Académique Documents
Professionnel Documents
Culture Documents
Assets
Odum Capital
Greg O. Odum
202.352.1207
greg@odumcapital.com
Overview
Can you increase liquidity by 25%?
Odum Capital
www.odumcapital.com
Cost + Benefit Analysis
Yes!
Increase Liquidity by Reducing Non-Performing
Loans
How?
Restructure portfolio of loans + Keep on the books
Restructure portfolio of loans + Sell portfolio of loans
Why?
A cost effective method of managing troubled assets
To properly manage liquidity
Odum Capital
www.odumcapital.com
Biography
Experience
New Harbour Partners: Developed fairness opinions and structured
acquisitions worth over $20M for a middle-market private equity
firm.
Wells Fargo: Structured over $15M worth of real-estate-related
transactions, debt restructurings and asset-based lending for middle-
market businesses.
Education
MBA in Finance - Babson College
B.A. in Communications and Economics - Michigan State University
Odum Capital
www.odumcapital.com
Cost + Benefit Analysis
The costs associated with re-directing existing personnel
to restructurings make it worthwhile to use an
outsourcing option
For Example:
In June, there were 336,173 foreclosure filings in the US, the 4th
straight month exceeding 300,000a
Rather than completely re-engineering your operations, it's
convenient and economical to have a vendor do the outsourcing
Instead of re-engineering operations, outsource to a vendor =>
more economical and less time consuming
Odum Capital
www.odumcapital.com
Commercial Real Estate Overview
An est. $400 billion in commercial real estate loans will mature
through the end of 2009 with the pace of maturities increasing over
the succeeding years1
The default rate of bank loans for shopping centers, office buildings,
warehouses and hotels rose to 2.8% in the second quarter, up 0.63
percentage points from the prior quarter2
The default rate for apartment buildings rose 0.68 percentage points
in the second quarter to 3.13 percent2
Research firms expects the commercial real estate default rate to climb to 4%
by year end, 5.2% by end of next year and peak at 5.3% in the fourth quarter
of 2011
For apartment buildings, Real Estate Econometrics sees the default rate
reaching 4.5 percent in the fourth quarter of 2009 and peaking at 5.5 percent
at the end of next year. The default rates are not expected to be below 4
percent through 2013
Odum Capital
www.odumcapital.com
Number of Foreclosures
Odum Capital
www.odumcapital.com
Expected New Foreclosures
Odum Capital
www.odumcapital.com
Soaring Prime Mortgage Delinquencies
Odum Capital
www.odumcapital.com
$2.4T est. in ALT-A Ready to Re-Set
Odum Capital
www.odumcapital.com
HELOC + Home Equity Loans Soared During Bubble
Odum Capital
www.odumcapital.com
Commercial Real Estate Losses
Commercial Real Estate losses are estimated to be in the $1.7* trillion
Odum Capital
www.odumcapital.com
Restructuring + Divestiture Steps
Step 1: Asset Valuation
Odum Capital
www.odumcapital.com
Restructuring + Divestiture Steps contd.
Step 1: Asset Valuation
Evaluate portfolio of properties/loans
Analyze underlying collateral, and how the collateral can
be positioned for short, medium or long-term value
enhancement, critical to any optimization strategy
Odum Capital
www.odumcapital.com
Restructuring + Divestiture Steps contd.
Step 1: Asset Valuation Example
Odum Capital
www.odumcapital.com
Restructuring + Divestiture Steps
Step 2: Due Diligence
Tenant + Mortgagor survey
Evaluate sustainability of tenants + mortgagors
Odum Capital
www.odumcapital.com
Restructuring + Divestiture Steps
Step 3: Financial Modeling + Analysis
Itemized cash flow + sustainability modeling
State-of-the-art modeling incorporating variables necessary to
arrive at a specific strategy
Odum Capital
www.odumcapital.com
Restructuring + Divestiture Steps
Step 4: Creation of Asset Pools
Units 35 34 18
Odum Capital
www.odumcapital.com
Restructuring + Divestiture Steps
Step 5: Divestiture of Assets
Units 35 35 18
Odum Capital
www.odumcapital.com
Overview
Can you reduce restructuring and loan loss costs by
20%?
Odum Capital
www.odumcapital.com
Overview
Can you increase Quality of Earnings?
Yes!
Savings - $7M ~
Odum Capital
www.odumcapital.com
Overview
Can you facilitate the divestiture of pools of
assets fast enough?
Yes
• Private Equity
• Hedge Funds
• Investment Banks
• Domestic + Foreign Real Estate Funds
• REITS
• Other Institutional Investors
• Regional Banks
Odum Capital
www.odumcapital.com
Tax Implications
Odum Capital
www.odumcapital.com
Questions?
