MANILA, PHILIPPINES - The Asian Development Bank (ADB) is providing the impetus for the development of the nonperforming loan market in Malaysia through financial assistance that will complete the first nonperforming loan agreement with third-party debt financing in the country.
ADB is extending a $10 million loan to Eucalypt Mortgages Sdn. Bhd. (Eucalypt) to fund the purchase of some 2,000 nonperforming residential loans from HSBC Bank Malaysia Berhad, a unit of HSBC Group.
Eucalypt is a special purpose vehicle set up by Asia Debt Management Hong Kong Ltd. to acquire the nonperforming loans. Asia Debt Management is an investment advisor with a strong track record identifying and successfully realizing value from distressed debt opportunities in Asia, making it one of the region's leading specialist managers of Asian distressed assets.
ADB is building on its positive experience in the Philippines, where similar interventions helped jump-start the Philippine nonperforming loan market, resulting in the reduction of nonperforming loan levels to 5.19% as of end-September 2007 from a high of 18.1% in June 2002.
"With ADB being a critical force in supporting distressed debt sales in the region, ADB's presence in the transaction will add an extra level of confidence in Malaysia's fledgling nonperforming loan market," said Ma. Elisa Balinghasay-Paterno, Investment Specialist of ADB's Private Sector Operations Department.
Being the first negotiated nonperforming loan agreement with third-party debt financing in Malaysia, the ADB-backed transaction may serve as a benchmark for future transactions in the Malaysian nonperforming loan market. The success of the transaction will encourage other private sector players to enter into similar structures, resulting in more resources and expertise being channeled toward viable nonperforming loan resolution in Malaysia.
"ADB intends to play a catalytic role in energizing the distressed asset market in Malaysia. By its intervention, ADB will demonstrate the credibility of this asset class and mobilize capital to support similar efforts in Malaysia and throughout Asia," said Ms. Balinghasay-Paterno.
Activity in Asia's nonperforming loans market has gradually picked up since Asia's economic crisis crippled its financial sector in the late 1990s. The Asian region's governments and banks have succeeded in removing more than $1 trillion of nonperforming loans from bank balance sheets.
However, while banks in the region are advancing measures to prevent new flows of nonperforming loans, the existing bad loan stock still needs attention. An active nonperforming loan market is needed, as well as viable and market-tested resolution strategies, so that remaining nonperforming loans can be resolved.