RBS 2012 Annual Report Download - page 175

RBS GROUP 2012
173
Wholesale renegotiations
Loan modifications take place in a variety of circumstances including but
not limited to a customer’s current or potential credit deterioration. Where
the contractual payment terms of a loan have been changed because of
the customer’s financial difficulties, it is classified as ‘renegotiated’ in the
wholesale portfolio.
Loans modified in the normal course of business where there is no
evidence of financial difficulties and any changes to terms and conditions
are within acceptable credit parameters, within credit risk appetite and/or
reflective of improving conditions for the customer in the credit markets,
are not considered to have been renegotiated.
A number of options are available to the Group when a wholesale
customer is facing financial difficulties and corrective action is deemed
necessary. Such actions are tailored to the individual circumstances of
the customer. The aim of such actions is to assist the customer in
restoring its financial health and to minimise risk to the Group. To ensure
that the renegotiations are appropriate for the needs and financial profile
of the customer, the Group requires minimum standards to be applied
when assessing, recording, monitoring and reporting this type of activity.
Wholesale renegotiations involve the following types of concessions:
x Variation 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.
x Payment concessions and loan rescheduling - payment concessions
or changes to the contracted amortisation profile including
extensions in contracted maturity 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, such as an issue of equity capital. These types of
concessions are 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.
x Forgiveness 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 renegotiations 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.
In addition, the Group may offer a temporary covenant waiver, a
recalibration of covenants and/or a covenant amendment to cure 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. These financial covenant concessions
are monitored internally, but are not included in the renegotiated loans
data (when this is the sole concession granted to a customer) as we
believe that such concessions are qualitatively different from other
renegotiations: The loan’s payment terms are unchanged. Covenant
concessions provide an early warning indicator rather than firm evidence
of a significant deterioration in credit quality.
The impact on the credit quality of any change in terms and conditions of
a loan is assessed at the time of granting such changes, and the
appropriateness of the credit metrics reviewed at such time. For
performing counterparties, credit metrics are an integral part of the latent
provision methodology and therefore the impact of covenant concessions
will be reflected in the latent provision. For non-performing
counterparties, covenant concessions will be considered in the overall
provision adequacy for these loans.
Covenant waivers and amendments are predominantly undertaken prior
to transfer to GRG. The vast majority of the other types of renegotiations
undertaken by the Group take place within GRG. Forgiveness of debt and
exchange for equity is only available to customers in GRG.
Loans may be renegotiated more than once, generally where a temporary
concession has been granted and circumstances warrant another
temporary or permanent revision of the loan’s terms. Where renegotiation
is no longer viable, the Group will consider other options such as the
enforcement of security and or insolvency proceedings.