Instruments for minimising risk
The EAA has fine-tuned the instruments used by banks to manage risks, and has tailored them to suit its mandate and its portfolio. Its risk management systems allow it to react in the shortest time possible to changes in market parameters or credit events. A comprehensive system is used to closely monitor and manage the exposures in question. Depending on how great the risk potential is, the experts in the EAA’s Credit Risk Management department may define different measures for counteracting the risk. If necessary, they mitigate the potential loss through restructuring measures that may be complex and possibly protracted. In addition to fundamental market and industry knowledge, as well as restructuring expertise, negotiating skills are also required to achieve the best result from assets at risk of default.
Restructuring and sale in Tokyo
In 2008, a subsidiary of WestLB funded a commercial building located in a sought-after location in Tokyo. The building in the Ginza shopping district offered more than 2,000 square metres of shopping and office space. The borrower was a real estate fund from Singapore.
The initial situation
As the fund management company could only rent out 50 percent of the space, the loan was at risk of default. The subsidiary of the former Landesbank had already recognised a valueadjustment on the exposure before it was transferred to the EAA. The fund approached the EAA in mid-2013, requesting to lower the interest and principal payments, or to even suspend them. The EAA refused and accepted that the borrower would subsequently default on its payments, after which the Japanese subsidiary of the EAA assumed ownership rights of the property.
EAA Japan KK opted for a new management for the building and for a strict marketing concept, and succeeded in renting all of the space and significantly enhancing the market value of the asset. The sale was then prepared. A new investor acquired the complex at the end of 2015.
The proceeds almost covered the entire loan amount. The adjustments created by the former WestLB subsidiary were not utilised. The Japanese subsidiary of the EAA therefore generated a positive contribution of more than EUR 8 million in 2015.
Exit from a high-risk airport property
Together with another big bank, the former WestLB funded an airport centre in Eastern Europe. A hotel was built with additional shops and offices. The property management company was supposed to service the loans from the rental income.
The initial situation
Demand failed to materialise and the shops and offices stood vacant. A well-known chain offered the hotel rooms for EUR 60, but occupancy remained weak. The loan was transferred to the EAA in 2012, which subsequently re-evaluated it. The assessment resulted in the receivables being written down. With the help of its parent company, however, the borrower met its obligations until autumn 2014. The situation then escalated. An investor acquired the parent company and refused to inject funds into the airport centre. The borrower was unable to present any solution until maturity at the end of 2014. The restructuring was also hampered as the centre was built on a leasehold property belonging to the airport holding company, which rejected alternative concepts. Insolvency threatened – and thus default of the loan.
The term was extended by three months to avoid insolvency. The EAA itself entered into negotiations on the property. The primary objective was to sound out if a project development company that was already in contact with the borrower might be an interested buyer. The project developer acquired the EAA‘s receivables at a relatively moderate discount. The syndicate bank involved agreed to provide follow-up funding.
Thanks to intensive negotiations, part of the written-down value could be recouped and a positive effect of over EUR 1 million was achieved in the wind-up planning. At the same time, the EAA was able to withdraw completely from a highrisk exposure.