Communication from the Commission on guidelines for a best-execution process for sales of non-performing loans on secondary markets

(2022/C 405/01)

Table of contents

GLOSSARY AND DEFINITIONS 3

EXECUTIVE SUMMARY 7

INTRODUCTION 11

1. Transaction structuring: Portfolio selection 12

1.1. Key activities 12

1.2. Assess legal/tax/consumer protection restrictions 13

1.3. Objectives of the portfolio selection process 14

1.4. Technical aspects of the portfolio selection process 16

1.5. Reflecting upon the necessary use of internal resources and potential additional need for external support 17

1.6. Organisational issues 17

2. Preparation phase 18

2.1. Key activities 18

2.2. Number of phases of the process and timeline 18

2.3. Preparation of main documents 19

2.4. Loan data tape preparation and documentation retrieving 19

2.5. Decision on VDR set-up 20

2.6. Preparation of the Loan Sale and Purchase Agreement 21

3. Pre-marketing phase 22

3.1. Key activities 22

3.2. Market sounding 22

3.3. Definition of the best marketing strategy 23

3.4. Preparation of the process and marketing materials for the Non-Binding and Binding Phase 25

4. Non-binding Offer Phase (Phase 1) 27

4.1. Key activities 27

4.2. Launch of the bidding process and distribution of the Information pack 28

4.3. Bidders undertaking initial Due Diligence 29

4.4. Submission of Non-Binding Offers by bidders and selection of shortlisted bidders to be advanced to second round 29

5. Binding Offer Phase (Phase 2) 29

5.1. Key activities 29

5.2. Seller Deliverables 30

5.3. Best practices 30

6. Signing of the transaction and closing 34

6.1. Key activities 34

6.2. Key risk considerations 35

6.3. LSPA Considerations 36

6.4. Other considerations 36

6.5. Price allocation 36

7. Post-closing 37

7.1. Key activities 37

7.2. Migration process 37

7.3. Seller’s responsibilities 38

7.4. After-sale activities 38

ANNEXES

GLOSSARY AND DEFINITIONS

1-Phase-Process An NPL sales process that only foresees a Binding Offer Phase (Phase 2). 2-Phase-Process An NPL sales process that foresees both a Non-Binding Offer Phase (Phase 1) and a Binding-Offer Phase (Phase 2). AML Money laundering is a type of financial crime. It involves taking criminally obtained proceeds (‘dirty money’) and disguising their origins so they will appear to be from a legitimate source. Anti-money laundering (AML) refers to the activities financial institutions perform to achieve compliance with legal requirements to actively monitor for and report suspicious activities. Analysis Report Once the Seller receives the NBOs from Phase 1 Investors, the Seller will compare and analyse them, which results in an Analysis Report of the NBOs. This supports the Seller in shortlisting the relevant bidders, which may then move on to Phase 2. Once the Seller receives the BOs from Phase 2 Investors, the Seller will again compare and analyse them, resulting in an Analysis Report of the BOs. Auction Types The Seller can choose an Auction Type for the intended NPL sale. A list of commonly used Auction Types is attached as Annex 4 to these Guidelines. AUP Report The agreed-upon procedures (AUP) Report is part of the vendor Due Diligence that should be provided to investors. AUP engagements involve a practitioner performing specified procedures that have been agreed to by the practitioner, the Seller and any appropriate third parties. On the basis of the factual findings of such Due Diligence efforts, an AUP Report is prepared by the practitioner and shared with those parties that have agreed to the procedures. BO The Binding Offer to be submitted by the Phase 2 Investors. BO Date The deadline set by the Seller for receipt of a BO from the Phase 2 Investors. BO Guidelines Written guidelines provided by the Seller to Phase 2 Investors detailing the form and content of the BO. Broad Auction A Broad Auction is a typical 2-Phase-Process, whereby a large list of investors is invited to submit an indicative NBO. Following this first auction stage, a Due Diligence process is run with a restricted shortlist of investors, which is invited to submit a final BO. Following this second auction stage, a single Preferred Bidder is selected, with whom the Seller enters into the negotiation of the LSPA and potentially additional transaction agreements. The Guidelines represent a Broad Auction process. Closing The date on which the NPL transaction is legally closed and customarily the date on which the purchase price is paid and ownership of the NPLs is transferred to the Purchaser. Cut-Off Date Seller customarily determines and communicates to the Phase 2 Investors a Cut-Off-Date from which onwards the proceeds in respect of the NPLs are due to the Purchaser. Defective NPLs NPLs which either do not fulfil all Eligibility Criteria or fulfil at least one Exclusion Criterion. Disclosure Qualifier Seller can qualify certain Representations and Warranties (R&Ws) to disclosure, an example could be: ‘Seller warrants that all securities are 1st rank mortgages unless as duly disclosed by Seller (in a form that can be evidenced by Seller) to Purchaser until [date of last disclosure].’ Due Diligence and Due Diligence Documentation In the course of a Due Diligence, the Seller customarily provides in a legally compliant manner physical or virtual access to relevant Due Diligence Documentation based on which legal and operational experts of the Phase 2 Investors can review and verify document quality and availability, validate assumptions made in pricing and assess R&W requirements for the LSPA. Exclusion Criteria or Eligibility Criteria Eligibility Criteria are criteria agreed in the LSPA all of which have to be fulfilled by each sold NPL. Exclusion Criteria are criteria agreed in the LSPA which none of the sold NPLs (should) fulfil. External Service Providers External Service Providers are service providers offering general support to a Seller for an NPL sales process, including Financial Advisors, Technical Advisors, Transaction Platforms and VDR providers. More information on specific categories of external service providers can be found in Annex 3. Information Memorandum The Information Memorandum provides a short presentation of the main features of the NPLs to be sold. Investor LSPA Mark-Up Mark-up of the draft Loan Sale and Purchase Agreement (LSPA) provided by a Phase 2 Investor in Phase 2, customarily delivered on the BO Date. KYC The know your customer or know your client (KYC) standards are used within the financial services industry, stipulating requirements to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of anti-money laundering (AML) policy. Loan Data Tape The Loan Data Tape denotes an electronic file or set of files that captures lending product data from a financial firm’s systems. It can be considered as a one-time snapshot of a subset of a Seller’s credit portfolio information. It includes the information provided by the Seller during Phase 2 to the Phase 2 Investors. LSPA The Loan Sale and Purchase Agreement, sometimes also referred to as Sale and Purchase Agreement or Debt Sale Agreement. In the Guidelines, the abbreviation LSPA will be used. LSPA Term Sheet A term sheet of no more than 2-4 pages, which includes major terms of the LSPA (e.g. envisaged transaction structure, Seller R&Ws, liability regime), on which the Seller wants to obtain investors’ feedback early on during the process, e.g. in Phase 1. Management Meeting Meeting(s) offered by the Seller to Phase 2 Investors in which Phase 2 Investors will receive background information on the NPLs to be sold and explanations of workout or pre-processing activities and where Phase 2 Investors can pose questions to employees of the Seller who have profound knowledge of the NPLs to be sold as well as prior workout actions. Negotiated Sale The Negotiated Sale is a bilateral process involving a single potential investor. Due to the lack of competition, the main steps (with relevant documentation shared) and the outcome of the marketing process vary significantly from the Broad Auction. NBO The Non-Binding Offer, i.e. an indicative offer submitted by a Phase 1 Investor, i.e. an offer that is not legally binding on the bidder. NBO Date The deadline set by the Seller for receipt of a NBO from the Phase 1 Investors. Non-Disclosure Agreements (NDAs) A Non-Disclosure Agreement is a confidentiality agreement signed by Seller and interested investors. In the NDA, the conditions are set out under which the Seller is willing to share confidential information. Investors need to sign the agreement before gaining access to the relevant data and initiating Due Diligence. Non-performing loans (NPLs) A bank loan is considered non-performing when there are indications that the borrower is unlikely to repay the loan (hence, the sub-category of ‘unlikely to pay’ (UTP)), or more than 90 days pass without the borrower paying the agreed instalments or interest. Phase 1 = Non-Binding Offer Phase The phase at the end of which the Seller expects to receive NBOs from all Phase 1 Investors. Phase 1 Investor An investor that was admitted by the Seller to participate in Phase 1 of an NPL sales process. Phase 2 = Binding Offer Phase The phase at the end of which the Seller expects to receive BOs from all Phase 2 Investors. Phase 2 Investor An investor that was admitted by the Seller to Phase 2 of an NPL sales process. Phase 2 Data and Documents Data and documents prepared during the preparation phase by the Seller to be provided to Phase 2 Investors at the beginning of Phase 2. Apart from loan-by-loan data in respect of all NPLs, Phase 2 Data and Documents customarily contain Due Diligence Documentation to be reviewed by Phase 2 Investors. Phase 2 Data and Documents should also contain any costs or fees that the Seller envisages the Purchaser to assume. Preferred Bidder The investor which submitted in the opinion of the Seller the best BO. Ideally and in most cases, the Preferred Bidder equals the Purchaser. Process Letter A Process Letter is a document that shows the steps of the sale process and the deadlines to be respected by all actors involved. Purchaser The investor with whom the Seller concludes an LSPA. Q&A Process A process usually conducted in Phase 2 whereby Phase 2 Investors may pose questions to be answered by the Seller. R&W(s) Representations and Warranties given in an LSPA whereas the Seller R&Ws can include representations and warranties in respect of the NPLs, the underlying securities, pre-processing etc. Servicing Transition Date The date on which the Purchaser or a servicer acting on behalf of the Purchaser takes over the servicing of the acquired NPLs. The Servicing Transition Date customarily equals Closing, but can also be subsequent to Closing if so agreed between the Seller and Purchaser. Signing The signing of the final LSPA negotiated between Seller and Purchaser and signed by Seller and Purchaser. Depending on the complexity of the transaction, Signing can either precede or equal Closing. Targeted Auction A Targeted Auction is a competitive process similar to the Broad Auction, but involves a shorter list of potential investors (approximately 2 to 8). This option typically allows the Seller to have better control over the process whilst benefitting from a still competitive environment. It is usually a 2-Phase Process, although under specific circumstances and especially in high time-pressure situations, the first phase may be omitted. Teaser A Teaser is an anonymous marketing document that contains the key transaction background and summary data on the NPLs to be disposed. It summarises the main elements of the investment opportunity. Transaction platforms Transaction platforms are online marketplaces that connect buyers and sellers of NPLs and help organise the sales process. They facilitate NPL transactions by providing access to investors and technological support (including a VDR). Transaction platforms offer to conduct online NPL auctions whereas the seller can choose the desired Auction Type. Vendor Due Diligence A review performed by the seller, the outcome of which is shared with investors. A Vendor Due Diligence can e.g. comprise: real estate revaluation, Loan Data Tape consistency checks, legal documentation review VDR Virtual Data Room, which can be used by the Seller to provide information, data and documents to all investors in Phase 2 (and Phase 1 unless Seller sets up the VDR only for Phase 2). VDR Provider A (tech) company offering the set-up and organisation of a VDR for an NPL sale.

