7. Restructuring
Restructuring occurs when there is a change or modification of the terms and conditions of the original exposure contract. Restructuring may only occur in the form of either forbearance or renegotiation and/or refinancing and/or rescheduling. The determination of whether restructuring results in forbearance or renegotiation is based on whether the modified terms of the original exposure contract is concessionary and whether the modification (which otherwise would not have been granted) was in fact granted as a result of the financial difficulty of the borrower.
7.1 Forbearance
7.1.1 Identification of Forbearance
Forbearance includes all exposures regardless of the measurement method for accounting purposes. Forbearance occurs when:
i. The borrower is experiencing financial difficulty in meeting the financial commitments specified under the initial credit contract; and
ii. The finance company grants a concession that it would not otherwise consider whether or not the concession is at the discretion of the finance company and/or the counterparty. A concession is at the discretion of the borrower when the initial contract allows the borrower to change the terms and conditions of the contract in its own favor due to financial difficulty.
Forbearance is identified at the individual exposure level to which concessions are granted due to financial difficulty of the counterparty. For regulatory classification purposes, these exposures should only be reported in Stage 2B, 3A or 3B.
7.1.2 Identification of Financial Difficulty
Finance companies should first determine if the borrower is experiencing financial difficulty at the time when the forbearance is granted. The following list provides examples of possible indicators of financial difficulty, but is not intended to constitute an exhaustive list of financial difficulty indicators with respect to forbearance.
i. A borrower is currently past due on any of its material exposures (more than 5% of total exposures);
ii. A borrower is not currently past due, but it is probable that the counterparty will be past due on any of its material exposures (more than 5% of total exposures) in the foreseeable future without the concession, for instance, when there has been a pattern of delinquency in payments on its material exposures;
iii. A borrower's outstanding securities have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange due to noncompliance with the listing requirements or for financial reasons;
iv. The borrower is unwilling to pay;
v. The finance company forecasts that all the borrower's committed/available cash flows will be insufficient to service all of its exposures or debt based on actual performance, estimates and projections that encompass the borrower's current capabilities;
vi. A borrower's existing exposures are categorized as exposures that have already evidenced difficulty in the counterpart's ability to repay in accordance with the SAMA categorization scheme in force or the credit categorization scheme within a finance company's internal credit rating system;
vii. A borrower is in non-performing status or would be categorized as non- performing without the concessions;
viii. The borrower cannot obtain funds from sources other than the existing finance companies at an effective interest rate equal to the current market interest rate for similar exposures or debt securities for a nontroubled counterparty;
ix. Customer is unable to provide promised security/collateral (while the exposure is disbursed) past 180 days and is deemed material to credit; and
x. For retail customers, the potential incidents would be customers with job loss, retirement with no income, reduced salary, discontinued salary transfers etc.
7.1.3 Identification of Concession
Concessions are special contractual terms and conditions provided by the finance company to a borrower facing financial difficulty so that the borrower can sufficiently service its financial commitment. The main characteristic of these concessions is that the finance company would not extend exposures or grant commitments to the borrower on such modified terms and conditions under normal market conditions.
Concessions can be triggered by:
i. Changes in the terms and conditions of the existing exposure contract by giving considerably more favorable terms to the borrower that otherwise would not be considered;
ii. A supplementary agreement, or a new contract to refinance on concessionary terms, the current transaction; or
iii. The exercise of clauses embedded in the contract that enable the borrower to change the terms and conditions of the exposure contract or to take on additional exposures or commitments at its own discretion. These actions should only be treated as concessions if the finance company assesses that the counterparty is in financial difficulty.
