[lbo-talk] Citigroup acquires China's bad assets worth 36.4 billion yuan

[boddi satva]

Just to add, Banks these days look at packages or groups of loans.
They bundle loans together in legal entities and then sell shares of
these bundled loans as securities, or they syndicate the loans with
other banks (basically the same idea, there is just no paper security
involved). But for loans to stay in these bundled arrangements they
have to be "performing" loans, which basically means the borrower
can't have missed too many payments of have a financial change of
status that threatens to put him in default on the terms of the loans.

Essentially "bad" loans are loans which are no longer possible to
bundle and sell or syndicate because there are too many problems. But
these loans can vary widely in the problems they have. There can be
anything from, say, a building owner who has stopped paying his loan
altogether but has assets that might even be pretty near the loan
amount to a factory that missed too many payments and got its credit
downgraded but still makes payments and is a candidate for a "workout"
to real deadbeats who might be a total loss. Basically these are loans
where there have been so many problems that banks have to administer
them individually. Different national laws make bad loan situations
unique. For example, for many years it was extremely hard for a
Japanese bank to put a defaulting borrower into Bankruptcy. So they'd
have customers (often in real estate) who just stopped paying but
still had very valuable assets - it was just really hard for the bank
to get their hands on those assets in order to get paid back.

Interestingly, banks that buy bad loans may actually leave the
administration to the original banks that issued the loan. They just
provide the original bank capital now in exchange for a premium on the
relatively unpredictable proceeds that will eventually come from the
"bad" loans.

The other consideration is that the bank that buys the loans may
either have or want the bank that originated the loans as a customer -
or as a potential takeover target. They stabilize the originating
bank's balance sheet so that the originating bank becomes a more
predictable, stable entity and source of revenue - sort of like
offering the originating bank a refinancing on its debt to put it on
more stable footing.

boddi

On 11/30/05, Ylle <ylle521 at highstream.net> wrote:
> At 08:09 AM 11/30/05, you wrote:
> >People's Daily Online
> >
> >Business
> >
> >November 29, 2005
> >
> >Citigroup acquires China's bad assets worth 36.4 billion yuan
>
> May I tug someone's sleeve with an Financial Issues 101
> question?     Why would a company want to acquire bad loans like
> this?  How do they make money off it?
>
> Maria
>
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