Customised vs “packaged” loan restructurings

8 Apr 2021 | Andria Koukounis

Customised vs “packaged” loan restructurings

Two reports issued last week reveal the importance of meaningful loan restructurings, which will assist viable, yet distressed, businesses achieve their revival through their own financial / operational restructuring.

The European Banking Authority (EBA) published its Risk Dashboard from data received by 130 EU banks in relation to Q4 2020, and the European Supervisory Authorities issued their joint risk assessment report (“the ESAs report”).

The Risk Dashboard notes a slight reduction in the Non-Performing Loan (NPL) ratio which should be of limited (if any) comfort, since the reduction is partly attributed to a large-scale sale of NPLs across Europe.

Very importantly, the Risk Dashboard reveals that, although the NPL ratio declined for most economic sectors, it increased significantly for accommodation and food services, arts, entertainment and recreation.

The ESAs report flags the dispersed impact of the pandemic across industry sectors as well, with areas such as technology and consumer remarkably benefiting and leisure, travel and tourism being severely struck. It, thus, urges banking institutions to engage with their clients for efficient restructurings of indebted but viable exposures.

Two steps that will immensely assist the threat of rising non-performing loans in general but also in industry sectors linked to the pandemic-affected industry sectors, are substantive portfolio segmentation and meaningful restructurings.


Portfolio segmentation

It is imperative, now more than ever, for banks to create appropriate groups of exposures beyond the traditional type-of-borrower, currency, borrower-size, and security-type groups. In fact, the current landscape begs for the establishment of buckets with common industry characteristics, response to market conditions, pandemic impact and resilience elements for which the banks can produce and to which they should provide customised restructuring solutions. 


What do meaningful restructurings include?

A further sine qua non is bespoke restructurings which will facilitate enterprises to continue as going concerns. Such restructurings involve the combination of commercial, financial and legal sophistication in:

  • Establishing the “recovery” implementation plan, including a projection of the company’s short-term and long-term activities, share and position in the market, financial results and response to threats. Such implementation plan requires deep understanding of the growth/decline drivers of an industry sector and of the consumer behaviour in changing conditions;
  • Striking a balance between providing the company with life-support until it is back on track, which may even require fresh funds lent to it, and the bank remaining adequately secured at all times against the risk of repayment;
  • Creating suitable legal structures and contract terms depicting the commercial plan and the parties’ rights and obligations.


How can an “across the portfolio” solution prove detrimental?

As a starting point, prolonged forbearance measures increase the level of uncertainty in relation to the borrower’s repayment ability and the security asset quality, and may be delaying an eventuality rather than assisting the cure of a distressed exposure. This is the reason loan moratoria in all parts of the world have been rather restrictively implemented.

In the same spirit, effecting uniform solutions such as interest-only repayment periods, waiving of cash-sweep mechanisms and modification of other financial covenants across a wide range of facilities, as for example large corporate accounts, or small retail accounts, without a specific and customised plan, may prove very harmful to a bank’s portfolio. Such practice can result in the granting of potentially unsuitable concessions that will mask the borrower’s financial deterioration.


The duty to prevent

The administration, management and sale of NPLs can be by far more costly than restructurings. At the same time, financial institutions are required to be disclosing the customer and societal impact of their business operations to investors. Showing sustainable operating policies such as addressing NPLs through appropriate loan restructure where possible, as opposed to tolerance for deadlocks and then and on-selling of deadlocks (i.e. NPLs) at a significant discount, shall pave the way for achieving long-term profitability and growth.  


This publication is provided for your convenience and does not constitute legal advice.

Author: Andria Koukounis

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Andria Koukounis

Advocate / Partner

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