FAIR DISCUSSION PAPER “Maximising Value of Non-Performing Assets” SESSION III AMCs in Asia Experiences and Current Challenges Seoul, South Korea November 2003

2 n Remove non-performing loan (NPL) distractions n Maximise recovery value of acquired assets FUNDAMENTAL PRINCIPLES n System-wide carve-out of NPLs n Market driven approach n True asset management company CHALLENGES n Effective collection of recoveries – currently 73% of total expected recovery already in hand n Unpredictable property market and volatile capital market dampening recovery n Redeeming bonds on schedule n Closure by end-2005 DANAHARTA’S OBJECTIVES

3 Receive share capital from Government Receive share capital from Government Acquire NPLs Determine recovery strategies Implement recovery strategies TIMELINE - DANAHARTA Receive cash Receive non-cash assets - securities, properties and restructured loans Receive non-cash assets - securities, properties and restructured loans Convert to cash/ residual assets Cash/ residual assets Distribute to government/ surplus recovery to respective financial institutions Distribute to government/ surplus recovery to respective financial institutions Redeem bonds. Any shortfall will be borne by Government NPL Portfolio Receive NPLs to be managed Issue government guaranteed bonds Issue government guaranteed bonds June March 2000 Sep Dec 2001 Nov Sep on-going till 2005 Dec on- going till 2005 End Dec on-going till 2005

4 LEGAL ASPECTS n Statutory vesting process n Danaharta steps into the shoes of the selling institution n Clear title vs. clean title n Third party claims preserved ACQUISITION APPROACH n NPL > RM5 million (gross value) n Secured loans are valued according to collateral value n Market value of property collateral determined by professional valuers n Unsecured loans are acquired at 10% of outstanding loan n Profit sharing - 20 (Danaharta) : 80 (FI) PAYMENT n Financial Institutions (FIs) receive government guaranteed bonds from Danaharta as consideration for the purchase of NPLs except non-BAFIA* FIs and Islamic facilities which require cash * BAFIA: Banking And Financial Institutions Act 1989 ACQUISITION OF NPLs

5 STRATEGIES n Viable loans are restructured using Danaharta’s published Loan Restructuring Principles and Guidelines; l informal restructuring, via rescheduling, redemption and settlement of loans or; l formal restructuring, via schemes of arrangement or Special Administrators’ schemes n Non-viable loans are restructured using assets restructuring options, i.e. via sale of collateral and/or sale of business n Foreign loan assets are sold via a bidding process LOAN RESTRUCTURING PRINCIPLES n Shareholders take a proportionately larger haircut than creditors n Fair treatment to secured and unsecured creditors n No dilution of inadequate security n Only one opportunity given n Make borrowers work for lenders * Detailed guidelines are published RESOLUTION OF NPLs

6 KEY STATISTICS

7 n Danaharta given special powers, by virtue of the Pengurusan Danaharta Nasional Act 1998 l Ability to acquire NPLs via statutory vesting process l Ability to foreclose on collateral quicker than banks – by giving 30 days notice to borrower l Ability to appoint Special Administrators over corporate borrowers to facilitate restructuring and recovery of NPLs n Building up virtual organisation l Small “permanent” staff l leveraging on professional community, e.g. lawyers, accountants, valuers n Strong political will n Design l International precedents l Market based approaches, e.g. surplus sharing arrangements with FIs as incentive to sell NPLs to Danaharta n Focussed scope of work l Danaharta to only deal with NPL problem in banking system. Other entities address other banking problems, e.g. recapitalisation of banks was done by Danamodal. Steering Committee coordinates activities of all entities – chaired by Central Bank Governor. l NPL resolutions vs mere NPL disposal l concentrate on larger sized NPLs (< 3,000 no. of accounts) KEY POINTS