Can Contingent Convertibles Help Private Asset Managers Fund Their Acquisition of Non-Performing Loans from Portuguese Banks?

Author/Editor:

Andre O Santos

Publication Date:

May 7, 2019

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper analyzes the capital structure of private asset managers in which the acquisition of nonperforming loans (NPLs) is funded with Contingent Convertibles (CoCos) placed with investors. The paper develops a model based on NPL transfer prices and residual recovery rates to assess capital structures consisting of CoCos and equity. The CoCos would contain put and call options to write down losses and write up profits, respectively, arising from liquidation and restructuring procedures. The paper concludes that the protection mechanism provided by debt write-downs embedded in CoCos and the incentives to investors provided by debt write-ups could help bridge the gap between Portuguese banks’ NPL bid prices and private equity firms’ ask prices.

Series:

Working Paper No. 19/99

Subject:

English

Publication Date:

May 7, 2019

ISBN/ISSN:

9781498312080/1018-5941

Stock No:

WPIEA2019099

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

30

Please address any questions about this title to publications@imf.org