Good news from AES for lending institutions, borrowers, and real estate investors. The gap between current market values and lender's mortgage book values has been bridged. Proving that 'less is often more,' a transaction structure developed by AES allows lenders to discount loans without suffering the penalties associated with the discounts. The structure also relieves borrowers from further encumbrance to the lender for the property's mortgage.
Most Japanese banks tell us they would be happy to discount mortgages to borrowers if it meant ready cash or credit for them, but there are problems. Even paper losses attributable to discounts reduce the bank's market capitalization and impair it's credit standing. The deficiency balance arising from discounting an obligation usually means the bank must chase it's valued customer into bankruptcy. Additionally, there are serious and complex issues including Japanese laws, credit issues, and client relationships that can combine as obstacles to a transaction. To be effective, profitable, and minimize risk, buyers must employ appropriate experts to deal with these issues and their implications.
The method used by AES serves the interests of the bank and the borrower. It employs complicated legal issues and Japanese accounting techniques to allow the lender to convert a poorly performing loan into an appreciating asset with a guaranteed cash value equal to the market value of the property securing the loan. The asset is booked to relieve the borrower's encumbrance without creating losses to the bank or a deficiency balance to the borrower.
