32539 - DARP Fortress

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Summary of Investment Information

Project Number

32539

Company Name

Fortress IFC Asian Investment Holdings L.P.

Date SPI Disclosed

May 3, 2013

Country

East Asia and Pacific Region

Region

East Asia and the Pacific

Projected Board Date

Jun 5, 2013

Environmental Category

FI-2 - Limited

Status

Active

Last Updated Date

Jun 11, 2022

Department

Regional Industry - FIG Asia & Pac

Industry

Financial Markets

Previous Events

Approved : Dec 25, 2013
Signed : Mar 12, 2014
Invested : Jul 15, 2014

Sector

Distressed Assets

Project Description

The project entails an investment in equity and debt, along with and affiliate of Fortress Investment Group LLC (“Fortress”) to establish a regional Non Performing Loan (“NPL”) platform for the acquisition and resolution of Distressed Assets (“DAs”) in East Asia. A to-be-formed Special Purpose Vehicle (“SPV”) will acquire DAs disposed by banks and other financial institutions. The DAs will mainly consist of sub/non-performing portfolios of assets and sub/non-performing single assets, including real estate-related performing, sub/non-performing loans, securities, assets and similar instruments, and distressed assets deriving from special situations opportunities. The SPV will also target equity interests in strategic distressed assets servicers.

The Project is expected to deliver significant development value by directly strengthening the balance sheet of banks, allowing them to further extend credit to under-served market segments, and improving the risk management, transparency and governance of banks’ DAs recovery programs.

The proposed project is part of IFC’s Debt and Asset Recovery Program (“DARP”), a crisis response initiative approved by the Board in August 2009, which focuses on DAs, roll-over risk and restructurings. DARP’s strategy is to revitalize financial systems through investments in DAs and servicing companies / platforms.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	50.0
Equity	25.0

Development Impact

- Market development: The successful implementation of the project could spark the interest of other DA market players and evolve into a common practice;

- Best practices: As part of the project IFC would promote international insolvency standards, creditors'' rights and collection practices for the resolution of the distressed assets; and

- Replication: Through this project, IFC would be helping to assign a market value to a NPL portfolio and distressed assets. If successful, the proposed project has the potential to be replicated by other entities in the other region.

ï»¿- IFC''s experience in emerging market.
At this point in the region''s market cycle, Fortress believes that DA opportunities in emerging Asia are prime for divestment activity by financial institutions that aggressively grew their balance sheets but are now facing slowing economies as well as the knock-on effects of the European debt crisis and the US financial de-risking. However, Fortress'' network and direct experience outside of Japan where they had invested over US$2.5 billion of NPLs over the past 2 years is not as large. IFC''s global reach and well-renowned experience in emerging markets, particularly in Asia for this project, add a critical role as a partner in identifying and assessing successful DA investments in emerging Asia.

- Counter cyclical role.
IFC would play its counter-cyclical role in the current market environment by supporting a reputable DA investor in the distressed assets market. Given that many of DA investors (e.g. banks, hedge funds, corporate) are no longer looking at the space (i.e. DA portfolio) that this Project is targeting because of various reasons (e.g. regulatory limitation, strategy), IFC''s counter cyclical role is significant.;

- Best practice.
The transaction will help entice best practices for distressed assets collection and resolution, especially in the nascent and formative DA markets such as in Asia''s emerging countries; and

- Market Support.
The vast number of opportunities for DA investments in the United States and Western Europe is significantly crowding out other regions, including EAP region. Through this project, IFC would support the appropriate evolution of the regional DA market, and hence contribute to the stability of the financial industry.

E&S Category Rationale / Risks and Mitigation

This project involves a creation of a SPV in which Fortress acquires and resolves non-performing and sub-performing NPL pools and single asset NPLs in East Asia, such as China, the Philippines and Thailand. Based on the fund manager''s past experience, the SPV''s investments range from pools of retail and SME NPLs and other distressed assets such as properties. The SPV can also make equity investments in strategic partners in distressed asset servicing. While the proportion of each type of investments is not known, the portfolio risks are considered to be medium overall because the investments with significant E&S risks, if any, are expected to be limited in number and the project has been classified as a Category FI-2 Project according to IFC’s Environmental and Social Review Procedure. The project will be required to screen the portfolios against the IFC FI Exclusion List and any unresolved social and environmental issues or high risk projects and work with debtors to achieve the compliance with applicable national E&S laws and regulations and where necessary the IFC Performance Standards, when the resolution strategies allow the interactions with the debtors.

The SPV''s investment may include low E&S risk investments such as pools of mortgage loans and also higher E&S risk investments such as ongoing construction projects. The main E&S risks and impacts of the project are expected to be properties in China involving some level of construction that may pose workers and community safety issues and concerns for their working conditions. Properties in China and the Philippines may also involve resettlement issues while the number of such transactions are expected to be few. The fund manager does not currently have a formal Environmental and Social Management System (ESMS), however, it addresses fire and life safety issues of properties in accordance with local laws. Relatively a small number of staff works on distressed asset transactions in Asia and the responsibilities will be centrally managed by the fund manager''s small team but the implementation may involve sub-servicers. The fund manager and a sample sub-servicer was found to be in compliance with the IFC Performance Standard 2: Labor and Working Conditions.

Contacts

For Inquiries About the Project, Contact

Thomas Pulley
Managing Director
Fortress Real Estate (Asia) GK
Roppongi Hills Mori Tower 29F
6-10-1 Roppongi Minato0ku,
Tokyo, Japan 106-6129
Tel +813 6438 4220
Email: mailto:tpulley@fortress.com

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Task Title & Description	Anticipated Completion Date	Status	Comments	Completion Date
Nominate officers		Completed	Completed	03/13/2014
Establish SEMS		Completed	Completed	03/13/2014

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