Valuation
Default interest and economic value
A swollen face value is not the cash you should expect.
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- Serenor Capital
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Two portfolios can show the same face value for different reasons: one because principal is large, the other because years of default interest have been added to a principal that was already doubtful. The second is not worth the first.
Where the swelling comes from
On an old file, the accounting balance mixes principal, unpaid ordinary interest and default interest. The more compromised and the older the file, the heavier the second and third layers. A price-to-face ratio then becomes impossible to compare across vintages.
A usable loan tape separates those layers. If it does not, the first task of loan tape analysis is to say so, not to value the total as if it were principal.
What is collected in practice
A settlement is almost always negotiated on ability to pay, not on the default-interest balance. An enforcement distributes sale proceeds, not face value. In both cases, part of the interest on the books never becomes cash.
That is one reason a 'recovery rate' computed on swollen face value looks very low, while recovery on original principal can tell another story. The limits of that ratio are discussed in recovery timing and recovery rate.
The model
The base case keeps the cash of the path chosen: a settlement schedule, or net security proceeds, or both as scenarios. Default interest that this cash does not support drops out. It is not discounted 'just in case'.
An upside scenario can put a fraction back, if there is an enforceable title and a solvent debtor not already absorbed by the security. That fraction is a written assumption, not a right. See NPL valuation.
Capitalisation
Whether interest itself was allowed to bear interest is a legal question. It goes to counsel when the balance seems to have grown faster than the stated rate. It is not decided in a spreadsheet.
Meanwhile the model can cap the face value it uses at principal plus documented ordinary interest, and treat the surplus as non-cash. That is still a convention, and it belongs in the pricing note.
In this series
- Pricing an NPL portfolio
- NPL valuation in Morocco
- Limitation periods on Moroccan bank claims
- Assignment of mortgage rank in Morocco
This note is a method of reading a file or a published series. It is not legal, tax or investment advice, and it is not an opinion on a particular exposure. Serenor Capital does not buy claims for its own account, manage a fund, or carry on collection.
Sources and references
- Bank Al-Maghrib, Annual Report on Banking Supervision, financial year 2025 — PDF
- Bank Al-Maghrib, Circular No. 19/G/2002 of 23 December 2002 on the classification of claims and their provisioning, as amended — PDF
- Circular No. 1/W/2025, adopted on 5 December 2025, effective 1 January 2027. It does not restate the 2012–2025 figures discussed here.
- Serenor public series, banks, social basis — Morocco NPL Monitor and methodology
Frequently asked questions
- Should default interest be discounted at the contract rate?
- Not as base-case cash. The contract rate explains how the balance grew. It does not say a court, a settlement or an enforcement will pay it. Modelled cash is what the exit path can produce.
- Is the bank entitled to claim it?
- That is a question of contract and law, for counsel. A pricing analysis can note that it sits in the balance without concluding that it is owed, or that it will be paid.
Evaluating an NPL Portfolio
Serenor Capital supports financial institutions and investors in the analysis and valuation of non-performing loan portfolios in Morocco.
Serenor Capital publishes research on non-performing loans, distressed-credit valuation and the development of Morocco’s secondary credit market.
This note is general commentary on method and market structure. It is not investment advice, legal advice, or a recommendation in relation to any portfolio, transaction or financial asset.