Valuing debts

LEGE ADVISORS specializes in valuing debts. Each debt requires an individual approach determined by a debt type and relevant ratios applied. As part of our valuation process, we examine all factors affecting the value of the debt. When estimating such value, we make an in-depth analysis of the debtor’s situation, debt type, and value of collateral, if any, or market situation. Our understanding of a value of a debt portfolio is essential for proper debt management and for making key debt-trading decisions. Our debt valuation procedure allows us to assess an actual value of any claim, and to determine a relevant recovery rate and time to recovery.

Drawing on our extensive experience of Enterprise Valuation, Movable Property Valuation, and Immovable Property Valuation Divisions at LEGE ADVISORS, we are experts in valuating secured debts.

Non-performing loans (NPLS) or irregular or in/close to default loans are loans that bear risk of not being repaid. At present, according to standards adopted by banking sector supervision authorities, loans are considered non-performing if a debtor has made no payments within 90 days or, if a retail customer, a debtor has lost its source of income, or, if a corporate customer, a debtor’s business position has deteriorated or industry has lost its stability.

The following legislation is in place to protect banks: Regulation (EU) of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (Capital Requirements Regulation) and Directive no. 2013/36/EU of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (Capital Requirements Directive IV); both of which constitute a CRD IV/CRR package. As part of the package, banking sector policies have been created to reduce risks of non-performing loans. As banks willing to reduce an NPL ratio have been forced to reduce non-performing loans, an opportunity has arisen for debt traders to grow.

At present, on the EUR area loan market, as many as 6% of loans are non-performing loans, which gives a EUR 790 billion portfolio of NPLs held by banks. This is why the debt trading market in Europe is highly developed and constitutes an appealing investment area for those interested in debts, collaterals, or any purchase of a debtor’s business. However, the highly developed debt trading market has resulted in the emergence of instruments, such as those hampering a debt collection process, that put debt recovery at risk. Still, a properly verified debt portfolio with properly identified risks constitutes a good investment product.