Process • Due Diligence • Evaluation of loans and collaterals • Income approach, cost approach, sales comparison approach • Discounted cash flow method • Submission of pricing • Documentation • Closing (assignment of loans and collaterals) • Servicing by assignee’s servicer starts

  11. Benefit of 3rd Party Servicer • Independence • No inter-creditor conflicts • No long standing client relationship • Specific experience • Knowledge on cash flow lending, etc. • Modern IT systems • Capital availability Licensed Servicers in Japan • Specialized in Asset Management and Loan Collection. • Incorporated in accordance with “Servicer Law” (1998, No.126) -Servicer Law v.s. Lawyers Law • One of the directors must be a lawyer. • Limited Liability Companies with paid in capital not less than JPY 500 million (US$3.8 million) • Regulatory Audit by Ministry of Justice under Servicer Law. • As of May 2002, 65 Servicers have obtained permission from Minister of Justice.

  12. Role of Servicer • Due diligence • Closing procedures • Collection • Cash management • Property management for REO (credit bid) properties • Monitor asset portfolios • Reporting Expertise of Servicer • Collection • Legal execution procedure • Finance • Property management • Information technology • M&A • Accounting

  13. Work Flow of Servicer From Entrance to Exit of Investment Due Diligence Collection Activities Cash Flow Management REO Property Management Cash & Information Performance Monitoring Collection Team Finance & IT Team Investors Legal Team Property Team

  14. Resolution Method of Servicer Seek Best Solution for Investors and Borrowers • Corporate restructuring • Debt equity swap • Fresh debt and/or equity • Dip financing • Voluntary sale • Private auction • Refinancing • Legal proceedings • Attachment • Foreclosure • Arbitration • Loan restructuring • Discounted pay-off

  15. Market Volume of Servicing in Japan (in million) Source: Ministry of Justice

  16. Comparison of Japanese Servicer Rating As of 2002/5/1

  17. Outline of Yamato Servicing K.K. • Leading special servicer in Japan • Servicing portfolio • UPB JPY2.3 trillion (US$18 billion) • Clients • Cerberus, overseas private equity funds and Japanese mega financial institutions. • Staffs/Offices • 50 staffs, with 10 to 25 years’ servicing experience. • Servicer Rating • CSS2-Yamato Servicing K.K. is at the top of the rated servicers in Japan. • History • Incorporated in April 1999, immediately after Servicer Law was promulgated. • Shareholder • Yamato is one of the Cerberus Group companies.

  18. Yamato Servicing K.K. Yamato’s Servicing Capabilities Yamato is capable to provide professional/unified services on behalf of investors from the commencement to the exit of investment. The following are the characteristics of such services. Outline of Yamato 1. Due diligence support Incorporation The first characteristic is to fully support due diligence upon investment made by investors. Yamato will enable investors to conduct an appropriate pricing, supported with our advice in accordance with our servicing experiences and the collection strategies based on our database. We believe that investors’ correct judgment at the time of investment is the first step for successful collection Yamato Servicing K.K. (“Yamato”) was incorporated in 12th April 1999 by Mr. Stephen A. Feinberg, for the purpose of acting as a servicing company for collecting loans, entrusted by non-Japanese investors investing in distressed assets in Japan 2.Servicing Capital and Shareholding 1.COLLECTION EXPERIENCE AND NETWORK WITH EXTERNAL PROFESSIONALS Yamato has a network with external professionals concerning collection strategy development and conducting collection thereby. In addition to our internal professional staffs who have been engaging in collection services for 10 to 25 years, Yamato has a strong network with Shoichiro Niwayama Esq., our director and a senior partner of Asahi Law Offices and other legal professionals. Yamato, therefore, is capable of carrying out effective and appropriate collections 2.OUTSTANDING PERFORMANCE Since the commencement of its servicing business, Yamato has taken only 12 months to 18 months to recoup investors’ investment. This proves how capable Yamato is in developing collection strategy, in conducting collection, and how conscious Yamato is about time value for investors. 3. CONSIDERABLE SERVICING PORTFOLIO Yamato has a considerable servicing portfolio. Its servicing portfolio is approximately 2.3 trillion yen on an unpaid principal balance base, 5,000 borrowers and 10,000 loans, 130 investment pools. Such servicing portfolio is at the top level among the servicing companies in Japan. This shows that the investors have strong confidence in Yamato in all aspects of servicing, including due diligence support, collection, cash management, portfolio monitoring and reporting 500 million yen （Stephen A. Feinberg 100％） Permission by Government Yamato has obtained Permission under the Servicing Company Act 1998 (Effective 1st February 1999) from Minister of Justice on 1st July 1999. Permission Number is No. 14 Servicer Rating Yamato obtained servicer rating, CSS2- from Fitch Ratings Limited in October 2001. Only few servicers are assigned CSS2- or above among more than 60 servicers in Japan.

  19. Yamato Servicing K.K.’s Resolution Policy • Try to let borrowers to survive • More effective than letting borrowers to go bankrupt and starting from scratch • Identification and problem solving with borrowers • Negotiate consensual resolution / restructuring Maximizing Collection

  20. YAMATOSERVICINGK.K. Toshikiyo Shimizu President of Yamato Servicing K.K. Telephone: 81-3-3287-2100 (ex 6411) Facsimile: 81-3-3287-2101 E-mail: tshimizu@yamatoservicing.co.jp Yamato Servicing K.K. Tokyo Head OfficeYusen Building 7th Floor2-3-2 Marunouchi, Chiyoda-ku, Tokyo 100-0005Telephone: 81-3-3287-2100Facsimile: 81-3-3287-2101 Yamato Servicing K.K. Osaka Branch NM Plaza Midousuji 12th Floor3-6-3 Awajimachi, Chuo-ku, Osaka-shi, Osaka 541-0047Telephone: 81-6-6232-0606Facsimile: 81-6-6232-0607

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