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CREFW-Fall2014 10.15.14

A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 43 Structure of an NPL Bond Those investors that have been successful in buying an NPL portfolio will frequently use a newly formed special purpose vehicle to acquire the loans (“NPL Lender”). Funding for the acquisition will typically take the form of the NPL Lender using 100% equity or a combination of debt and equity. In the event that any debt finance is used then the third party lender (typically a bank) will lend directly to the NPL Lender. Although it would be desirable to issue an NPL Bond contemporaneously with the acquisition of an NPL portfolio, in practice this would be difficult to achieve. NPL portfolios are often sold as part of an auction process with the seller keen to offload the NPL portfolio swiftly following conclusion of such a process. Given the time it would take to structure the NPL Bond and provide relevant disclosure, an NPL Bond would need to be issued following the acquisition of the NPL portfolio. An NPL Bond could therefore be structured in two ways: • Agency Deal — the NPL Lender would enter into a loan with another special purpose vehicle which in turn would directly issue NPL Bonds into the market (see figure 1). • True Sale — the financing bank would either securitise the acquisition loan or if pure equity has been used to acquire the NPL portfolio which is later refinanced, the bank would securitise the refinance loan (see figure 2). Figure 1 Figure 2 Although both structures are viable, the agency structure would clearly be the most desirable and cost efficient as unlike a true sale structure the financing bank would not be required to use any of its balance sheet to lend. Further, implementing this structure would mean that the arranging bank would not be required to retain 5% of the NPL Bonds in order to satisfy the 122a retention requirements under the European Commission’s Capital Requirements Directive IV. It should however be noted that the NPL Sponsor or an affiliated entity as sponsor of the issuance would instead be required to retain a 5% interest of the NPL Bonds. In both structures, amounts received under the NPL loans would be used to pay interest and principal on the NPL Bond. Security for these payment obligations would take the form of an assignment by way of security of the NPL Lender’s entire security interest in each underlying NPL loan and a pledge granted over the shares of the NPL Lender. All security would be held by the bond security trustee for the benefit of the NPL bondholders. Other than with respect to special servicing, the securitisation structure would resemble that of a standard CMBS 2.0 transaction. There are likely to be several agents (account bank, cash manager, paying agent) appointed to manage cash flows and pay amounts on the NPL Bonds. A bond trustee and security trustee would respectively have the role of representing the interests of the NPL bondholders and holding security granted by the issuing Europe’s Future Power Couple — CMBS


CREFW-Fall2014 10.15.14
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