Good Bank, Bad Bank
In the closing years of the 1980s, a large number of savings and loan institutions found themselves with an unusually high percentage of non-performing real estate loans. Conventional financial analysis was not sufficient. Without systematic and rigorous information about the risks and uncertainties inherent in the non-performing assets, no investors or buyers would consider purchasing the assets. Evocative of the subprime mortgage crisis of today, this period marked the beginning of a savings and loan crisis in the United States. Because these financial institutions did not want to be in the business of managing real-estate-owned (REO) properties, many took steps to establish a separate "liquidation bank" that would dispose of these non-performing assets. Financed by securities backed by the non-performing loans, the liquidation bank would buy the non-performing assets from the established bank.
Note: Although this engagement was completed nearly two decades ago, we include it with our more recent work as an example of the groundbreaking, industry-changing nature of SDG's work.
The First of Its Kind
In the first of these transactions, our client, a regional bank, held $1.4 billion in bad loans, concentrated in real estate and oil and gas.
The lead investment bank working on the transaction recognized that conventional financial information and analysis were not sufficient. Without reliable information about the risks and uncertainties inherent in the non-performing assets, no investors or buyers would consider purchasing the assets.
SDG, known for its systematic and rigorous assessment of risk and value, was asked to join to team. For hundreds of properties -- industrial, commercial, residential, multifamily, even agricultural -- SDG identified the key risks and uncertainties and the timing of cash flows for each asset category. We were able to portray the risks and uncertainties to potential investors and the banks. The results were crucial in designing the security structure for a liquidation bank.
This transaction, which came to be known as "good bank, bad bank" in the media, was the first of its kind and a blueprint for many subsequent transactions. The original bank, free of the burden of non-performing loans, was able to focus on more profitable opportunities. The investment grade, high yield, and subordinated notes in the securitization were all fully repaid, ahead of schedule.
