RBS 2013 Annual Report Download - page 245
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Business review Risk and balance sheet management
243
When the relationship is transferred, GRG conducts a detailed
assessment of the viability of the business as well as the ability of
management to deal with the causes of financial difficulty. Following
GRG’s initial file assessment and, if appropriate, wider due diligence with
input from independent experts (sector experts, accountants and
surveyors), various options are presented to the customer. A strategy is
then agreed with the customer for dealing with the distressed loan.
The objective is to find a mutually acceptable solution, including
repayment, refinancing or transfer to another bank if that is the
customer’s preferred option. Once a solution is found, management of
the loans may be transferred back to the performing divisions. If the
business is not viable and a turnaround is not possible, insolvency may
be an option.
Wholesale forbearance
Definition
Forbearance takes place when a concession is made on the contractual
terms of a loan in response to a customer’s financial difficulties.
Concessions granted where there is no evidence of financial difficulty, or
where any changes to terms and conditions are within the Group’s usual
risk appetite (for a customer new to the Group), or reflect improving credit
market conditions for the customer, are not considered forbearance.
A number of options are available to the Group. Such actions are tailored
to the customer’s individual circumstances. The aim of such actions is to
restore the customer to financial health and to minimise risk to the Group.
To ensure that forbearance is appropriate for the needs and financial
profile of the customer, the Group applies minimum standards when
assessing, recording, monitoring and reporting forbearance.
Types of wholesale forbearance
Wholesale forbearance may involve the following types of concessions:
• Payment concessions and loan rescheduling, including extensions
in contractual maturity, may be granted to improve the customer’s
liquidity. Concessions may also be granted on the expectation that
the customer’s liquidity will recover when market conditions improve.
In addition, they may be granted if the customer will benefit from
access to alternative sources of liquidity, such as an issue of equity
capital. These options are commonly used in commercial real estate
transactions, particularly where a shortage of market liquidity rules
out immediate refinancing and makes short-term collateral sales
unattractive.
• Debt may be forgiven, or exchanged for equity, where the
customer’s business or economic environment means that it cannot
meet obligations and where other forms of forbearance are unlikely
to succeed. Debt forgiveness is commonly used for stressed
leveraged finance transactions. These 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, strategy and debt level are viable, maintaining the
business as a going concern is the preferred option, rather than
realising the value of the underlying assets.
A temporary covenant waiver, a recalibration of covenants or a covenant
amendment may be used to cure a potential or actual covenant breach.
In return for this relief, the Group would seek to obtain a return
commensurate with the risk that it is required to take. The increased
return for the increased risk can be structured flexibly to take into account
the customer’s circumstances, for example increased margin on a cash
or payment in kind basis, and/or deferred return instruments.
The contractual margin may be amended to bolster the customer’s day-
to-day liquidity to help sustain the customer’s business as a going
concern. This would normally be a short-term solution. As set out above,
the Group would seek to obtain a return commensurate to the risk that it
is required to take and this can be structured in the same ways set out
above.
Loans may be forborne more than once, generally where a temporary
concession has been granted and circumstances warrant another
temporary or permanent revision of the loan’s terms. All customers are
assigned a PD and related facilities a LGD. These are re-assessed prior
to finalising any forbearance arrangement in light of the loan’s amended
terms. Where forbearance is no longer viable, the Group will consider
other options such as the enforcement of security and/or insolvency
proceedings.
The ultimate outcome of a forbearance strategy is unknown at the time of
execution. It is highly dependent on the cooperation of the borrower and
the continued existence of a viable business. The following are generally
considered to be options of last resort:
• Enforcement of security or otherwise taking control of assets -
Where the Group holds collateral or other security interest and is
entitled to enforce its rights, it may enforce its security or otherwise
take ownership or control of the assets. The Group’s preferred
strategy is to consider other possible options prior to exercising
these rights.
• Insolvency - Where there is no suitable forbearance option or the
business is no longer regarded as sustainable, insolvency will be
considered. Insolvency may be the only option that ensures that the
assets of the business are properly and efficiently distributed to
relevant creditors.
The data presented in the tables below include loans forborne during
2011, 2012 and 2013 which individually exceeded thresholds set at
divisional level. The Group continues to refine its reporting processes for
forborne loans and, as a result, in 2013, thresholds were reduced to
range from nil to £3 million. During 2011 and 2012, these thresholds
ranged from nil to £10 million. The proportion of the Watch and GRG
population covered by these thresholds has changed over time as the
thresholds have been reduced. In 2013, this was 90% (2012 - 84%).
As part of the Group’s ongoing review of forbearance reporting, the
amounts shown as “Completed forbearance” relating to 2012 and 2013
now include loans granted covenant concessions only. These were
disclosed by way of a note in 2012. While the Group considers these
types of concessions qualitatively different from other forms of
forbearance, they constitute a significant proportion of wholesale
forbearance and were therefore included.