Contact
Odum Capital
Greg O. Odum
202.352.1207
greg@odumcapital.com
Odum Capital
www.odumcapital.com
Appendix
Odum Capital
www.odumcapital.com
Solutions
A trouble debt restructuring can be one of the
following:
Odum Capital w
ww.odumcapital.com
Solution 1: Settle Debt Option
The Debtor’s Gain = the Carry Amount of the Debt -the Value of the
Asset(s) transferred to settle the debt. Any gain is reported as an
“extraordinary item”.
Example:
A bank holding a $50 million note agrees to accept a land valued at $40
million from R.J. Company, which is in severe financial difficulty, as
a settlement of the $50 million debt.
Assume that the carrying amount of the land is $32 million. The
following journal entries are recorded for this troubled debt
restructuring:
Odum Capital
www.odumcapital.com
Solution 2: Modified Debt Terms Option
In this case of debt restructuring, the bank allows the
debt to continue but modifies the terms of debt
agreement (i.e., reduce or delay interest payments;
reduce or delay maturing amount, or a combination
of these concessions
Example 2:
Assume a 10% interest on the $50M note in question and interests
(i.e. $50M x 10% = $5M) are payable in December of the two
remaining years. In addition, R.J. failed to pay $5 million of
interest for the year just ended. Therefore, the carrying amount of
the debt is $55M.
Odum Capital
www.odumcapital.com
Solution 2: Modified Debt Terms Option
Case I :
Total future cash payments < The carrying amount of the
debt
Accounting Treatment
Recognize Extraordinary Gain = Carrying amount of the
Debt -Total Future Cash Payments;
Reduce the carrying amount of the debt to the total future cash
payments.
Assume that all interests have been eliminated
All subsequent cash payments are payments for the debt itself.
Odum Capital
www.odumcapital.com
Solution 2: Modified Debt Terms Option
Case I contd.
Extraordinary Gain:
Carrying Amount= $55M
Future Cash Payments*= $46M
Extraordinary Gain= $9M
Odum Capital
www.odumcapital.com
Solution 2: Modified Debt Terms Option
Case II
Total cash payments exceed the carrying amount of the
debt
Continued with example 2, assume that the bank agrees to:
Delay the due date for all cash payments until maturity date and
accept $57,222,000 at maturity date.
Since $57,222,000 exceeds the carrying amount of the debt ($55M),
the new agreement still require an interest payment.
A new effective interest rate needs to be calculated: $55,000,000 /
$57,221,927=0.96117
The new effective interest rate is 2% (via present value).
At the debt restructuring date, no entry is required.
Odum Capital
www.odumcapital.com
Tax Implications
At the end of the first year following the restructuring:
Interest Expense (2%x$55M) = $1,100,000
Interest Payable = $1,100,000
At maturity date:
Note Payable= $50M
Interest Payable = $7,222,000
Cash = $57,222,000
Odum Capital
www.odumcapital.com
SFAS 157
Investment securities: The fair values for investment
securities are determined by quoted prices for similar
assets or liabilities (Level 2)
Residential loans held for sale: The fair value of loans held
for sale is determined using quoted prices for a similar
asset, adjusted for specific attributes of that loan (Level
2).
Odum Capital
www.odumcapital.com
Sources + Citations
Sources:The Real Estate Round Table, December 2008 1 ; Real Estate Econometrics, August
2009 2 (The research firm breakout multifamily homes separately because of their residential
use.The report was based on 8,195 institutions)
Sources: Federal Reserve Flow of Funds Accounts of the United States, IMF Global Financial
Stability Report October 2008, Goldman Sachs Global Economics
Paper No. 177, FDIC Quarterly Banking Profile, OFHEO, S&P Leverage Commentary & Data,
T2 Partners estimates
1 See section 860G(a)(3)(A)(i) of the Internal Revenue Code of 1986, as amended, and Treas.
Reg. sec. 301.7701-4(c). Hereinafter, all statutory and regulatory references are references to
the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations there
under.2 Id. See also section 860F(a)(1) (prohibited transactions tax)2. Treas. Reg. sec. 1.860G-
2(b)(3)(i).4 Treas. Reg. sec. 1.1001-3 (the debt modification regulations).
Sources: 5 Treas. Reg. sec. 1.860G-2(b).6 See Treas. Reg. sec. 1.1001-3(e).7 Prop. Treas. Reg. sec.
1.860G-2.8 Rev. Proc. 2007-72, 2007-52 IRB 1257; Rev. Proc. 2008-28, 2008-23 IRB 1; Rev.
Proc. 2008-47, 2008-31 IRB 272.9 Rev. Proc. 2007-72, Rev. Proc. 2008-47.10 Rev. Proc. 2008-
28.
Odum Capital
www.odumcapital.com