Collateral Value Is Not Recovery Value

Most underwriting errors on secured portfolios are made in a single step: taking an appraised collateral value and treating it as the amount that will be recovered. The two are related, but the distance between them is systematic, and it can be estimated.

What an appraisal is

A valuation states a price expected between a willing buyer and a willing seller, both adequately informed, acting without compulsion, after proper marketing. Enforcement satisfies none of those conditions. The seller is compelled, the marketing period is set by procedure rather than by strategy, the buyer pool is narrower, and the circumstances of the sale are known to everyone bidding.

Before anything else, therefore, an appraisal is an estimate under a set of assumptions that the recovery process will not meet. That is not a criticism of the valuer. It is a description of what the document is for.

Two further questions follow immediately: when was the valuation done, and on what basis. A valuation carried out at origination, on a property that has since been vacant for several years, is not evidence of current value. It is evidence of what the property was worth when the loan was written, which is a different and much less useful fact.

The deductions

Between the appraised figure and cash in the investor's account sits a sequence of deductions, each of which has to be estimated separately.

Prior-ranking claims come first: any earlier registered security, and statutory preferences, including tax and employee claims where they rank ahead. What remains is the first meaningful number.

Enforcement costs come next: court fees, bailiff and auction costs, and the legal fees accrued across the procedure. These are duration-driven and accrue whether or not the sale ultimately completes at a good price.

Holding costs apply from the point the asset is taken into possession: property tax, insurance, security, maintenance, utilities, and management. On an asset held for two or three years before disposal, these are not a rounding item.

Disposal costs close the sequence: brokerage, marketing, any repairs required to make the asset saleable, and taxes on the transfer.

The forced-sale discount then applies to the gross proceeds, not to the net figure, and it is the deduction most often guessed rather than estimated. It is properly a function of the depth of the buyer pool for that specific asset in that specific location, not a standard percentage applied across a portfolio.

Ranking and registration

A charge is only worth what its ranking makes it worth, and ranking is a factual question that has to be verified rather than read from the tape.

The questions are narrow and answerable. Was the security validly created. Is it registered, and registered against the correct title. Does the registration cover the whole of the property being valued, or part of it. Are there earlier registrations, and what do they secure. Has anything happened since — a further advance, a division of title, a transfer — that affects the position.

Where the property is registered land, these questions have documentary answers. Where the land is unregistered, the analysis is different in kind, not just in degree: what exists is a claim whose enforceability depends on evidence of title that may take years to establish, and pricing it as though it were a registered charge is the single most expensive mistake available on a Moroccan secured portfolio.

The market at the point of sale

The value that matters is not today's value. It is the value at the point in the future when the asset can actually be sold, in the condition it will then be in, to the buyers who will then exist.

Three adjustments follow. Condition deteriorates: assets in enforcement are rarely maintained, and vacancy accelerates the decline. Buyer depth is asset-specific: an apartment in a city with an active resale market and a purpose-built cold store outside it are not comparable liquidity propositions, whatever their appraised values. And the disposal is not private: a court auction is a public process, and the pricing behaviour of the buyers who attend reflects that.

Guarantees are a separate question

Personal and corporate guarantees are frequently carried in a tape at face amount, which tells you the size of the obligation and nothing about the recovery.

The relevant analysis is the guarantor's ability to pay, which requires knowing what they own, what those assets are already encumbered by, whether the guarantee is enforceable as drafted, and whether there is any realistic route to enforce it within a timeframe that matters. A guarantee from an entity that is itself in difficulty carries a recovery assumption close to zero, whatever the face amount, and should be modelled that way rather than discounted by a percentage.

A practical rule

We underwrite collateral by working forwards from the charge to the cash, one deduction at a time, and we require each deduction to have a stated basis. Where a valuation is more than a couple of years old, or was carried out for lending rather than for realisation, it is treated as an indication to be tested rather than an input to be relied on.

The rule we apply is that no collateral assumption enters the model without an answer to three questions: what secures it, what ranks ahead of it, and what it will cost and take to convert it. A number without those three answers is not a recovery estimate. It is an appraisal with a discount applied to it, which is a different and much weaker thing.