UAE banks ask not for whom the bad loans toll

The big debts are reportedly being shopped around just in case but a number of institutions are out to buy the small debts that went bad.

No one is happy when the knacker shows up on their doorstep. It means something has gone horribly, horribly wrong. It's no surprise, then, that when Bertrand Guillot came to Dubai last week to offer his services, a lot of the doors he knocked on went unanswered. In the world of finance, Mr Guillot is the equivalent of the knacker men who collect dead and dying animals from farms and render them into useful byproducts, lard and tallow. Mr Guillot buys bad debts from banks and tries to turn them back into profitable assets.

It's an unkind analogy, admittedly, but the knackers serve a vital role in the cycle of food production in the same way that carrion birds sweep the savannahs, and fungi help turn fallen forest giants into fertile earth. Distressed debt investors like Mr Guillot and his firm, Jamison Consulting, help banks go back to work and, with them, the economy that relies on them to finance enterprise. Mr Guillot is French, but speaks fluent Spanish on account of the fact that he works in Madrid, "ground zero" of Spain's economic implosion, and does a lot of business in Argentina, Chile and Uruguay - also no strangers to credit catastrophes. All told, he said Jamison had bought US$1.5 billion (Dh5.5bn) in bad debts, most of it from Grupo Santander, the Spanish bank that is Latin America's top lender and has emerged from the crisis as one of the world's largest banks. It did so by buying Sovereign Bancorp in the US and two British banks - Alliance and Leicester, and Bradford and Bingley.

"We've seen the situation this country is going through," he said, "in Argentina, in Spain, in Germany in 2005." Mr Guillot isn't in the market for the kind of debts that Dubai World will be trying to renegotiate with its bankers, big commercial loans worth hundreds of millions, even billions, of dollars. There is a different kind of distressed-credit investor that would be interested in buying such debt: larger, more aggressive firms that buy the loans at a discount to their face value and hope to recover something above what they paid for them. And indeed, Dubai World's creditors have reportedly been shopping around some of their loans, if for no other reason than to gauge what they might be worth on the open market and to hedge their risks.

Jamison is after the smaller debtors - credit card debt, car loans and eventually, mortgages. It buys these in bundles and then sets about trying to either get the borrower to cough up or refinance them at a lower amount, preferably above what they paid for the loans. For those that don't or can't pay, Mr Guillot's firm seizes the car, or the home, and tries to sell it for a profit. That's what banks are trying to avoid. For if a big debtor starts missing payments, for instance, the bank would have to start setting aside profits against the entire value of the loan and then, in what is a banker's nightmare, start marking down the value of other, similar loans. Provisioning for bad loans not only sucks up profits, but reduces the amount banks can lend. In a worst-case scenario, it can trigger a situation in which the bank has to start pulling in even good loans to make sure its loans don't exceed regulatory limits on its deposit levels and capitalisation. In fact, that's what happened to a lot of US banks during the crisis a year ago.

For this reason, Mr Guillot and other restructuring experts say, banks are pretty lackadaisical about pushing borrowers to repay. They'll do almost anything to prevent an outright default, even fudge which loans are performing and which are not. Banks in the UAE have long been bracing themselves for a sharp increase in bad loans, all the while reporting non-performing loan (NPL) levels in the single digits, a level bankers overseas say is implausible considering the slump in the property market. Yet even the definition of an NPL is more liberal in the UAE than most places: banks don't have to classify a loan as non-performing until a borrower is six months behind on payments.

In most countries, loans are classed as non-performing after just three months. The Central Bank is supposedly going to tighten up on NPL classifications, a step that could in a stroke turn a sizeable portion of the assets on banks' books into bad loans. That's one of the paradoxes of the regulatory response to the crisis, bankers and analysts say. Authorities tend to tighten up regulations on lending even as banks are still struggling to recover from the results of their being lax. It's shutting the barn door after the horse has bolted: it takes even longer for banks to rebuild their balance sheets and resume lending.

So banks cling on to their questionable loans as long as possible, fearful of the consequences of having to mark them down if they default or if they sell them. And those NPLs sit there on the banks' books, clogging up the system. Bankers tend to be particularly possessive about their NPLs in an economy like this one, Mr Guillot says, when people are so used to sunny days that even when it's raining hard they're convinced a break in the storm is just around the corner.

They're living in denial. "It's like a death in the family. It takes a long time to acknowledge," he says. "It'll take two to three years for this thing to really start." Mr Guillot is happy to watch. And wait. @Email:[e-mail]