EXECUTIVE SUMMARY

As announced in its Action Plan of 16 December 2020, the Commission, in close cooperation with members and observers of the Commission’s NPL Advisory Panel, has developed Guidelines on a best-execution process for sales of NPLs on secondary markets. The objective of these Guidelines is to encourage good sell- and buy-side processes for NPL transactions in EU secondary markets and, in particular, to help sellers and buyers that may have less experience with secondary market transactions.

The document is based on best practices and describes the sequence of main activities to be performed within the preparation of the competitive transaction process. The Guidelines outline some practices and conditions considered necessary to achieve a successful outcome. While market participants are not obliged to follow the Guidelines, they provide NPL sellers and buyers with a clear and structured process that should enable them to achieve a successful outcome.

The main structure of the document follows a chronological reasoning. Each main chapter focuses on one of the specific stages that should be followed throughout a sales procedure. By default, a standard market transaction is defined in this document as a Broad Auction process that comprises multiple phases with two main stages: a Non-Binding Offer Phase (Phase 1) and a Binding Offer Phase (Phase 2).

The table below provides a stylised summary of the document, spanning across all phases of the transaction process. It highlights the key activities and key deliverables for each phase. More information on each of these elements can be found in the relevant chapters in the main body of the Guidelines.

Phase Key activities Key deliverables — Assess possible legal/tax/consumer protection restrictions — Review existing IT system to enable optimising the selection process — Definition of the transaction perimeter / selection of the portfolio to sell — Decide upon the use of External Service Providers and / or other external advisors — Determine most efficient and effective organisational set-up to run the process (if relevant supported by External Service Providers) — Other considerations around servicing, portfolio modelling and setting of the ‘reserve price’ — Possible amendments to IT system — Selection of portfolio for sale — Establish organisational structure to manage transaction process — Contracts with External Service Providers (if relevant/required) — Define the number of phases of the process (namely, 2-Phase-Process with NBOs and BOs, or 1-Phase-Process, directly with BOs) — Set the timeline – including internal steps and approach to the market (taking into account involvement of legal and consulting advisors) — Prepare the main marketing documents (mainly Teaser and Information Memorandum). A Management Presentation may be required during Due Diligence in the BO Phase. Preparation of the main process documents (mainly investor NDA, Process Letter (if required separately for Phase 1 and Phase 2), BO Guidelines and, if relevant, NBO Guidelines) — Prepare Loan Data Tape and retrieve documentation — Set up VDR (1) (including a detailed VDR index), unless cost-benefit analysis would dissuade use of VDR, especially for small portfolios — Preparation of LSPA — Investor VDR (Phase 1 VDR ready for opening, Phase 2 VDR in preparation) — Teaser — Information Memorandum — Early draft of Management Presentation — Early draft of Process Letter — Early draft of LSPA — Loan Data Tape — Draft NDA — VDR rules (for Phases 1 and 2) — Market sounding — Definition of the best marketing strategy — Negotiation of NDAs — Preparation of LSPA Term Sheet — Continue preparation of the process and marketing materials (e.g. investor presentation) for the Phase 1 and Phase 2 — Process Letter — Due Diligence material inventory — LSPA Term Sheet — Signed NDAs — Investors long list — Optional: Expressions of Interest — Management of the Phase 1 investor VDR (incl. opening, user and access management, VDR reporting, etc.) — (Continued) preparation of the Phase 2 Data and Documents as well as investor VDR, if applicable — Disclosure of the process and marketing materials for Phase 1 — Disclosure of (meaningful) data tapes to investors (via the VDR) — Management of a (limited) Q&A Process if applicable due to the complexity of the perimeter and/or the number of bidders — Analysis of NBOs that have been submitted and comments on LSPA Term Sheets, if applicable — Selection of a short list of bidders to admit to the Binding Offer Phase — Selection of an Auction Type and preparation of auction — Finalisation of the NPL portfolio, potentially excluding certain ineligible NPLs from the portfolio (i) if they do not match the original selection criteria (anymore) or (ii) based on the reasonable request of investors. — Investor VDR (Phase 2 VDR ready for opening) or other means of sharing data with investors — Loan Data Tapes (full set) — Optional: Vendor Due Diligence materials prepared (AUP Report, legal Due Diligence, etc.) — VDR reporting (e.g. on bidder activity and areas of interest) — Answers to questions based on Q&A, if applicable — Analysis Report of NBOs and shortlist of bidders — Optional (if not included in the Process Letter): Draft Q&A Process guidelines (for Phase 2) — Provision of Phase 2 Data and Documents to Phase 2 Investors — Management of Q&A Process — Optional: Organisation of Management Meeting(s) and summarising / providing outcome to all Phase 2 Investors — Organisation of the auction — Analysis of submitted BO Letters and Investor LSPA Mark-Ups — Selection of Preferred Bidder / Purchaser — Optional: KYC Process — Finalisation of the NPL portfolio, potentially excluding certain ineligible NPLs from the portfolio (i) if they do not match the original selection criteria (anymore) or (ii) based on the reasonable request of investors — Provision of Process Information to Phase 2 Investors — Provision of draft LSPA to Phase 2 Investors — Provision of BO Guidelines to Phase 2 Investors — Final Management Presentation — New or updated information (including any costs in connection with the NPLs or the transaction that Seller wishes Purchaser to assume) to be provided to investors via the VDR and the Q&A Process — Optional: Vendor Due Diligence reports to be provided to Phase 2 Investors — Optional and if applicable: VDR reporting (e.g. on bidder activity and areas of interest) — BO Analysis Report and selection of Preferred Bidder — Manage a smooth exit from the portfolio once the NPL sale is completed, inter alia by defining after-sale activities of Seller and Purchaser — Execute LSPA and, if applicable, further transaction documentation — Financial closing — Finalise preparation of transfer of data and documents — Negotiate and agree on the transition of the NPL servicing from the currently acting servicer to the Purchaser or its servicer — Accounting of the transaction — Upon Closing: Migration process: transfer of NPLs and relevant information and documentation to the Purchaser to ensure a smooth on-boarding. — VDR archives — Final LSPA — Conduct and implement post-Closing obligations according to the LSPA. — Cooperation between seller and Purchaser as foreseen in the LSPA and, if applicable, on an ad-hoc basis if problems occur or non-foreseen actions become necessary.

INTRODUCTION

The COVID-19 pandemic has led to a sharp economic downturn in the EU and worldwide. Despite vast support schemes implemented by governments, banks are exposed to companies and individuals that have become financially more vulnerable, in particular small and medium-sized enterprises (SMEs). Addressing a renewed build-up of NPLs on banks’ balance sheets as early as possible is a key lesson from the last economic crisis. In this context, further structural measures are needed to prevent the accumulation of NPLs on banks’ balance sheets as a result of the ongoing pandemic and related effects.

In order to provide banks with a further tool to face challenges to credit risk due to the COVID-19 pandemic, the Commission has outlined targeted action to improve secondary markets for NPLs in its December 2020 Action Plan on ‘Tackling NPLs in the aftermath of the COVID-19 pandemic’. The further development of secondary markets for distressed debt is one of the key policy areas in this regard. A deep and liquid secondary market for distressed assets across the EU would better allow banks to reduce their NPLs by selling them to third-party investors. If banks are better able to off-load non-performing assets from their balance sheet via secondary markets, this would help banks focus on their lending activities, free up space in their balance sheets for new lending and hence enable them to fund the economic recovery (2). Easier market entry and participation should be encouraged, especially for smaller sellers and purchasers who may be crucial for local-level NPL resolution.

As the economic repercussions of the COVID-19 pandemic have set in, NPL trading activity initially declined markedly, but has recently picked up pace again. When national support measures are phased out, it is likely that insolvencies may rise and the balance sheets of banks may be impacted by this stress. Banks need to be ready to identify debtor distress early, engage proactively with their borrowers in a timely manner and consider appropriate restructuring when needed (3). In the event that a sale of (portfolios of) NPLs to third-party investors is considered a suitable approach, banks should be ready to conduct an efficient and effective transaction process, leading to the best possible outcome. This would result in a better price for the NPLs, sold to a reputable purchaser that ensures compliance with laws including consumer protections.

To this end, the Commission announced in its Action Plan that it would develop guidance for sellers of NPLs, in cooperation with the European Banking Authority (EBA) and relevant stakeholders. The Commission therefore publishes the Guidelines on a best-execution process for sales of NPLs on secondary markets. The objective of these Guidelines is to encourage good sell- and buy-side processes for NPL transactions in EU secondary markets and, in particular, to help sellers and buyers that may have less experience with secondary market transactions. The Guidelines could lead to a number of benefits for EU secondary markets, by enabling more standardisation of processes, increasing efficiency and transparency of the timeline of transactions, and improving market practices in Member States, in particular where secondary markets are less developed.

