World Bank launches distressed assets programme

The International Finance Corporation (IFC) – the private-sector financing arm of the World Bank – has launched the Debt and Asset Recovery Programme (Darp), an initiative to free-up credit flows in middle-income and developing economies by purchasing distressed assets and restructuring debt.

The IFC will contribute up to $1.55 billion to the programme over the next three years, and aims to raise around $4–5 billion in additional capital from other international financial institutions and the private sector. As well as directly investing in distressed asset pools and businesses in need of restructuring, the Darp will invest in funds that specialise in such investment and restructuring projects.

The IFC's first deal will involve CRG Capital – a US and Austria-based private equity firm that focuses on restructuring and investing in distressed assets in central and eastern Europe (CEE). According to a press statement, the IFC is also in discussions with various other financial institutions, including the European Bank for Reconstruction and Development; DEG, a Europe-based financial development institution; FMO, the Netherlands development bank; the US government-owned Overseas Private Investment Corporation; Oesterreichische Entwicklungbank, the Austrian development bank; and the Inter-American Investment Bank.

In its latest Global Financial Stability Report, the International Monetary Fund warned distressed assets and non-performing loans are still common in many emerging economies, with bank writedowns expected to increase from $1.3 trillion in the crisis so far, up to June, to $2.8 trillion over the next few years. CEE has been an area of particular concern for some time. The high levels of euro-denominated debt in some CEE countries, along with the sharp devaluation of local currencies in the first quarter this year, created a substantial financing gap in the region, leading some analysts to draw comparisons with the Asian crisis of the 1990s. And while most CEE currencies have strengthened lately – the Hungarian forint rose from 315.98 to the euro on March 5 to 270.65 on October 1 – the IMF warns the region is not out of the woods quite yet.

"If risk sentiment deteriorates again, corporate refinancing gaps could re-emerge and represent a potential large drain on international reserves, particularly in emerging Europe. Decisive measures are required to deal with non-performing assets and troubled banks, including removal of problem assets from bank balance sheets, bank resolution and recapitalisation. Also, there might be a need for encouraging further debt restructurings to share the burden of losses with international creditors," the IMF wrote in the report.