Credit crisis reduces value of collateral on assets

One of the causes of the credit crisis was the overvaluation of assets. And since the tightening of monetary regulations, asset valuations have fallen.

Credit insurer Coface has witnessed in dealing with its clients that the value of some assets held as security no longer cover the value of the debt.

“Assets held as security should be re-valued at least annually,” says Coface operations director Jacqui Jooste. “Companies not doing this may find at the time of a bad debt, the value of the security held does not cover the loss as expected.”

“There is also the issue of how many cession holders there are over the asset. If you are the third or fourth cession holder, and the value of the asset has fallen, there may be no value left after the first and second cession holders have made claims. Banks usually hold the first right to cession,” says Jooste.

The National Credit Act (NCA) implies that assets held as security should be re-valued for each new credit application. Therefore, when a debtor requests a higher credit limit for example, the asset being held as security should be re-valued.

“In these uncertain times, companies can no longer assume that the value of a fixed asset will remain the same or appreciate over time,” says Jooste.