This document summarises the best practices following the sequence of main activities to be performed within the preparation of the competitive transaction process. Throughout all of the different phases, the Guidelines provide clear suggestions on what would constitute an efficient and effective approach. The document illustrates in detail the main process and materials that are provided to external investors in standard market transactions. Considering the significant importance of sharing relevant data and information, the Guidelines include suggestions specifically on the scope of disclosure in the respective phases.

The Guidelines outline some practices and conditions considered necessary to achieve a successful outcome. Banks (as sellers of NPLs) are the main target audience and in particular smaller institutions that have less experience with offloading NPLs on secondary markets. However, the Guidelines also reflect the perspective of bigger banks, as this document could become a market practice standard for all sellers of NPLs. Beyond the banking sector, the Guidelines could also provide a reference document for other institutions that engage in sales of NPLs.

Market participants are not obliged to follow the Guidelines. These are rather meant to support NPL sellers and buyers in following a clear and structured process description that would enable arriving at a successful outcome. In particular, the Guidelines include indications on specific steps that the seller and buyer could take to improve the efficiency and effectiveness of the process. The Guidelines also point to certain steps that are more important for a specific type (and in certain cases a specific size) of transaction and/or asset class.

As regards the types of transactions, the Guidelines cover outright sales of (large) NPL portfolios and make reference to (large) single-name transactions (4). Both unsecured and secured loans are considered, including the following NPL categories:

— Residential real estate (RRE) secured: requires many checks and proper documentation is essential.

— Commercial real estate (CRE) secured: very heterogeneous in nature, with characteristics differing according to location, size, industry, use, etc.

— Small and Medium Enterprise (SME) exposures: need strong focus on collateral valuation, cash flow analysis and the use of statistical methods and sampling.

— Consumer unsecured: portfolios are typically made up of small exposures.

— Corporate unsecured: implies heavier Due Diligence.

— Leasing: has particular characteristics and specialisation (5).

The above implies that NPLs are a ‘special’ product. NPL sales are often highly portfolio-specific. Standardising the process entirely would therefore not be possible and is not the objective of the Guidelines.

The main structure of the document follows a chronological reasoning. Each main chapter focuses on one of the specific steps that should be followed throughout a sales procedure. The two main alternative standard strategies for setting up a competitive process are a Targeted Auction and a Negotiated Sale. The Guidelines elaborate on these two alternative strategies as relevant and their possible implications if chosen. The Guidelines represent a Broad Auction process, which is a typical 2-Phase-Process.

This document was developed by the Commission, in close cooperation with members and observers of the Commission’s NPL Advisory Panel. The latter’s membership can be found in Annex 1.

1. Transaction structuring: Portfolio selection

1.1. Key activities

The portfolio selection lays the foundation for a successful transaction. It is essential to select a marketable portfolio that complies with internal strategic targets and attracts investor demand. An early involvement of senior management during the portfolio selection process increases execution certainty, which is important for Seller as well as Purchaser. A marketable and well-selected portfolio reduces the execution risk, thus avoiding inefficient use of resources from all involved parties.

The key activities in this first phase are as follows:

— Assessment of legal/tax/consumer protection restrictions.

— Review existing IT system to enable optimising the selection process.

— Definition of the transaction perimeter / selection of the portfolio to sell.

— Decision upon (i) the use of internal resources vs External Service Providers, provided that a certain level of internal resources will always be needed (6); and (ii) Definition of the most efficient and effective organisational set-up to run the process.

— Fine-tuning of other considerations around servicing, portfolio modelling and setting of the ‘reserve price’.

In order to optimise the selection process and to avoid high costs for data validation, data reconciliation and time-consuming manual changes, the existing IT system should be reviewed and adjusted, if necessary. The more complex a transaction is, the more likely that the design of a Seller’s internal organisational set-up as a project is advised, insofar that it allows a better alignment of all internal stakeholders in a transaction and closer monitoring of the transaction progress.

Portfolio selection plays an important role in any transaction as the right choice of a portfolio is key to a successful execution. The portfolio selection process needs to reflect the requirements and strategic targets of the Seller and simultaneously to attract investor demands, which might not necessarily be aligned to the Seller. The Seller’s goals may be driven by changes in strategy, regulatory pressure, and/or changes in risk appetite. While the Seller might have the expectations to sell more complex exposures at a high price, these goals may need to be adjusted because investors have a different yield expectation and cost calculation for work-out strategies for the NPLs offered. Decision to sell or to keep/retain to benefit from further upside is mainly driven by internal views within the Seller organisation (recovery value net of enforcement costs combined with P&L effect for different customer business segments) vs perceived market view (applicable for portfolio or single ticket).

The portfolio selection process may also need to exclude assets, which might be difficult to enforce against a borrower and/or to assign to a third party or which are specifically marked within the portfolio. A good example are exposures with third-party rights, or those that are otherwise encumbered, like guarantees. In such cases, it is often hard or unlikely to obtain the needed consent to transfer the asset from the beneficiary. This could lead to situations where, for example, some exposure of the borrower, like term loans, might be transferred to the Purchaser while the most labour-intensive exposures will remain with the bank. This also shows how important it is that the transaction team (if separate from the work-out team) maintains an open dialogue with the respective work-out officers.

It is worth noting that the portfolio may still undergo changes later in the process, i.a. reasonable ineligible claims will be excluded upon detection. During Phase 1 and Phase 2, the Seller continues to check the NPLs, verifying whether certain loans should be excluded from the final portfolio, in line with the Eligibility Criteria and Exclusion Criteria. The Preferred Bidder (which eventually/ideally is also the Purchaser in most cases) might equally ask to exclude some NPLs. On this basis, the portfolio is finalised. Chronologically, this approach entails the following steps:

— Application of the main selection criteria (type, counterparty, status, size, geography, etc.);

— Exclusion of non-transferrable loans; (7) and

— Exclusion of loans according to the negotiation between the Seller and the Purchaser.

1.2. Assess legal/tax/consumer protection restrictions

Before composing and selling an NPL portfolio, there are several legal checks to be clarified varying in different countries:

— Is it allowed to sell the loans to a third party (e.g. banking secrecy, special loan conditions etc.) and what are the requirements to the third party (as prescribed by the local law implementing the Directive on credit servicers and credit purchasers (8))?

— Is it allowed to share data with third parties and what data can be shared and which ones not or only with a Data Processing Agreement (9)?

— Is it necessary to request authorisation from any regulatory bodies, taking into account the specifics of the envisioned transaction (as well as the stipulations of the local law implementing the Directive on credit servicers and credit purchasers)?

— Are there any liabilities on the portfolio from a contract with a current loan servicer/lawyer (e.g. legal fees, penalties etc.) when selling it to a third party?

— Are the loans subject to restrictions or do they include publicly traded companies with special restrictions (e.g. inside information, employees of the Seller, assignment restrictions stipulated by law)?

— Is the consent of a public/state-owned development bank (e.g. Finnreva, KfW) necessary when selling to a third party?

— What are the tax implications according to the Seller’s jurisdiction?

If the contracts underlying the NPLs have been terminated (‘denounced loans’), usually the whole exposure is on demand and fully due upfront, making direct sale possible. However, for the NPL sub-category of ‘unlikely to pay’ (UTP) exposures, the situation is more complicated because the underlying contracts are still valid, and both the receivables and contracts should be considered in order to perform the disposal (10).

In terms of ensuring appropriate consumer protection, where relevant, there are certain local/national legal information duties towards consumers that need to be verified and complied with.

1.3. Objectives of the portfolio selection process

The selection of the portfolio plays a key role in reducing the execution risk. Mitigating this risk is key to an efficient and effective NPL portfolio sale and is one of the most important factors in transactions for Sellers as well as for Purchasers. The potential of failure of a transaction, especially when Seller and Purchaser have invested substantial time and resources, should not be underestimated, and might also lead to reputational issues for the Seller and/or the Purchaser. When a Seller is unable to execute a transaction, depending on the specific causes, investors might not participate again in future transactions organised by the same Seller. Sellers who cancelled transactions in the past might not be considered as attractive/dependable as others as they might be associated with more uncertainty and the risk of abandoning transactions once more. Investors prefer to allocate their limited resources, personnel and capital to transactions in the market where they expect to have the highest likelihood of execution and not to waste a potentially substantial amount of financial as well as other (internal) resources on Due Diligence. On the other hand, Phase 1 Investors that withdraw from the process after submitting unrealistic NBOs, might not be invited by the Seller in any future transactions.

It is crucial to use the portfolio selection as a means to balance the various and often conflicting interests of all interested parties. A portfolio disposal transaction often requires involvement of many different internal stakeholders, including, at a minimum, the NPL relationship management team as well as representatives from Finance, Risk, IT, Legal, and Compliance. Internal expectation management is therefore important to get the approvals needed to execute a trade. However, considering the various internal departments involved, even a well-designed and well-executed process can result in the consumption of large amounts of resources of the Seller organisation. In addition, it might be necessary to enhance internal IT systems, which generates additional costs. In cases where external support for data advisory and validation, indicative pricings, etc. is needed, total direct and indirect costs can become material. Therefore, the Seller should recognise that there may be substantial costs regardless of whether the transaction is successfully completed.

Examples of factors that may result in transactions not completing include:

— Failure to obtain the necessary internal approval, (among other reasons) due to: — Submitted prices being well below price expectations; — Missing and/or inadequate involvement of senior management; and/or — Emergence of unexpected factors (for example, adverse press coverage, change of legislation, etc.)

— Poor market timing due to a lack of interest by investors and/or no market for the portfolio offered.