There are many types of concession granted to borrowers. However, not all concessions will cause a reduction in the net present value of the exposure and such concessions do not lead to the recognition of a loss by the finance company. Such concessions would cause a stage 2B forborne exposure to retain its stage 2B status and not migrate to stage 3 as a credit impaired exposure. A concession is granted only when the borrower is experiencing financial difficulty. Examples of potential concessions (not complete exhaustive list) include the following:
i. Extending or rolling over the exposure term over 1 year and easing covenants; also includes if rolled over for more than 2 times;
ii. Supplementary agreement or new contract to refinance current transaction. Rescheduling the dates of principal or interest payments i.e. changes in conditions of existing contract, giving considerably more favorable terms to obligor;
iii. Granting new or additional periods of non-payment (grace period/moratorium);
iv. Reducing the interest rate, concession in interest rate, resulting in an effective interest rate below the current interest rate that borrowers with similar risk characteristics could obtain from the same or other institutions in the market;
v. Capitalizing arrears;
vi. Forgiving, deferring or postponing principal, interest or relevant fees;
vii. Changing an amortizing exposure to an interest payment only;
viii. Releasing collateral or accepting lower levels of collateralization;
ix. Repayments linked to disposal of assets or non-operating events;
x. Allowing the conversion of debt to equity of the counterparty;
xi. Deferring recovery/collection actions for extended periods of time; and
xii. Exercise of clauses in agreement that enables obligor to change terms and con ditions.
Refinancing an existing exposure with a new contract due to the financial difficulty of a borrower should qualify as a concession, even if the terms of the new contract are no more favorable for the counterparty than those of the existing transaction. Such arrangement is treated as forbearance and the Rules specified in this Section are applicable.
7.1.4 Stage Allocation for Forborne Exposures
A forborne exposure will likely affect its stage allocation. A forborne exposure categorized as stage 2B may likely retain its categorization if the cash flow characteristics do not warrant migration to stage 3 or result in impairment (only exceptional circumstances). Generally, forbearance would warrant changes in the ECL model inputs to account for the increase in credit risk. Where this is automatic if forbearance causes exposure migration from stage 2B to stage 3, the finance company must consider similar changes in model inputs when computing ECL for forborne exposures.
The following situations will not lead to the re-categorization of a forborne exposure as performing:
i. Partial write-off of an existing forborne exposure, (i.e. when a finance company writes off part of a forborne exposure that it deems to be uncollectible);
ii. Repossession of collateral on a forborne exposure, until the collateral is actually disposed of and the finance company realizes the proceeds (when the exposure is kept on balance sheet, it is deemed forborne); or
iii. Extension or granting of forbearance measures to an exposure that is already identified as forborne subject to the relevant exit criteria for forborne exposures.
The re-categorization of a forborne exposure as performing should be made on the same level (i.e. debtor or transaction approach) as when the exposure was originally categorized as forborne.
7.2 Renegotiated and/or Refinanced and/or Rescheduled Exposures
Renegotiated and/or Refinanced and/or Rescheduled exposures represent a change in exposure terms, conditions, and/or timing of repayment performed for the convenience of the borrower, where no financial deterioration coexists with the transaction now or in the foreseeable future. For example, a borrower may seek to change repayment terms from monthly to quarterly due to changes in the timing of incoming payment streams but not due to any deterioration in overall cash flows.
Transactions within this definition must not lead to a reduction in the present value of the exposure. The borrower must not be in financial difficulty during the renegotiation. Otherwise, the transaction would qualify as forbearance instead of renegotiation.
It is expected that finance companies will maintain exposure documentation that demonstrate that the financial repayment capacity and credit risk of the borrower has not changed and that the act of renegotiation is not consistent with the forbearance Rules specified in Section 7.1.
The mere act of renegotiation does not qualify for a downgrade in the stage allocation of renegotiated exposures. Instead, the staging allocation of renegotiated exposure follows the rules outlined in Section 3.
For Retail exposures, renegotiation should only be permitted for personal finance and for residential exposures on an exceptional basis. This renegotiation should only be maximum once in a year and 3 times in the lifecycle of the exposure. If this renegotiation exceeds 3 times, that should be considered as forbearance.