HSBC 2015 Annual Report Download - page 202

Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
200
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 Group rights of repricing or acceleration, but they are
frequently set at levels where payment capacity has yet to be affected, providing rights of action at earlier stages of credit
deterioration. Such concessions do not directly affect the customer’s ability to service the original contractual debt and are not
reported as renegotiated loans. However, where a customer requests a non-payment related covenant waiver, the significance
of the underlying breach of covenant will be considered together with any other indicators of impairment, and where there
is a degree of severity of credit distress indicating uncertainty of payment, all available evidence will be considered in
determining whether a loss event has occurred. The waiver will not, however, trigger classification as a renegotiated loan
as payment terms have not been modified.
When both payment-related and non-payment related modifications are made together as a result of significant concerns
regarding the payment of contractual cash flows, the loan is treated as a distressed restructuring and disclosed as a
renegotiated loan.
Where clauses are built into the contract in advance which allow for payment-related modifications, and are exercised under
conditions of credit distress at a point where the modification provides a concession to the customer, these cases are treated
as meeting the definition of 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 their 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.
When considering acceptable restructuring terms we consider the ability of the customer to be able to service the revised
interest payments as a necessity. When principal payment modifications are considered, again we require the customer to be
able to comply with the revised terms as a necessary pre-condition for the restructuring to proceed. When principal payments
are modified resulting in permanent forgiveness, or when it is otherwise considered that there is no longer a realistic prospect
of recovery of outstanding principal, the affected balances are written off. When principal repayments are postponed, it is
expected that the customer will be capable of paying in line with the renegotiated terms, including instances when the
postponed principal repayment is expected from refinancing. In all cases, a loan renegotiation is only granted when the
customer is expected to be able to meet the revised terms.
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 allowance remains against any of the customer’s credit facilities.
The period of performance will vary depending on the underlying structure 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.