— Technical reasons, e.g. transfer restrictions materialising during the transaction process. Usually, such restrictions would be foreseeable and the chosen perimeter should not include NPLs where such risk exists.

— Data gaps and/or data quality issues, adversely impacting pricing and/or transfer.

— Legal/tax constraints for NPL sales in certain jurisdictions, e.g. specific license requirements for Purchasers (which should cease to exist once the Directive on credit servicers and credit purchasers has been implemented), pre-condition of legal recovery before any sale, taxation that makes the transaction commercially unviable, etc (11).

Most of these factors can be mitigated with a well-considered portfolio selection and a well-researched/planned sale process before launching a transaction. A portfolio selection based on a confirmed strategic decision by senior management will typically obtain relevant approvals as it is usually already aligned with management goals and the bank’s strategic NPL disposal plan. Reasons and possible goals for conducting a transaction are covered in Annex 2.

Even if there is no pre-defined or comprehensive strategy for an active NPL sales program, a portfolio selection should always be based on the overall internal goals and KPIs and comply with internal guidelines. It is important to note that internal strategic targets do not necessarily need to be met on a case-by-case basis. It is possible that adding exposures not meeting the criteria on a single-name basis might still add value to the overall marketability of the portfolio. For example, assets for which there is a clear interest in the market could be added to the portfolio, even if they would not fulfil all transaction goals. Such an addition might increase the offer’s attractiveness in absolute terms as well as widen the investor base, leading to a higher price.

Selecting a portfolio that meets the Seller’s expectation is certainly a prerequisite, albeit just one part of a successful transaction. The portfolio must also attract the investors’ interest and should allow them to achieve their expectations as well. Market intelligence and soundings are key to mitigating this risk factor. Evidently, selecting a portfolio that meets the requirements/considerations of the Seller, but would not find any demand in the market, is futile. The art of portfolio selection balances the market demand with internal Seller objectives in the selection process.

It is advised to compose a homogeneous portfolio targeting specific investor groups. Additionally, in the composition of the portfolio, although there are some mixed portfolios sales, it should be avoided to mix up too many different asset classes as investors are mostly specialized on specific asset classes. In most of the cases, investors are deciding between:

— Consumers OR Corporates OR Public;

— Secured with hard assets (e.g. real estates, airplanes, cars etc.) OR Unsecured; and

— Bankrupted OR Not bankrupted.

It is further advised to compose a homogeneous NPL portfolio with regard to jurisdiction, i.e. selecting NPLs (and ideally, also real-estate collateral) from only one jurisdiction. The number of investors will decrease for portfolios that include NPLs from different jurisdictions and cross-country portfolios increase complexity regarding various parameters of the planned transaction for both Seller and Purchaser (legal, tax, servicing). When looking at jurisdiction, the Seller should take into account:

— Where is the NPL effectively ‘booked’, i.e. in which jurisdiction is the seller located?

— The laws of which country apply to the underlying loan contracts?

— Where do the borrowers reside / have their seat or registered office (at the time when the loan was granted and currently)?

— Where is the (real-estate) collateral located?

Another relevant criterion to consider is the size and potential purchase price of the portfolio. Investors need to invest time and resources in the Due Diligence process, which has to be included in the calculation of their potential return on investment. Moreover, such investment might not be recovered at all in the case that a different party wins the deal. If the portfolio is too small in terms of investable funds and the expected return too low, the potential Due Diligence cost might be higher than the expected return on the offered portfolio or, the Seller might have to consider to provide for comprehensive R&Ws in the LSPA to outweigh the risk of not enabling Due Diligence and/or to provide a chance to get familiar with a portfolio. In this case, there is a high risk that nobody would join the process or submit a bid. As Due Diligence cost is a significant sunk cost in the event of not being selected as the Preferred Bidder and a function of complexity, the right balance must be found between size, R&Ws and price/return of the portfolio to create interest in the market.

1.4. Technical aspects of the portfolio selection process

It is important to take into account the more technical aspects of a portfolio selection process. IT systems in banks are often not specifically designed for portfolio divestment as such systems are usually designed to support the in-house work-out process and the work-out officer in their daily tasks. A bank offers various products to its clients and needs to disclose a material amount of accounting and regulatory information predominantly on an overall exposure level. However, the business model of a bank in the context of the banking book is usually not aimed at frequently buying and selling assets. The IT system of a bank is not designed for frequent transactions. It usually reflects the exposure view as this is important for the bank. They do not necessarily reflect a more legal or contract view, which can be critical from a transaction perspective. Providing information to potential investors in an adequate way might therefore be challenging for a bank, and the information used to prepare Loan Data Tapes usually requires validation (the preparation of a Loan Data Tape is highlighted in section 2).

For one-off transactions, the validation and, where applicable, the remediation of data might often be done manually. In cases where more regular transactions are planned, it makes sense to improve the IT system to enable a more efficient process. This may involve a review of the existing IT system and amending and/or creating a number of (additional) fields for transaction purposes. The improvements to the IT system should enable the Seller to provide relevant data on all of the positions in a timely manner throughout the transaction process. This would decrease Due Diligence costs for the investors and would reduce overall transaction costs, thereby improving pricing.

An innovative approach in support of efficient transactions is the implementation of a specific field in the front office system that allows the loan officer (or workout officer) to classify an exposure as suitable for transaction purposes. As the loan managers should have the best overview about the value of an exposure, they may be in a better position to recommend an in-house work-out strategy or a sale strategy. This field, therefore, allows loan managers to classify specific loans as disposable and enables them to focus on loans to which they might be able to add more value.

In addition, the transaction management team should be able to filter specific management targets and to include NPLs that meet the management targets. The inclusion of these NPLs usually requires the approval of the respective loan manager. Such approach also allows the transaction team to better steer the timing of a transaction, which might be useful in case too many other sellers are currently active in the market. It is a very simple and powerful tool to establish an internal warehousing function. Given that this field is actively used by the loan manager, it would also enable closer alignment between the responsible loan officer and the transaction team.

When the transaction team concludes that a sufficient size has been reached and the timing to go to market is considered attractive, relevant data from the front office system may be uploaded to a system used (and in certain cases specially developed) by the transaction team. The software allows for detailed analysis of the portfolio, displays stratification tables, fills the relevant fields, and eventually produces the Loan Data Tape. Based on the data, a first assessment of a possible purchase price will be provided to senior management. Following the latter’s approval, the transaction process could be initiated. In the context of a ‘plain’ portfolio, with full and complete datasets and LSPA, the process described above works well and could give swift insights into a potential portfolio and the relevant impact of a sale. In case of larger or specific transactions that do not follow a clear rationale (reason for sale) and portfolios assembled unstructured, mixing across asset classes, a detailed case-by-case analysis is inevitable. Additional efforts especially would be required, especially with respect to organisational issues.

1.5. Reflecting upon the necessary use of internal resources and potential additional need for external support

Before preparing the portfolio composition and sale, the Seller should reflect upon the available internal resources for the planned sales activities and the potential need to engage an External Service Provider, such as a transaction platform (see also Annex 3).

The following questions would help in the decision process:

— Does the Seller have internal experts that are experienced in executing a sales process?

— Does the Seller have access to a wide investor database to select the most proper and competitive investors for the transaction?

— Does the Seller know what investors expect in the Due Diligence Process?

— Does the Seller need support in data preparation?

— Does the Seller have a dedicated internal lawyer or is support needed in terms of legal/tax advice for the documentation (NDA, LSPA)

— Does the Seller have its own technical capacities for sharing the data or is a VDR provider or transaction platform needed?

1.6. Organisational issues

When planning a transaction, a dedicated internal team and/or an External Service Provider are resources worth considering. In this section, the main focus lies on internal aspects and considerations. Planning and executing a successful transaction cannot be left just to the Loan/Workout Manager, but rather, as previously mentioned, it requires a set of skills from many departments and might benefit from the facilitating role of an advisor. The amount of work involved should not be underestimated. Similarly, the value of an existing network of Purchasers and the experience of conducting multiple transactions is very important.

Another important consideration is whether the personal objectives of a loan/workout manager might (or appear to) conflict with the overall management target regarding the transaction. It can be complicated to align the individual aims of a loan/workout manager with the aims that would be achieved by selling the NPL in the market, thereby reducing his/her workload. It could also be the case that loan/workout managers face personal concerns that selling their exposures in the market could render their role redundant. One option to mitigate this issue could be, similar to the possibility of including a field for marketable assets in the IT system (see previous section), to adjust the annual goals for loan/workout managers to encourage the loan/workout officer to ‘tick the box’. This has demonstrated to be a successful method to incentivise the appropriate and effective identification of loans for a sales programme.

The establishment of a dedicated (and ideally independent) transaction team/department could be advised for many sellers (if economically efficient) and would further ameliorate the organisational set-up to facilitate and run effective NPL transactions. Such a specialised team could build knowledge about NPL markets and experience with market dynamics (in different countries/jurisdictions). This would enable the team to advise on NPL portfolio selection, possible market prices and the economic benefits of selling a specific portfolio. In turn, this facilitates the required (pre-) approval and support from the (senior) management to engage in NPL transactions.

For larger transactions, it could be advised to set up the transaction as a (separate) project. The project should be run by the internal transaction team (potentially supported by External Service Providers) for the reasons outlined above.

In the case of larger selling institutions, it could be advised for the transaction team to establish a project management office (PMO), which would coordinate the various work streams, set up shared folders to exchange information between the various work streams, and organise the communication with the steering committee. The steering committee should include all relevant senior managers to ensure that they are consistently informed about the progress on the transaction and to align them with the appropriate outcome. This helps in mitigating the risk that the approval for selling would be refused. As regards the set-up and implementation of different work streams, sellers generally have quite some flexibility. However, major workflows need to be able to fulfil their functions and should not be disrupted by an overly complex structure. Such processes include Loan Data Tape validation/remediation/enrichment; Data/Due Diligence (which should be led by the loan/workout manager), Finance, Marketing (led by transaction manager) and Legal.

