Legal finance trends: Asset recovery

This past year has seen many global developments in the asset recovery and enforcement space and recent trends suggest further change to come in 2019.

Financial institutions will enforce on non-performing loans

Non-performing loans (NPLs)—loans that are more than 90 days past due or otherwise unlikely to be repaid in full—range from small consumer debt to complex commercial loans, sometimes with guarantees provided by high-net-worth individuals. The latter are bad news for banks: They consume capital; require time and attention that divert from core activities; decrease profitability; and may even result in the destabilization of the overall viability and sustainability of the institution. Meanwhile, effective management of NPLs can be hindered in jurisdictions where creditors are overly protected from foreclosure actions or there is unavailability of out-of-court restricting arrangements.

To address the issue, the European Commission has published a draft directive which encourages the development of an EU-wide secondary market for NPLs. The draft recommends setting common standards for specialist firms employed by banks to seek repayment and requiring each Member State to establish an accelerated extrajudicial collateral enforcement procedure as a faster way for banks to salvage bad business loans by recovering collateral against which they are secured.

Burford’s respected in-house asset recovery team routinely navigates complex jurisdictions and works with local counsel to trace and recover assets all around the world. As banks face more pressure to proactively clean up their balance sheets and pursue new ways to unlock value from their NPL books, we expect to see increased demand for these services in coming months.

Insolvency rates will increase leading to higher levels of unrealized assets

In 2019, markets are expected to continue experiencing a high level of volatility, which may tip precarious or highly leveraged companies into insolvency. Unsatisfied judgments or debts often represent the best path to an estate’s creditors being made whole. But pursuing them requires capital and time—two resources that are in short supply for insolvent entities.

As the number of insolvencies grows, we anticipate more office holders to seek creative solutions to achieve recoveries. Elsewhere in this issue, Emily Slater addresses how monetization and single-case and portfolio financing can help estates realize the full value of litigation assets. Combined with litigation finance, asset recovery will increasingly be used to pursue debts that creditors do not have the funding or bandwidth to pursue themselves.

Demand for enforcement services will expand to new geographies

Although enforcement is a significant need globally, we see two geographies emerging as particularly well-suited to financed recoveries.

The UAE has long sought to be a global business, trade, maritime and finance hub—but along with that designation comes a larger volume of large-scale complex disputes. Meanwhile, pursuing enforcement in the region is a longer, more expensive and higher-risk undertaking than ever before.^[1] Increased demand for asset recovery services is likely to continue as the percentage of NPLs soars due to the declining price of oil.

As Korea becomes an increasingly serious infrastructure and finance partner globally, we will see more large, cross-border arbitration disputes arising from that exposure. We expect that enforcement finance may be the initial point of entry to wider exposure to litigation finance in this region.

What to expect in 2019

As markets fluctuate and more jurisdictions rise to the fore as emerging hubs of commerce, we expect greater demand for complex cross-border enforcement and asset recovery solutions. Increased need for these solutions is reflected in the speed with which Burford’s in-house asset recovery team has grown: Since joining Burford, the team has doubled in size to meet client demand for asset recovery and judgment enforcement services. In the year ahead, our industry-leading team combined with Burford’s unmatched capital resources can help creditors realize the value of unenforced claims and overcome the expensive stalling tactics of recalcitrant debtors.

[1] Daniel Hall & Michael Redman. Asset recovery: New opportunities in the UAE. Burford Blog (Oct. 29, 2018). http://www.burfordcapital.com/blog/asset-recovery-new-opportunities-uae/.