HSBC 2012 Annual Report Download - page 259

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Corporate and commercial forbearance
(Unaudited)
In the corporate and commercial sectors, forbearance activity is undertaken selectively where it has been identified
that repayment difficulties against the original terms already have, or are very likely to, materialise. These cases are
treated as impaired loans where:
• the customer is experiencing, or is very likely to experience, difficulty in meeting a payment obligation to the
bank (i.e. due to current credit distress); and
• the bank is offering to the customer revised payment arrangements which constitute a concession (i.e. it is
offering terms it would not normally be prepared to offer).
These cases are described as distressed restructurings. The agreement of a restructuring which meets the criteria
above requires all loans, advances and counterparty exposures to the customer to be treated as impaired. Against the
background of this requirement, as a customer approaches the point that it becomes clear that there is an increasing
risk that a restructuring of this kind might be necessary, the exposures will typically be regarded as sub-standard to
reflect the deteriorating credit risk profile, and will be graded as impaired when the restructure is proposed for
approval, or sooner if there is sufficient concern regarding the customer’s likeliness to pay.
For the purposes of determining whether changes to a customer’s agreement should be treated as a distressed
restructuring the following types of modification are regarded as concessionary:
• transfers from the customer of receivables from third parties, real estate, or other assets to satisfy fully or
partially a debt;
• issuance or other granting of an equity interest to satisfy fully or partially a debt unless the equity interest is
granted pursuant to existing terms for converting the debt into an equity interest; and
• modification of the terms of a debt, such as one or more of the following:
– reduction (absolute or contingent) of the stated interest rate for the remaining original life of the debt;
– extension of the maturity date or dates at a stated interest rate lower than the current market rate for new
debt with similar risk;
– reduction (absolute or contingent) of the face amount or maturity amount of the debt; and
– reduction (absolute or contingent) of accrued interest.
Modifications that are unrelated to payment arrangements, such as the restructuring of collateral or security
arrangements or the waiver of rights under covenants within documentation, are not regarded by themselves to be
evidence of credit distress affecting payment capacity. Typically, covenants are in place to give the bank rights of
repricing or acceleration, but they are frequently set at levels where payment capacity has yet to be affected. They
provide rights of action at earlier stages of credit deterioration. However, when these modifications are made in
conjunction with modifications affecting payment arrangements as a result of significant concerns regarding the
payment of contractual cash flows, they are treated as a distressed restructuring.
In assessing whether payment-related forbearance is a satisfactory and sustainable strategy, the customer’s entire
exposure and facilities will be reviewed and the customer’s ability to meet the terms of both the revised obligation
and other credit facilities not amended in the renegotiation is assessed. Should this assessment identify that a
renegotiation will not deal with a customer’s payment capacity issues satisfactorily, other special management
options may be applied. This process may identify the need to provide assistance to a customer specifically to
restructure their business operations and activities so as to restore satisfactory payment capacity.
Modifications may be made on a temporary basis when time is needed for the customer to make arrangements for
payment, when deterioration in payment capacity is expected to be acute but short lived, or when more time is
needed to accommodate discussions regarding a more permanent accommodation with other bankers, for example
in syndicated facilities where multilateral negotiation commonly features.
If a restructuring proceeds and the customer demonstrates satisfactory performance over a period of time, the case
may be returned to a non-impaired grade (CRR1-8) provided no other indicators of impairment remain. Such a case
cannot be returned to a non-impaired grade when a specific impairment reserve remains against any of the customer’s
credit facilities. The period of performance will vary depending on the frequency of payments to be made by the
customer under the amended agreement and the extent to which the customer’s financial position is considered to
have improved.