RBS 2011 Annual Report Download - page 139

RBS Group 2011 137
At 31 December 2011, exposure to customers reported as Watchlist Red
and managed within the divisions totalled £4.9 billion.
Strategies that are available within divisions include granting the
customer various types of concessions. Any decision to approve a
concession will be a function of the division’s specific country and sector
appetite, the key credit metrics of the customer, the market environment
and the loan structure/security. Only those concessions deemed to be
outside current market norms are reported as restructurings in the
discussions below.
Other potential outcomes of the review of the relationship are to: take the
customer off Watchlist and return it to the mainstream loan book; offer
further lending and maintain ongoing review; transfer the relationship to
the GRG for those customers requiring such stewardship; or exit the
relationship altogether.
Global Restructuring Group
In cases where the Group’s exposure to the customer exceeds £1 million,
the relationship may be transferred to the GRG following consultation
with the originating division. The GRG’s primary function is active
management of the exposures to minimise loss for the Group and where
feasible return the exposure to the Group’s mainstream loan book
following an assessment by the GRG that no further losses are expected.
At 31 December 2011, credit risk assets relating to exposures under
GRG management (excluding those placed under GRG stewardship for
operational reasons rather than concerns over credit quality and those in
the AQ10 internal asset quality (AQ) band) totalled £22 billion. Credit risk
assets are defined on page 144. The internal asset quality bands are
defined on page 145.
The following table shows a sector breakdown of these exposures:
Watchlist Red credit risk assets under GRG management Core
£m
Non-Core
£m
Total
£m
2011
Property 6,561 6,011 12,572
Transport 1,159 2,252 3,411
Retail and leisure 1,528 669 2,197
Services 808 141 949
Other 1,952 916 2,868
Total 12,008 9,989 21,997
Types of wholesale restructurings
Anumber of options are available to the Group when corrective action is
deemed necessary. The Group may offer a temporary covenant waiver, a
recalibration of covenants and/or an amendment of restrictive covenants
to mitigate a potential or actual covenant breach. Such relief is usually
granted in exchange for fees, increased margin, additional security, or a
reduction in maturity profile of the original loan. Such covenant-related
concessions are not included in the quantitative loan restructuring
disclosures below.
The reported restructurings comprise the following types of concessions:
xVariation in margin - the contractual margin may be amended to
bolster the customer’s day-to-day liquidity, with the aim of helping to
sustain the customer’s business as a going concern. This would
normally be seen as a short-term solution and is typically
accompanied by the Group receiving an exit payment, a payment in
kind or a deferred fee.
xPayment holidays and loan rescheduling - payment holidays or
changes to the contracted amortisation profile including extensions
in contracted maturity or roll-overs may be granted to improve the
customer’s liquidity. Such concessions often depend on the
expectation that the customer’s liquidity will recover when market
conditions improve or will benefit from access to alternative sources
of liquidity, e.g. an issue of equity capital. Recently, these types of
concessions have become more common in commercial real estate
transactions, particularly where a shortage of market liquidity rules
out immediate refinancing and makes short-term forced collateral
sales unattractive.
xForgiveness of all or part of the outstanding debt - debt may be
forgiven or exchanged for equity in cases where a fundamental shift
in the customer’s business or economic environment means that the
customer is incapable of servicing current debt obligations and other
forms of restructuring are unlikely to succeed in isolation. Debt
forgiveness is often an element in leveraged finance transactions,
which are typically structured on the basis of projected cash flows
from operational activities, rather than underlying tangible asset
values. Provided that the underlying business model and strategy
are considered viable, maintaining the business as a going concern
with a sustainable level of debt is the preferred option, rather than
realising the value of the underlying assets.
The vast majority of the restructurings reported by the Group take place
within the GRG. Forgiveness of debt and exchange for equity is only
available to customers in the GRG.