Wang a senior executive from huarong the deal

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Unformatted text preview: Value (b) (a) Huarong AMC Loan Portfo io 65% 35% 35% Workout Huarong AMC IProceeds65 Morgan Stanley Morgan Stanley According to Mr. Wang, a senior executive from Huarong, the deal structure includes following components (Figure 1): (a) Morgan Stanley purchased 65% of the total loan portfolio from Huarong at 10% of the face value, i.e. Morgan Stanley's up-front payment to Huarong amounting to RMB 702 million. (b) The net recovery proceeds from the remaining 35% of the loan portfolio would be shared by Morgan Stanley and Huarong at a split of 65%:35%. Through the sensitivity analysis, it is evident that the deal structure provided Huarong with a downward protection while allowing it to participate marginally in the upward potential (Table 10). "The deal is structured in a way that allows Huarong to participate in the value we create as partners," said Mr. Dave Bednar, Managing Director of Morgan Stanley's Real Estate Investment Fund-. Table 10: Return Sensitivity Analysis 10% 20% 30% 32% 40% 50% 54% 60% 70% Huarong Guaranteed Huarong Unguaranteed Return Total Recovery Rate Return 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 1.23% 2.45% 3.68% 3.98% 4.90% 6.13% 6.62% 7.35% 8.58% Huarong Total Return Morgan Stanley Return before Workout Expenses 7.73% 8.95% 10.18% 10.48% 11.40% 12.63% 13.12% 13.85% 15.08% 2.28% 11.05% 19.83% 22.02% 28.60% 37.38% 40.88% 46.15% 54.93% From the return sensitivity analysis, it is also obvious that Morgan Stanley is bearing a much higher downward risk than Huarong because it has a much larger spread of total return based on a recovery range from 10% to 70%. The international consortium led by Morgan Stanley also includes Lehman Brothers, Saloman Smith Barney, and KTH Capital Management, Ltd., with Morgan Stanley as the general partner and the rest as limited partners. The partnership helped Morgan Stanley to share risks with other firms in the first ever NPL deal in China. As the first mover, Morgan Stanley was not motivated to make easy profit from this deal. The more important strategic consideration was to understand China's NPL market. 3 Quoted from Finance 12/02, Morgan Stanley in Biggest Yet International NPL deal with China Huarong, The IFC's financing package not only allowed Morgan Stanley to mitigate some risks but also served a much broader purpose. According to Ms. Reng from the IFC Beijing Office, the purpose of IFC's support to this auction is to encourage a transaction that is fair, transparent, and follows international best practices. It would set a precedent for future sales and help provide much needed momentum to the development of the NPL market in China. IFC's role would contribute to encourage foreign participation, increase competition, restructure assets and help develop a local NPL market. -Prior to this NPL portfolio auction, Huarong's average asset recovery rate was 54% in 2001 according to the International Finance Report 2001-2002 36. Assuming the same 54% recovery rate to be realized in this case, Huarong's will...
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This document was uploaded on 03/12/2014.

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