Banks air concern over a watered-down SPAV Law

Watering down the Special Purpose Asset Vehicle (SPAV) Law to cover only foreclosed assets would do more harm than good to the banking sector and possibly trigger the foreclosure of non-performing loans (NPLs).

Officials said yesterday that the emerging consensus to water down the SPAV law to the point where it would apply only to the disposition of foreclosed assets would eliminate the objective of encouraging banks to dispose of problematic loans for restructuring.

Sources in the banking industry said the SPAV law should not be watered down at all or this would precipitate a spate of foreclosures and defeat the purpose of saving problematic companies that would otherwise close down without the remedy offered by the proposed law.

In its present form, sources told reporters that the SPAV bill would apply only to real and other properties, owned and acquired (ROPOA) assets that banks could sell on their own anyway.

The original intent of the proposed bill, according to the source, was to enable banks to turn over non-performing loans to asset management companies which would then restructure the loans and possibly turn them around, thereby avoiding the possibility ofclosing down companies.

"These non-performing loans could then become performing loans," said a veteran banker. "That’s what these asset management companies do, that’s where they make money, it’s their expertise."

If the option would be opened only to assets that have already been foreclosed by banks, the source said this could prompt banks to foreclose on their NPLs instead. "That would defeat the whole purpose of avoiding foreclosure," the source said.

The SPAV law was originally intended to ease the NPL burden of the banking industry by allowing asset management companies to take over bad loans and to turn these around or dispose of these as they saw fit.

The source said this was the Arroyo administration’s only recourse since it did not have the capability or the inclination to do what Thailand, Indonesia and Malaysia did – infuse huge sums into the rehabilitation of their banking industry.

Without the SPAV law, prospective investors that were eager to get into the country’s NPL market would not be able to do so since there would be no legalframework for them to conduct the kind of specialized business that they do.

Dismayed by the delay in the passage of the SPAV law, the US-based Cerberus Capital Management, L.P. has already bypassed the Philippines and instead invested $500- million buying bad loans in Thailand where the laws on asset management companies are more transparent.

Known as a leader in the international distressed debt, securities and reorganization market, Cerberus had invested over $20 billion in the market and has an available capital in excess of $7 billion that it planned to invest in Asia, specifically Japan, Korea and Thailand.

Early this year, Cerberus announced that it was planning to invest more than $1 billion in the country, specifically looking for non-performing assets that it planned to buy from banks as soon as the legal framework for the disposition of problematic assets had been set.

Instead, Cerberus has moved into Thailand and invested half of the fund it had originally intended to invest in the Philippines. This still left some $500 million that could still go into the country, but the source said even this half could go elsewhere unless the SPAV law is passed quickly.

Cerberus’ investment would have helped alleviate the banking industry’s non-performing loans now estimated at 18.06 percent of the industry’s total loan portfolio or P288.97 billion.

When Cerberus started looking into several banks in the country, the company said the only limiting factor to the company’s investments in the Philippines was the number of opportunities and the legal framework that would govern SPAVs.

Cerberus said at the time that the company was committed to invest about $500 million in the housing sector and another $500 million on corporate restructuring but this amount could easily go up and expand once it finalizes its planned partnership with Goldman & Sachs.