Such a set-up, including a PMO, might not be viable for a smaller seller that wants to sell an NPL portfolio that is considered to be small by the market, yet is of a considerable size for the Seller. Internal analysis by the (smaller) Seller should reflect upon the most effective and cost-efficient organizational set-up, taking into account the size and complexity of the NPLs to be sold.

2. Preparation phase

2.1. Key activities

Building on the actions and reflections described above, the Seller should take care of the following key activities during the preparation phase:

— Define the number of phases of the process (namely, 2-Phase-Process with NBOs and BOs, or 1-Phase-Process, directly with BOs).

— Set the timeline – including internal steps and approach to the market (taking into account involvement of legal and consulting advisors as well as timing to take care of requests that investors can have).

— Prepare the main marketing documents (mainly Teaser and Information Memorandum). A Management Presentation may be required during Due Diligence in Phase 2. Preparation of the main process documents (mainly investor NDAs, Process Letter (if required separately for Phase 1 and Phase 2), BO Guidelines and, if relevant, NBO Guidelines).

— Prepare Loan Data Tape and retrieve documentation.

— Set up VDR (12) (including a detailed VDR index).

— Preparation of the LSPA.

2.2. Number of phases of the process and timeline

First of all, a decision should be taken on whether to conduct a 2-Phase or a 1-Phase-Process according to the type of portfolio to be brought to the market and expected deadlines (e.g. if the asset type is well known with good understanding of expected prices, a 1-Phase-Process could be preferred to shorten the timeline). A timeline, including all of the relevant internal steps and milestones to approach the market should be defined, taking into consideration:

1. Consistency of approval path, stemming from Board of Directors’ delegation of powers and signatory powers (13);

2. Identification of list of possible investors to be invited. In case of disposal, all the internal compliance requirements (e.g. KYC) need to be addressed;

3. Identification of list of possible servicers to be invited for any investor potentially interested in the acquisition, but without currently having access to a servicer);

4. Set up of competitive tender context to achieve sufficient price tension, as appropriate; however, in case of a small NPL portfolio or single-name transaction, the seller should also weigh increased transaction costs and efforts against the possibility of a bilateral negotiation approach;

5. Definition of transaction documentation – the NDA, LSPA and potentially additional transaction documents have to be agreed upon by the relevant internal legal functions, eventually supported by external legal advisor; the LSPA should in addition be signed off by the tax department and by the auditors.

6. Consideration of the time needed to perform vendor Due Diligence / data remediation, to prepare Teaser and Information Memorandum and Loan Data Tape.

2.3. Preparation of main documents

The institution should then prepare the documentation related to the NPLs and the commercial materials. A Teaser contains the key transaction background and summary data on the NPLs to be disposed, a Process Letter with all relevant transaction steps and timing (see also Section 3.4) and an Information Memorandum with further information on the transaction structure and the NPL portfolio. The Information Memorandum provides a detailed description of the target NPL portfolio/single exposure that serves as the primary marketing document in the tender process. It also contains an executive summary, investment considerations, sale structure, bidding method, estimated recoveries etc.

Within these documents, all the engagement rules of the process, including timeline, conditions, etc. should be clearly stated. The importance of clear and transparent communication in the initial phase should be stressed, to explain to potential investors why the transaction is taking place and what are the rules of engagement. This could otherwise lead to misunderstandings and ultimately jeopardise the deal. These soft facts should not be overlooked by sellers, as they can motivate an investor to consider a deal.

2.4. Loan data tape preparation and documentation retrieving

During this phase, the selling institution should start collecting the data on the NPLs (and collaterals, if applicable) of the portfolio, in order to create the Loan Data Tapes that would be made available to investors. The Seller should prepare a Loan Data Tape covering, as a minimum, information in the following key main areas:

— total outstanding amount and breakdown into principal claim, interest, fees and costs

— date of origination

— nature of borrowers

— status of claim / borrower (e.g. insolvent)

— date of default and information on actions taken to avoid statute-barring

— historical payments, ideally on a loan-by-loan basis

— status of recovery procedures and projected recoveries (business plan), if available

— legal status of the debt (e.g. pre-legal, currently in-court proceedings, already titled and in enforcement actions (14))

— if the loan is secured, additionally: key information on collateral, including rank of the lien, register facts (registered amounts), third-party rights, open market values available, personal guarantees, etc. For CRE loans, more disclosure may be needed on tenancy/occupancy status, yield, gross market rent. In case of corporate loans, it may be necessary to add financial statements of the borrowers, etc.

In order to obtain a more accurate pricing of credit portfolios, it is advised to strive to not only take a snapshot of the data, but also provide some historical performance data, especially on recovery rates. Historical performance data should include the actual gross collection cash flows (including detailed interim collection and cash in court information) on the portfolio at loan or borrower level plus procedural costs and legal expenses. The historical performance data might include aggregated recovery curves reflecting the general workout experience of the selling institution. Due to the disordered relationship with the borrower, information about the legal status is very helpful as well. It is advised to also perform an internal vendor Due Diligence to check completeness and correctness of stored information and eventually improve the data quality via ad hoc remediation. Vendor Due Diligence can be performed internally or with the support of a (specialised) External Service Provider, which may offer an additional neutral (and potentially clearer) view regarding the key relevant information to be disclosed, mainly affecting the prices.

It is important to note that the EBA standardised NPL data templates, which were first developed in 2017 to help facilitating financial Due Diligence and the valuation of NPL transactions, will play an increasingly important role in the future. At the request of the Commission and following the adoption of the Directive on credit servicers and credit purchasers, the EBA is currently carrying out a review of the data templates, streamlining them to help banks better prepare as part of their NPL management strategies in the aftermath of the COVID-19 pandemic. Use of the templates has been voluntary so far, yet the Directive on credit servicers and credit purchasers (15) mandates the EBA to further develop them into implementing technical standards for credit institutions. In line with the conditions as set out in the Directive, credit institutions will in future be required to use the templates for transfers of non-performing credit agreements (including transfers to other credit institutions). Taking into account the experience of market participants on the buyer and seller side, the revised templates should become simpler, more proportionate and more effective, which would enable price discovery in a consistent way across the single market.

The Seller can perform completeness, accuracy and other data quality checks and create a Loan Data Tape in the specific format required for transaction or regulatory purposes. In this respect, it is advised to employ the NPL data template of the European Banking Authority, which is to become mandatory in the future. An External Service Provider can also support the determination of an expected price for the specific portfolio.

Preparation of the documentation should include the actual loan files, or a sample thereof, as those will be required by the investors during the Due Diligence. In any case, availability of documentation will become a topic during the BO Phase as investors usually request R&Ws with respect to documentation being available. Documentation in a transferable form needs to be ready before signing / closing. Knowledge of what data and documentation can be provided in which form is a prerequisite when starting an NPL sales process.

The collection of physical documentation might not be a trivial formality. Lack of quality of documentation can pull down the price. Depending on the loan contract, it might include a variety of documents and records:

— Loan documentation: — Contracts or deeds with debtors — Judicial documentation — Insolvency documentation

— Addendums in longer term loans

— Collateral documentation

— Correspondence with the client or the courts

— Correspondence with lawyers

Should the Seller decide to share a sample of documents with investors only, then the sample creation process should be well explained and all borrowers belonging to the sample should be clearly marked in the Loan Data Tape. The seller should prepare sample documentation for a (statistically) random sample. If the chosen NPLs do not (seem to) represent a random sample, analysts on investor level will point this out and investors are likely to request additional documentation, which can delay the overall process or, if the seller does not fulfil the request, can lead to lower prices offered as investors fear that data quality is not uniform for the NPLs in the portfolio.

2.5. Decision on VDR set-up

In order to share information, for larger transactions with mostly digitally available information, it is advised to use a VDR (internal VDR solution and/or External Service Provider offering VDR solutions). This enables tracking downloads of documents and the activity of each potential investor in a manner that is easily auditable. In addition, VDR usually allows for Q&A sessions and might also enable sharing any request of additional information to every investor, which facilitates a fair and transparent process. A VDR can be set up internally by the Seller or in cooperation with an External Service Provider (see also Annex 3 for more details).

If the Seller chooses to make use of a VDR, then all (electronically available) data and documents are shared via the VDR. If the Seller does not make use of a VDR, the Seller chooses another secure medium of data transfer.

The decision to set up and use a VDR should be determined on a case-by-case basis to meet the interests of all participating parties. Especially for small portfolios or single-name transactions, a cost-benefit analysis should be conducted, which might deter using a VDR and may suggest using alternative solutions that could be more cost-efficient under such circumstances.

When using a VDR, guidelines in a specific document should set the rules to be followed by the investors in using the VDR (access to the VDR and use of the information disclosed therein). The document typically contains the list of persons to be given access to the VDR, data room rules and permission rights (e.g. permission levels of downloads, printing possibilities etc.). VDR rules should be balanced and should state that agreements in the NDA prevail in case of conflict. It can create a significant delay if VDR rules contain stricture stipulations than the NDA including potentially personal liability of persons entering the VDR. If investor analysts refuse to enter the VDR based on e.g. personal liability clauses, this is not in the interest of the seller or the process in general.

Documents uploaded in the VDR need to comply with the applicable personal data protection and banking secrecy legislation. Therefore, if applicable, personal data information (i.e. personal identification number, name/surname, etc.) and/or sensitive information must be black-lined following the advice of internal/external transactional counsel.

