The EAA has fulfilled its mandate ahead of the schedule forcast at the time the WestLB assets were transferred. Not only were the initial wind-up targets for the portfolios continuously exceeded, the EAA’s financial reserves are also higher than expected.
Long-term planning for conserving value while winding up
The EAA achieved its success by adopting a long-term strategy of a balanced wind-up: positions that held their value and generated income, and could be classified as low risk, were generally held until maturity. The EAA focused mainly on winding up problem exposures. To minimise losses, it restructured numerous non-performing loans (NPLs) and participations prior to their sale, thus frequently increasing their value. This strategy meant that more than two-thirds of the remaining portfolio now has good and medium ratings, and the risk buffer that is available for the ongoing wind-up process is greater than planned.
Planning without a binding end date – but with a break in 2027
The wind-up plan forms the basis for the EAA’s activities and its success to date. It was established in 2010 when the first portfolio was transferred and extended in 2012 when the second portfolio was taken on. It has been updated annually since then, taking into account new analyses and developments.
However, the wind-up plan does not prescribe an end date for the entire winding up process. Rather, it sets a break for 2027.
According to the planning, the active wind-up through the EAA should end in 2027. The EAA is expected to present a concept for a final solution for the residual portfolio that still remains at this point – the original forecasts had assumed a volume of around EUR 10 billion.
Options for a wind-up at an ongoing accelerated pace with a more favourable economic result
- Nine years after the wind-up process started, the EAA portfolio is smaller but qualitatively better than expected.
- The market environment is seller-friendly and is therefore likely to continue to favour the portfolio reduction from today’s perspective.
- The necessary services for the portfolio were meanwhile outsourced to private providers. This creates predictability and flexibility for the future wind-up process.
- Despite falling income as a result of the portfolio wind-up since 2012, the EAA has succeeded in avoiding losses and creating higher reserves than expected.
These successes create opportunities for reaching the 2027 wind-up target several years ahead of schedule. Such an early reduction of risks should ensure the financial interests of the investors, as well as strengthen their planning security and creditworthiness.
- According to the analyses and market tests to hand, the EAA’s holdings in the current market environment can be reduced ahead of time to a volume that was forecast for 2027 according to the original planning.
- Some of the equity and risk provisions would be available to cover the risks of the residual portfolio.
- The residual portfolio comprises a relatively low number of positions that are suitable for a passive management approach until maturity.
- Based on the analyses to hand, this can be achieved at a relatively low cost and with less regulatory expense.
It therefore seems possible in principle to slim down the complex wind-up structures in their current form ahead of schedule.
The objective is to attain a better economic result for the entire winding up process
Having conducted a thorough analysis, the EAA has put forward a corresponding concept that it is currently discussing intensively with its committees and stakeholders, and will validate further.