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Recent Developments in the FINSAC
Programme, and the Way Forward

Speaker: Patrick Hylton, Managing Director
Hotel Four Seasons, 24/2/99

Within a relatively short time after incorporation the management of FINSAC Limited developed a three phased strategic plan for resolution of the difficulties being experienced by the Financial Sector.

This three phased course of action in corporate the strategies of Intervention, Rehabilitation and divestment.

As always I hasten to point out the phases are not necessarily mutually exclusive but may overlap somewhat given timing issues and the nature of the resolution program.

Given the overall context however I believe it is fair to say that FINSAC is well immersed in the rehabilitation phase of its activities.

Recent initiatives which underscore this point is the creation of the Union Bank Holding Company to oversee the merger and rehabilitation of four banks and the recent program announced for the sale of the portfolios of three insurance companies.

I should point out that significant progress has been made operationally in the establishment of Union Bank and the team in place is working assiduously to ensure adherence with the established timetable for completion of the merger.

A very detailed (almost granular) systems development, merger and rehabilitation program has been agreed and good progress is being made along a continuum towards timely implementation.

In respect of the insurance portfolio divestment I recently announced that eight expressions of interest were received by way of mou’s. We have subsequently responded to those companies requesting of them information which will enable us to do a proper due diligence on them and assess their plans while indicating to them further details of the bidding process.

There has been much public debate about the change in direction from Independent Life as a going concern with the suggestion being that not sufficient analysis had been undertaken.

Let me hasten to point out that the original proposal to establish Independent Life was always a viable one and had been subjected to very vigourous analysis.

I have within my office folders containing the analysis including the financial and operating indices which would have to be improved and the extent to which they could reasonably be improved, the conservative assumptions underlying those analysis and the projected outcome.

All of these analysis indicate that the combination of the traditional and equity linked portfolio’s under Independent Life with appropriate management would generate sufficient surpluses from the business to make Independent Life extremely viable.

The decision to change course came against the background of the fact that after having gone into the companies in some detail (Mutual in particular) i.e. since December 17, 1998 we found no additional surprises in respect of the insurance business (over what we anticipated). Coupled with this was the fact that we were receiving indications from some players in the market that there could be considerable interest in the portfolio’s if the fundamental insurance portfolio’s were in reasonably good order.

It was on this basis that we decided that there could be advantages to us from pursuing an alternate course of portfolio divestment.

These advantages would include:

  • Removal of Operational Risk – government does not need to assume this when there are sufficient indications of interest in the market.
  • Removal of the need to establish a bureaucracy to manage and oversee operations of Independent Life.
  • Mitigation of Perception risk – i.e. need to remove unjustified perception of FINSAC holding on the institutions longer than is necessary. In any case it was always our intention to sell Independent Life so that this move only shortens the process.
  • This will facilitate early introduction of private sector capital, management practices and incentives.
  • This move will facilitate further non-core Asset Divestment as the portfolios being sold will have to be underwritten with assets some of which could come from FINSAC’s Asset holdings.

There is yet however another important initiative undertaken by FINSAC during the year, which I would like to address tonight. This involves the structuring and establishment of a loan workout unit for value maximization of the loans we have purchased.  The unit was established in late October of last year and has been working assiduously on loan collection and restructuring. Prior to that arrangements were made with the intervened banks to collect the loans on our behalf under our supervision. We believe the approach of establishing our own loan collections unit is the most effective way of maximizing value from the loans we have purchased. The rationale for the creation of the FINSAC NPL unit are as follows:

The first is that it enables:

  • Creation of the good bank/bad bank scenario, where the banks which had to manage significant non-performing loans will be relieved of that responsibility and be able to focus on their own rehabilitation efforts.
  • The Centralization of the loan portfolio will help identify common debtors and ensure that there is a single platform for negotiations with these debtors.
  • We may be able by bringing all their loans together to facilitate rehabilitation of distressed sectors through proper remedial management of segments of the portfolio. In this way enterprise restructuring which is a critical component of financial sector rehabilitation is supported. These restructured real sector loans may once again become viable clients of the banking sector.
  • It facilitates greater co-ordination of security, which is shared by several institutions; in order to determine the value of the security and whether the value can cover combined loans.
  • This is a proven methodology that has been used extensively in a number of other countries that have experienced similar problems.

You will appreciate that the funds collected through this process will play an important role in off-setting some of the costs of the FINSAC program.

THE WAY FORWARD

Our program of merger, rationalization and rehabilitation will continue in those entities where such a program has been established. As we approach the end of another financial year (March 1999) we look forward to the New Year financial year beginning April, 1999. We would like to signal this year (1999/2000) as the beginning in earnest of the divestment phase.

One important initiative in this regard is the sale of the Insurance portfolios. Other important initiatives are being carefully developed particularly as these relate to the sale of non-core assets such as hotels and other significant real estate holdings. These initiatives will be announced at an appropriate time.

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