On the other side, during this phase, the Seller gives investors access to essential information in the form of the Loan Data Tapes to allow portfolio analysis. The more relevant the information, the more likely the Seller will obtain realistic non-binding price offers. Relevant information should at least include the following: total outstanding amount, segment of debtors (private individuals, small businesses, large corporates, etc.), date of default, historical payments, legal status of the debt, details regarding collateral (in case the loan is secured). In case of large portfolios, the VDR might not include full documentation during Phase 1. A sample of loan documentation may then be provided during Phase 2. Scope of the loan documentation disclosure could be provided to Phase 1 Investors during Phase 1, so that they factor this in for their NBOs. Sampling criteria may need to be properly disclosed to the investors as such could be included in the LSPA in the form of R&Ws. If External Service Providers are engaged, it is advised that they check and endorse the sampling criteria.

2.6. Preparation of the Loan Sale and Purchase Agreement

Apart from data and documentation, the terms included in the LSPA will affect the price. The process around the LSPA should thus already be started in the preparation phase and be part of the documentation to be shared with investors via VDR before the BO is submitted and constitute a key element to be considered for the BO itself.

The Seller should decide on the process regarding the LSPA:

— In which language is the LSPA to be provided to investors? It is considered standard market practice that English is the preferred language, provided that specific legal terms should also reference the respective legal term in the local language. However, where targeted investors are (solely) local, the local language is likely to be acceptable.

— Will it be drafted by in-house lawyers or would external legal counsel be mandated?

— Are LSPA templates available from industry associations or transaction platforms?

— What information do the lawyers need to be able to customise the LSPA to the portfolio?

— Which R&Ws can the Seller give? Input from the work-out team is imperative here.

— Who needs to sign off on the LSPA internally before it is provided to the investors (16)?

— Define a reasonable timeline for investors to prepare a mark-up and thereby taking into account additional time that might be needed if the LSPA language is not English, but international corporations / funds are among the investors.

— Set internal timelines: what needs to be done and when, to be able to meet the delivery timeline?

— When would the draft LSPA be delivered to investors?

The draft LSPA should be further developed during the next phase (see also section 3.4).

3. Pre-marketing phase

3.1. Key activities

The Pre-Marketing Phase entails the preliminary assessment of the market appetite to receive feedback on a transaction. The output of this phase is the final selection of the transaction structure and perimeter, the Process Letter describing the transaction’s rules and timeline, and a Due Diligence Material Inventory detailing at what point in the process key material will be released to potential investors.

The key activities are the following:

— Market sounding

— Definition of the best marketing strategy

— Continue preparation of the process and marketing materials for the NBO and BO Phase.

The scope and depth of pre-marketing is defined by often-conflicting requirements within which the Seller is operating. The Seller must balance:

— its need for transaction transparency as demanded by its stakeholders (e.g. regulators, shareholders, etc.); and

— the general objective (e.g. maximizing recoveries/value, speed and costs, minimizing disruption, discretion, deliver towards customers in distressed situation etc.)

3.2. Market sounding

During this phase, the Seller may perform a ‘market sounding’, based on the features of the projected transaction and prepare a long list of potential investors to assess their interest in the transaction. External restrictions on the process may not allow an open invitation to as many investors as possible and/or the Seller may not have knowledge of the most likely investors. Therefore, it is important to have access to and maintain the widest possible investor pool with no limitation. In this regard, for certain sellers, in a number of jurisdictions, External Service Providers can help addressing the right investors through their investor databases.

As part of the Market Sounding, the Seller may issue the Teaser presenting the envisaged process (with a general timeline), the rules to access information, and the bidding procedure. It is important to clarify the expectations and to outline the process as detailed as possible. It is therefore key to provide a concrete timeline, to indicate when the Seller deliverables will be provided, when the bids are expected and on which basis, etc.

The Teaser is an anonymous marketing document, which summarises the main elements of the proposed NPL sale. It can be provided to potential investors before the signing of an NDA (and provides a first indication on when the NDA has to be signed/executed). Particularly for NPL sales involving real estate collateral, it is important that such Teaser be prepared with a set of visuals, maps, etc. that is as comprehensive as possible. To the extent possible without disclosing confidential material, the Teaser, at a minimum, should address key property facts, property location, investments highlights, borrower overview, current stage within the legal process of the loan, key financial indicators, picture (17), and contact information (18).

The Teaser is distributed to target investors to introduce them to the key characteristics of the envisaged transaction. The Seller collects expressions of interest from potential investors. Following the receipt of the written expressions of interest, the Seller may consider inviting further investors to the sales process.

The Seller’s internal/external legal advisor needs to negotiate NDAs with the potential investors and their respective legal counsels. At the end of this phase, potential investors are required to sign these NDAs. Following execution of the NDA, the Seller will be able to distribute an initial Process Letter and Information Memorandum to Phase 1 Investors.

As NDAs present a complex topic of their own, it might take a long time to negotiate an NDA with experienced investors that have their own internal rules and guidelines to adhere to. This needs to be reflected in the timeline. It is possible that an investor is ready to sign swiftly and that the process is still held up for weeks because the NDA needs to be negotiated with another investor. It is advised to centralise the on-boarding of interested investors, using strict team responsibilities and modern technologies (via internal systems or via e.g. transaction platforms).

Elements to consider when marketing/advertising a sale:

The selection of the investors’ residence and the language of the marketing material is very important. As a rule of thumb, transactions with a possible cash price (net proceeds) below EUR 5 to 20 million (depending on the country and the specificities of the NPL portfolio) may only be attractive to local investors; larger transactions should be marketed to both local and international investors. International investors will typically expect that the transaction incorporates generally accepted market documents and processes (e.g. LMA NDA) and need an English documentation for the transaction process. Also for smaller transactions, English documentation should be considered, as ‘local investors’ may be affiliated to bigger corporations with their seat abroad and where committee approval needs to be obtained.

It is also important to elaborate on the selection of investors based on the preference in the specific asset category. Investors in the NPL market mostly divide their interest according to a number of factors (see also section 1.3). Willingness to buy might also be demonstrated via a financial commitment (e.g. refundable deposit). With respect to the latter option, the Seller should weigh the level of security a deposit offers, against the additional efforts arising from the necessity to negotiate another document and to handle the financial deposits from various investors, which in the end will have to be reimbursed (except for the Purchaser for which the deposited amount could be deducted from the purchase price payment).

3.3. Definition of the best marketing strategy

As noted above, a choice needs to be made between a 1-Phase-Process and a 2-Phase-Process. The latter is characterised by two levels of disclosure: first, bidders are provided with high-level disclosure during the NBO phase. Subsequently selected investors are provided access to a second level of disclosure during the BO phase, which generally includes more detailed Due Diligence materials (AUP Report, re-valuations, servicing review etc.). Conversely, in a 1-Phase-Process all bidders are provided with the same level of disclosure at once.

There are a number of advantages in having an NBO Phase:

(i) Increases competition as the initial pool of bidders is larger;

(ii) Investors are selected for the following phase based on their NBO letters so that the more work-intensive binding phase and Due Diligence is only conducted with a restricted group of investors, making the overall process more efficient and easier to manage;

(iii) Investors have the chance to ask for additional data during the NBO phase, which the Seller can prepare and then provide in the binding phase. Necessary disclosures regarding the quality of the portfolio can increase the pricing of the portfolio (leading to more accurate pricing) and make discussions on the LSPA easier;

(iv) Price discovery may be more important for unlikely-to-pay portfolios, which could become more common in the aftermath of the COVID-19 crisis than it was for the legacy NPLs transacted in the last 10 years;

(v) More sensitive data/information (such as private contractual and judicial information related with the borrower itself, property revaluations, full servicer review etc.) is only provided to shortlisted bidders in Phase 2.

On the other hand, the disadvantages of an NBO phase include:

(i) Transaction may take longer given the 2-Phase nature of the process;

(ii) Two sets of data must be prepared. Nevertheless, the second Loan Data Tape should benefit from the partial work done in the first one adding a higher degree of completion; and

(iii) Wider investor outreach may reduce transaction confidentiality.

In general, a 2-Phase-Process could be advised in case the number of potential investors has not yet been reduced to e.g. 5 or less. In case a Seller already knows that the number of investors would be limited and competition might even be counterproductive, the Seller could certainly consider a faster (and probably more profitable) short-list process.

Length of the disclosure phases: on average, Phase 1 lasts up to ca. 4 weeks and the second phase 4 to 12 weeks (depending on whether the portfolio is secured or not and depending on whether the Seller will comply with its own delivery deadlines). However, given the heterogeneity of portfolios and bespoke nature of these transactions, the exact duration depends on each portfolio and investor base.

Once the decision to opt for either a 1-Phase-Process or 2-Phase-Process has been taken, based on market practices, the three standard strategies for setting up a competitive process are a Broad Auction, a Targeted Auction and a Negotiated Sale. Below is an overview of these three options and indications on what constitutes the best marketing strategy in different scenarios.

Broad Auction

A Broad Auction is a typical 2-Phase-Process, whereby a large list of investors is invited to submit an indicative NBO. Following this first auction stage, a Due Diligence process is run with a restricted short list of investors which is invited to submit a final BO. Following this second auction stage, a single Preferred Bidder is selected, with whom the Seller enters into the negotiation of the LSPA and potentially additional transaction agreements.

Building on the advantages mentioned above, the main benefit of this process lies in the bigger base of potential investors:

— More competition leading to higher sales results;

— Investors will be treated in a more transparent selection process based on the price and not on personal relationships; and

— From compliance perspective, a more representative market price and pricing comparable are available.

The main disadvantages are additional resources required to manage the transaction, sharing confidential information with more participants, sellers’ reputational risks and possible risk of failed execution with new investors. Regarding longlists of investors, the risk of having an excessively long list is that those investors that have a real interest in the transaction could be more reluctant to spend time and resources on Due Diligence in such a situation, due to the very high competition and the perception of the process being less focused.

