Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
not be calculated on the basis of expected recoveries. From the business perspective,
restructuring generally only makes sense in cases where the loss due
to the partial write-off is lower than in the case of liquidation. The other loss
components notwithstanding, a partial write-off does not make sense for cases
of complete collateralization, as the bank would receive the entire amount
receivable if the collateral were realized. Therefore, the expected book value
loss arising from liquidation is generally the upper limit for estimates of the partial
write-off.
As the book value loss in the case of liquidation is merely the difference
between EAD and recoveries, the actual challenge in estimating book value loss
is the calculation of recoveries. In this context, we must make a fundamental
distinction between realization in bankruptcy proceedings and the realization
of collateral. As a rule, the bank has a claim to a bankruptcy dividend unless
the bankruptcy petition is dismissed for lack of assets. In the case of a collateral
agreement, however, the bank has additional claims which can isolate the collateral
from the bankruptcy estate if the borrower provided the collateral from
its own assets. Therefore, collateral reduces the value of the bankruptcy estate,
and the reduced bankruptcy assets lower the recovery rate. In the sovereigns/
central governments, banks/institutions and large corporates segments, unsecured
loans are sometimes granted due to the borrowerÕs market standing or
the specific type of transaction. In the medium-sized to small corporate customer
segment, bank loans generally involve collateral agreements. In this customer
segment, the secured debt capital portion constitutes a considerable part
of the liquidation value, meaning that the recovery rate will tend to take on a
secondary status in further analysis.
A large number of factors determine the amount of the respective recoveries.
For this reason, it is necessary to break down recoveries into their essential
determining factors:
Chart 83: Factors Determining Recoveries
The point of departure in estimating recoveries is the identification of the
assessment base. This is the collateral value in the case of collateral realization
and the liquidation value of the enterprise in the case of bankruptcy proceedings.
In the first step, it is necessary to estimate these values at the time of
default, as at that time the bank or bankruptcy administrator receives the power
of disposal over the assets to be realized. In this context, it is necessary to mark
down the collateral value at the time of default, especially for tangible fixed
142 Guidelines on Credit Risk Management