Download Nimble Group values a non-standard and complex retail mortgage

Case Study: Valuation of Loan Book
Development Finance Institution, South Africa
Nimble Group values a non-standard and
complex retail mortgage loan portfolio for a
development finance institution.
THE CLIENT
A Development Finance Institution
INDUSTRY
Affordable Housing Finance
BUSINESS NEED
To establish the fair market value
of a unique and complex asset in
preparation for a formal sale
process
NIMBLE GROUP SOLUTION
 Study, analyse and determine
fair ranges for every subjective
variable
 Perform sensitivity analysis
 Conclude on value range
BUSINESS IMPACT
 Addressed all objective and
subjective variables
 Presented different scenarios
 Provided a valuation range
resulting in stakeholder
approval for sale
CONTACTS
Trevor Jacobs, Joint CEO
+27 21 402 0751
[email protected]
Jean Erasmus, Director
+27 11 253 7241
[email protected]
The Challenge
The client, a development finance institution, was considering the sale of an existing retail
mortgage loan book (the asset) and seeking to establish a fair market value, due to a strategic
transformation and the introduction of a mortgage default insurance product.
The asset consisted of approximately 2,500 accounts in the affordable housing segment and had
a unique and complex nature due to the subjective impact of the following variables:
• lack of scale or critical mass resulting in an abnormally high cost of administration relative
to the capital outstanding
• various credit enhancing attributes like state guarantees, favourable loan to value ratios,
interest free employer loans acting as deposits, payroll deduction collection mechanisms,
sufficient vintage in order to accurately assess affordability etc
• benefit in the saving of sunk costs like origination and, avoidance of risks like development
risk
• a limited number of buyers with apprehensions to entering the historically underserved
segments of the housing market
• a number of different sources of origination
• elements of potential concentration risk
The client engaged Nimble Group to propose a potential solution in establishing a fair market
value for the asset.
Nimble Group Solution
Initially an in-depth assessment of the asset was conducted by analysing the systems and data
and performing a limited due diligence on supporting documentation.
Nimble Group performed a valuation focussing on the following key solutions:
• An assessment of the historic payment profiles, affordability and creditworthiness on an
individual debtor basis in order to project future cash flows
• The client’s cost of administrating the asset was analysed and a projected cost range
formulated
• Underlying property valuations were updated in order to calculate the recovery from
security given default, but only after taking into consideration a reasonable cost (and time)
to realize
• A range of potential discount rate deviations was formulated
• Sensitivity (or scenario) analyses applied to the valuation model in order to better
understand the subjective variables’ impact on value
• A range of value enhancing recommendations was made throughout the valuation process
• To further support the valuation work, a detailed study of the key potential buyers and
their perceived potential appetite for the contemplated transaction was prepared
Business Impact
A valuation report addressed all objective and subjective variables, presented different scenarios
and provided the client with an enhanced understanding of their own asset. The conclusion of a
valuation range ultimately resulted in stakeholder approval to effect the sale of the asset,
highlighted value enhancing attributes and placed the client in a position to address areas of
concern and maximise the price through the sale process.
www.nimblegroup.co.za
Issue date: August 2017