For transactions attempting to reach a broad audience, for certain sellers in a number of jurisdictions, transaction platforms could offer an efficient manner to minimise the disadvantage of dealing with a large number of investors. Transaction platforms are designed to shift the complexity of interacting with multiple possible investors from the Seller to a purpose-built platform.

Targeted Auction

A Targeted Auction is a competitive process similar to the Broad Auction, but involves a shorter list of potential investors (approximately 2 to 8). This option typically allows the Seller to have better control over the process whilst benefitting from a still competitive environment. It is usually a 2-Phase-Process, although under specific circumstances and especially in high time-pressure situations, the first phase may be omitted.

The main advantages are linked to the narrower base of potential investors:

— Less complexity (fewer interactions, less Due Diligence efforts needed at this stage);

— Participants are well known, which fastens the timeline and the rate of success. It also allows to get a better commitment from every participant, as they believe they stand a better chance to be selected as the Preferred Bidder, spurring them to spend more resources, focus more efforts on Due Diligence, which can have a positive impact on price and the LSPA;

— Q&A Process with investors is more manageable by the bank’s team; and

— Containment of potential issues with confidentiality of information and limited reputation risks.

The main disadvantages of a narrow marketing disclosure are limited competition, in particular the possible exclusion of newcomers that could have been interested in the transaction. This could lead to lower sale proceeds and, in a worst case, regulatory review later on.

Negotiated Sale

The Negotiated Sale is a bilateral process involving a single potential investor. Due to the lack of competition, the main steps (with relevant documentation shared) and the outcome of the marketing process vary significantly from the Broad Auction. The strategy is more likely to be adopted in scenarios where speed and confidentiality related to the transaction are critical for the Seller, or in the following cases:

— In the preliminary market assessment, only a limited number of investors (one or two) showed interests in the transaction.

— Negotiation between the Seller and the potential Purchaser have been made beforehand or this is a repeat/follow-up transaction, therefore there may be no need to start a competitive process.

The main advantages would be linked to special knowledge/interest on the Debtor/Creditor:

— Investors that are already invested in a specific Debtor (Corporate) would be able to pay a premium due to reduced Due Diligence effort and risk.

— Investors/servicers that already perform servicing for the Creditor have developed specific know-how/procedures over time to pay a Premium and give Execution certainty.

— The effort on sharing Due Diligence documents is very low.

The main disadvantages are the possible collection of limited reference prices and narrow market feedback.

Depending on the choice among the three options above, the following timelines could be envisioned:

Process Preparatory Phases Non-Binding Offer Phase (Phase 1) Binding Offer Phase (Phase 2) Negotiation and Signing Broad Auction – 2-Phase-Process 8-12 weeks 4-6 weeks 6-10 weeks 2-4 weeks Targeted Auction – 2-Phase-Process 6-10 weeks 4-6 weeks 6-10 weeks 2-4 weeks Targeted Auction – 1-Phase-Process 6-8 weeks N/A 6-10 weeks 2-4 weeks Negotiated Sale – 1-Phase-Process 4-8 weeks N/A 6-8 weeks 2-4 weeks (19)

3.4. Preparation of the process and marketing materials for the Non-Binding and Binding Phase

Preparation of the process and marketing materials for the NBO Phase

The final objective of the pre-marketing phase is to prepare the process and marketing materials that are appropriate to the marketing strategy chosen (e.g., Broad, Targeted, Negotiated). The output is a Process Letter (20), which is shared with investors who have signed an NDA. The Process Letter document defines:

(i) the procedure and rules to which participants in the sale will adhere; and

(ii) the Due Diligence Material Inventory, which will detail what material prepared in the previous stages (e.g. Teaser, Loan Data Tapes, loan documents, appraisals, AUP Report, legal Due Diligence report, LSPAs, etc.) will be included in the NBO and the BO phase (if a decision has been made to have a split process).

The importance of this phase cannot be underestimated. Investors build confidence in a process based on the professional spirit of the ‘rules of the game’ as defined by the Seller in the Process Letter. Investors typically prefer to invest Due Diligence costs in processes where they have high confidence in the timeline and goals of the Seller. Conversely, sales processes that appear to have sliding timelines, changing rules, etc. damage not only the prospects for that individual sale process, but also the Seller’s prospects at conducting further sales. Sellers should take this into account when launching an NPL sales process and consider that investors are less likely to take part in processes again if they observed either of the following:

— the Seller seems to be merely interested in cross-checking the book value of its NPLs;

— the Seller launches a transaction process for the same (or similar) portfolio on a regular basis, yet does not sell on account of its price expectations not being met, while never revealing its reserve price.

Similarly, investment in this phase reduces the risk of legal costs, regulatory scrutiny, and liability later. The Process Letter determines investors’ expectations as to the process, timeline, and format of the bidding process. It allows them to allocate resources and sets their strategy.

The Process Letter, at a minimum, should address:

— Restrictions on what type of entities can bid: Based on advice from in-house or external legal (regulatory) counsel, the Seller should specify license or other requirements applying to the Purchaser. Even if legally it is predominantly a Purchaser obligation to ensure such compliance, the seller does not want to risk a process delay or admitting investors who cannot fulfil the requirements to Phase 2.

— Means by which a bidder acknowledges and agrees to the Process Letter: For example, written acknowledgement prior to bid, through the action of submitting a bid, etc.

— All deadlines applicable to the relevant transaction phase, including seller deliverables such as data, sample loan documentation and LSPA.

— KYC: At what stage a prospective bidder will have to provide KYC material.

— Bid Procedure: — How will Due Diligence be performed, and at what stages different levels of material will be released. For example, an anonymized Loan Data Tape will be made available during the NBO phase; a detailed Loan Data Tape will be made available during the BO phase. — How will questions related to Due Diligence be addressed? Submission process, targeted turnaround time, etc. — Deposit: Will a deposit be required to submit a bid and what are the instructions for submitting the deposit, if required? — How bids should be submitted: For example, email, electronic platform, phone, physical, etc. — Bidding type: Whether the sale will be conducted as a sealed bid, English auction, Dutch auction, or some hybrid model (see also Annex 4 for more information). — What a valid bid will constitute: For example, whether partial bids will be considered, whether bids contingent on changes to the LSPA will be considered, etc. — For what timespan bids have to be binding (e.g. during 72 hours), if during Phase 2.

— Cut-Off Date: For loans where interest is being accrued, what will be the calculation date? How will payments of principal and interest received after this date be addressed.

— Bid Deadline: When do bids have to be submitted by and whether late bids are considered.

— Bid Nomenclature: Should bids be submitted as a percentage of outstanding principal balance or gross book value or as an amount in the bid currency, etc.?

— Bid Confirmation: How the Seller will confirm the receipt of the bid and what the bidder should do if they fail to receive a confirmation

— How Bids will be Assessed: For example, what will the process be if identical bids are received, is the Seller committed to selling regardless of the value of the highest bid, is the Seller constrained to selling to the highest bidder, etc.

— Bid Award: How will the winning and losing bidders be informed?

— Closing Process: For the winning bidder, process and timeline to closing, e.g.: — Good faith deposit. If a deposit is required, how is it calculated, what is the deadline, and under what circumstances will it be returned. — Execution of the LSPA. When is signing intended?

— Other: Other factors that the Seller envisages. Examples of this include will the Seller offer finance, is regulatory approval required, etc.

Previous stages of the preparation process have created all the documents and material that will be made available to the investor. The Due Diligence Material Inventory will set out for the Seller team and potential investors at what stage material will be released. The release of the data is driven by:

— Data Protection Laws: The Seller wants to safeguard and minimise the risk of violating data protection laws.

— Competition Issues: Sellers may want to restrict data being seen by competitors that might give their competitors an advantage over them.

— Maximizing Proceeds and Transparency: As a general rule, the sooner potential investors have access to the full Due Diligence material (good or bad), the higher the participation and the bids.

Preparation of the process and marketing materials for the BO Phase

In a 2-Phase-Process, the BO phase will make use of the documentation prepared in the previous NBO phase, in particular the Process Letter with the terms of sale therein. The VDR may give greater permission levels for downloading detailed information within the limits of data protection and bank secrecy.

The draft LSPA is the final main documentation to be prepared and to be released at the beginning of the BO Phase. Main topics to be covered in the LSPA are listed in Annex 6.

4. Non-binding Offer Phase (Phase 1)

4.1. Key activities

The overall objective for the Seller is to receive NBOs from all Phase 1 Investors on the NBO Date in the form requested by the Seller.

When the decision has been made to follow a 2-Phase-Process, the Seller first asks for NBOs and then for BOs. As a critical part of the preparation phase, the Seller has selected an appropriate group of prospective investors and compiled corresponding contact information. The Seller (potentially supported by External Service Providers) identifies and puts together a list of appropriate Phase 1 Investors.

At the beginning of Phase 1, the Seller is to provide each Phase 1 Investor with (i) the information that such investor was admitted to Phase 1; and (ii) a specific/detailed timeline setting out each major step, including any data, documents or information to be provided by the Seller.

The key activities are as follows:

— If a VDR is employed: Management of the Phase 1 Investor VDR (incl. opening, user and access management, VDR reporting, etc.)

— (Continued) preparation of the Phase 2 Investor VDR

— Disclosure of the process and marketing materials for the Phase 1

— Disclosure of (meaningful) data tapes to Phase 1 Investors

— Management of a (limited) Q&A Process if applicable due to the complexity of the perimeter and/or the number of bidders

— Selection of an Auction Type for Phase 2

— Optional: provision of an LSPA Term Sheet to Phase 1 Investors

— Analysis of the NBOs that have been submitted

— Selection of a short list of bidders to admit to Phase 2

— Finalisation of the portfolio potentially excluding certain ineligible NPLs from the portfolio (i) if they do not match the original selection criteria (anymore) or (ii) based on the reasonable request of investors.

4.2. Launch of the bidding process and distribution of the Information pack

Marketing materials represent the first formal introduction of the NPL portfolio/single exposure to investors. They are essential for sparking investor interest and creating a favourable first impression. Together with the Teaser, the main additional marketing documents for a first-round NBO phase are the Information Memorandum, a (meaningful) Loan Data Tape (21) and the Process Letter.

The Phase 1 Process Letter sets out the rules of the NBO phase. The Seller can already share the LSPA draft in Phase 1, but it is not customary to ask investors to prepare an Investor LSPA Mark-up in Phase 1 as (i) investors might be reluctant to spend money (external legal counsel) and resources on this in Phase 1 and (ii) the Seller does not want to review Investor LSPA Mark-ups of all Phase 1 Investors. However, if the Seller wants to use comments on contractual topics as selection criterion, the Seller can choose to distribute a (concise) LSPA Term Sheet stipulating the main parameters that will be contained in the LSPA. On this basis, Phase 1 Investors can be asked to submit a statement on these parameters, together with their NBO. This enables the Seller to take into account the preferences of Phase 1 Investors before moving on to Phase 2, supporting the Seller to further develop and finalise the LSPA draft. In addition, the seller would be made aware if the LSPA Term Sheet contains contractual arrangements which all or the majority of investors reject.

If a professionally prepared LSPA is not released for comment as early as possible in the process, the Seller exposes itself to the risk of ‘re-trading’ (the Purchaser’s negotiating strategy of using the negotiating of the LSPA as an opportunity to claw back economic value after committing to a purchase price during the bidding process). It is therefore advised that:

— an LSPA Term Sheet is shared with investors during Phase 1,

— the LSPA be prepared in the preparation phase and finalised in Phase 1, to be released latest at the beginning of Phase 2, and

— investors should be required to submit Investor LSPA Mark-ups to the as part of their BOs.

Together with the Process Letter, the materials to be received by the Phase 1 Investors will also contain detailed portfolio data on a line-by-line basis, and where applicable further detailed information regarding all or the largest loans. The Process Letter or another part of the Phase 1 materials shared by the Seller sets out, inter alia:

— the detailed timeline for Phase 1 and ideally already the rough timeline for Phase 2. In case of any delay on the Seller’s side, the Seller actively communicates this immediately to all Phase 1 Investors including information about postponement of deadlines which were originally communicated by the Seller. The timeline initially communicated to the Phase 1 Investors should be realistic and changes should be made transparent for the Seller to retain a reputation of reliability;

— the information on the Seller’s requirements for format and contents of the NBO. It is advisable for the Seller to request from Phase 1 Investors to specify e.g. any information and Due Diligence requests they would have for Phase 2, as well as the assumptions their NBO is based on, to enable the Seller to take this into account for Phase 2 planning and to determine a realistic Phase 2 timeline.

To the extent that the Seller has undergone any Vendor Due Diligence work (e.g. real estate revaluation, loan data tape consistency checks, legal documentation review), it might be helpful to disclose the scope of such Vendor Due Diligence in Phase 1. This would enable investors to scope the potential Due Diligence work required in Phase 2 and factor this in as part of their NBO.

4.3. Bidders undertaking initial Due Diligence

After receiving the Phase 1 materials from the Seller, the Phase 1 Investors carry out an initial Due Diligence based on the available information. They might also submit a limited number of questions to clarify certain aspects regarding the NPLs (and their underlying collateral, if applicable) to the Seller. There would also be the option to allow for limited Q&A with Phase 1 Investors, which might already pose (limited) questions to the Seller. This could be due to the potential complexity of the sale perimeter and/or the number of bidders. Furthermore, the Seller could develop guidelines for the more detailed Q&A Process in Phase 2. During this first round, the Seller (potentially supported by External Service Providers) will manage investors’ questions in a centralised file and subsequently prepare answers to these questions or provide supporting material to address investors’ initial concerns. In parallel, the Seller will continue the preparation of the relevant (additional) material for the second round.

4.4. Submission of Non-Binding Offers by bidders and selection of shortlisted bidders to be advanced to second round

Depending on the type of transaction or portfolio structure, the Seller (potentially supported by External Service Providers) will request from the Phase 1 Investors an NBO within the time period as set out by the Seller in the Process Letter or other materials. Once the NBOs are received, the Seller will compare and analyse them, which results in an Analysis Report of NBOs. If necessary, brief follow-up discussions may be conducted with individual investors to clarify some aspects of their respective NBOs.

The outcome of Phase 1 is to allow the Seller to shortlist the chosen Phase 1 Investors and to continue the sales process by providing access to more detailed confidential data and information about the NPL portfolio to the chosen Phase 2 Investors. Finally, investors that are not selected to proceed to Phase 2 are to be notified as soon as possible to strengthen the Seller’s reputation as a reliable and transparent market participant.

5. Binding Offer Phase (Phase 2)

5.1. Key activities

The objective for the Seller is to receive BOs from all Phase 2 Investors on the BO Date in the form requested by the Seller in the BO Guidelines.

Key activities include the following:

— Provision of Process Letter to Phase 2 Investors

— Provision of BO Guidelines to Phase 2 Investors

— Provision of Phase 2 Data and Documents to Phase 2 Investors

— Provision of draft LSPA to Phase 2 Investors

— Management of Q&A Process

— Optional: Organisation of Management Meeting(s) and summarising / providing outcome to all Phase 2 Investors

— Organisation of the auction

— Analysis of submitted BO Letters and Investor LSPA Mark-Ups

— Selection of Preferred Bidder / Purchaser

— Optional: KYC Process

— Finalisation of the portfolio (continuation from non-binding phase)

5.2. Seller Deliverables

Process Information

At the beginning of Phase 2, the Seller provides each Phase 2 Investor with:

(i) the information that such investor was admitted to Phase 2;

(ii) a specific/detailed timeline setting out each major step, including any data, document or information to be provided by the Seller. This timeline should be realistic and any changes that were made should be as transparent as possible, in order to preserve the Seller’s reputation of reliability; and

(iii) information on the Seller’s requirements for format and contents of the BO. It is advisable for the Seller to request from Phase 2 Investors to specify e.g. the assumptions their BO is based on.

The information on process can be given by an electronically signed Process Letter.

BO Guidelines

At the beginning of Phase 2 (and often as part of the process information): the Seller provides each Phase 2 Investor with the BO Guidelines setting out the Seller’s requirements in respect of the format and contents of the BO.

Phase 2 Data and Documents

At the beginning of Phase 2: Phase 2 Data and Documents are provided to all Phase 2 Investors. Any costs, which, based on the draft LSPA are borne by the Purchaser, are communicated as part of this.

Due Diligence (Documentation)

At the beginning of Phase 2: communication of physical Due Diligence time slots or provision of virtual Due Diligence Documentation to all Phase 2 Investors.

LSPA Draft

At the beginning or Phase 2 or shortly thereafter: draft LSPA to be provided to the Phase 2 Investors.

Additional Phase 2 Data and Documents

Ongoing: potentially, at the request of one or more Phase 2 Investor(s), or as updated information becomes available, the Seller to provide additional / updated information to all Phase 2 Investors.

Answers in Q&A Process

Ongoing: Seller to provide timely answers to questions posed in the Q&A Process.

Optional: Presentation for and Findings from Management Meeting

After Management Meeting: If the Seller organizes one or more Management Meetings where a presentation is shared, such presentation and relevant findings from the Management Meeting(s) are to be shared with all Phase 2 Investors.

Optional: Snapshot of Final VDR

If the Seller uses a VDR and wishes to link certain R&Ws to a Disclosure Qualifier, the Seller could save a ‘snapshot’ of all information included in the VDR, which can be provided electronically to the Purchaser upon Signing.

5.3. Best practices

Process Information and Timing

The process information that the Seller provides to the Phase 2 Investors should at least include:

(i) dates on which certain data, documents or information is expected to be made available to the Phase 2 Investors (including the Phase 2 Data and Documents as well as the draft LSPA),

(ii) dates on which Phase 2 Investors are expected to provide certain deliverables (including the BO Date and the date on which the Investor LSPA Mark-up would be submitted by Phase 2 Investors);

(iii) further information: e.g. language(s) of the draft LSPA, specific contents the BO should include and form in which the BO is to be submitted, (if applicable) specific format which questions in a Q&A Process should have, etc.

(iv) if, when and in which form (a) Management Meeting(s) is / are planned, e.g. would there be one meeting for all Phase 2 Investors or individual meetings for the Phase 2 Investors, would the Management Meeting(s) take place physically or virtually, who would take part from the Seller and what are the persons’ roles and expertise, etc.

To lead an efficient, transparent and reliable process, the Seller should:

(i) carefully plan and set an overall reasonable Phase 2 timeline;

(ii) determine the timing communicated to Phase 2 Investors in a way which allows a certain ‘buffer’ for unexpected delays;

(iii) actively inform Phase 2 Investors in case any Seller deliverables would be delayed;

(iv) adapt the deadlines for Phase 2 Investor deliverables (mainly BO and Investor LSPA Mark-Up) in case of a delay of Seller deliverables;

(v) extend deadlines for all Phase 2 Investors and not for single Phase 2 Investors.

Note that NPL investors are customarily experienced investors who can adapt to different processes. A very important or even the most important feature of the bidding process for the investors would be that the process is led in an efficient, transparent and reliable manner where all investors are treated fairly.

Phase 2 Data and Documents / Due Diligence Documentation

General: All Phase 2 Data and Documents should have been prepared either in the preparation phase or latest during Phase 1. In a 2-Phase-Process, the Seller might have received data / information / documentation requests during Phase 1 and if the Seller can and wants to provide such data / information / documentation, these should be prepared before Phase 2 starts. Especially in a 1-Phase-Process, (an unexperienced