6.1 | LFIs must employ the criteria presented herein to identify an event of Default. These are applicable to all Credit Facilities and all Obligors, including Retail Obligors and Wholesale Obligors. For Islamic Financial Services, the definition must also comply with Shari’ah requirements including the Shari’ah contract terms and conditions.
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6.2 | In the case of Default measurement, each LFI must monitor and assess the Defaults of Obligors by considering the obligation of a given Obligor across all the legal entities of a banking group incorporated in the UAE and abroad, including the Parent company, its branches and Subsidiaries.
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6.3 | A Default is considered to have occurred with regard to a particular Obligor when either or both of the following events have taken place: non-payment and/or unlikeliness to pay.
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Non-payment
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6.4 | The Obligor is Past Due for a period greater than 90 days on any material credit obligation to the LFI. In this context, materiality must be measured with respect to the total exposure of the individual Obligor. A Facility or a group of Facilities with an Obligor is considered material if their combined exposure is greater than 5% of the total funded exposure of that Obligor to the LFI. In the case of multiple Credit Facilities, for Wholesale Obligors, the Days-Past-Due (“DPD”) counter must start from date of the first Credit Facility becoming Past Due. In other words, the DPD counter must be computed across Credit Facilities with a consecutive day count.
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6.5 | Overdrafts will be considered Past Due once the Obligor has breached a contracted or internal limit, or been advised of a limit smaller than the current outstanding. In addition, Default must be considered when the outstanding balance is consistently in excess of the agreed upon limit. ‘Consistently’ is defined as a period that exceeds 90 continuous days, in addition, for Wholesale Obligors only, a total of more than 90 days in any 6 months period.
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Unlikeliness to pay |
6.6 | The LFI considers that the Obligor is unlikely to pay its credit obligations in full. This evaluation should be based on a holistic evaluation of creditworthiness supported by factual evidence, whereby the LFI must forms a balanced view on the current and future overall performance of the Obligor. The classification of an Obligor as ‘defaulted’, due to a perceived unlikeliness to pay, is not automatic.
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6.7 | For the purpose of the evaluation of the unlikeliness to pay, LFIs must establish a set of criteria, including the requirements provided herein. These criteria would be most applicable to Wholesale Obligors with high Credit Risk, such as Obligors involved in Facilities with Interest only obligations, Obligors that are routinely Past Due with Repayments and/or Obligors with a bullet Repayment at maturity.
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6.8 | Indicators of unlikeliness to pay may include, but are not limited to, the indicators listed below. LFIs must clearly evaluate and document whether any of these situations apply (or others specific to the LFI) prior to forming an overall conclusion on the likeliness to pay of the Obligor:
a. | The LFI makes an account-specific provision due to a significant decline in credit worthiness of the Obligor, subsequent to the origination of the Credit Facility.
| b. | The Interest and/or fee relating to the Credit Facility is Past Due more than 90 days.
| c. | The LFI sells part of a Credit Facility at an economic loss exceeding 30% of the amount which is the greater of the current outstanding balance and the net present value of the Credit Facility.
| d. | The LFI has filed for the Obligor’s bankruptcy or a similar order with respect to the Obligor’s obligation to the LFI. Alternatively, the Obligor has become insolvent, has sought voluntary liquidation, or has been placed into bankruptcy by any other party.
| e. | The Obligor is classified as defaulted by another LFI.
| f. | There is evidence that the Obligor is capable but unwilling to meet its contractual credit obligations.
| g. | The LFI has to liquidate collateral due to a decline in the Obligor’s credit worthiness.
| h. | The Obligor is classified in the default grade by approved credit rating agencies included in the Capital Adequacy Regulations.
| i. | Material concessions to the Credit Facility’s original contractual obligations have been granted formally in writing, or informally, in the context of a restructuring, including but not limited to a bullet Repayment, significant grace periods, payment holidays or low Repayment at the beginning of the Repayment schedule.
| j. | For Wholesale Obligors based in the UAE, one of the owners of the company has left the UAE without a clear rationale, for a period greater than 6 months.
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6.9 | For Wholesale Obligors in particular, unlikeliness to pay can be indicated by a clear material decline in credit worthiness evidenced by the following circumstances:
a. | A significant deterioration in financial performance of the Obligor leading to financial difficulty,
| b. | A high likelihood that the Obligor will enter bankruptcy or other material financial reorganisation,
| c. | Crisis in the Obligor’s sector,
| d. | A breach of a material covenant included in the Credit Facility structure.
| e. | Repeated restructurings granted to the Obligor due to financial difficulties faced by the Obligor,
| f. | The Obligor’s sources of income to repay the Obligor’s Credit Facility are no longer existent or are distressed,
| g. | A significant deterioration in the quality of Obligor’s operating assets leading to an inability to operate these assets efficiently. For asset-based Lending, this should include the ability of the assets to generate sufficient cash flows,
| h. | A significant deterioration in the value of collateral,
| i. | Pending litigations or regulatory changes resulting in material negative consequences,
| j. | The Default of a Subsidiary for which the Obligor provides a guarantee,
| k. | A loss of key staff to the Obligor’s organisation,
| l. | Breach of major terms and conditions of the Facility and/or practice of non-payment on due dates,
| m. | For Wholesale Obligors, maintaining a material overdraft constantly up to or above limits with limited and irregular inflows, or
| n. | Other circumstances and external factor that would affect the Obligor’s ability to repay.
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6.10 | For Retail Obligors in particular, the LFI should introduce a process to identify and evaluate Obligors that may be unlikely to pay based on specific circumstances of the Obligor, including, but not limited to, the following:
a. | The Obligor’s sources of income to repay the Credit Facility are no longer existent or are distressed,
| b. | The regulatory Debt Burden Ratio (“DBR”) and/or internal DBR limits if more stringent is breached or likely to be breached when undertaking appropriate stress tests,
| c. | For Obligors/Obligors based in the UAE, the Obligor/Obligor has been absent from the UAE and not contactable for a period greater than 3 months, with an outstanding balance on a Credit Facility,
| d. | There is a significant deterioration of collateral whereby the value of the collateral falls below a predetermined minimum level, for example a significant fall in residential real estate values that brings the loan/financing-to-value (“LTV”) of mortgage loans/financing above regulatory and/or internal limits.
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Cross Default
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6.11 | Retail Obligors: The definitions of Default must only apply at Credit Facility level, therefore cross-Default does not apply automatically. The Default of a Credit Facility must neither trigger the Default of the individual Obligor nor the Default of other Credit Facilities granted to the same Obligor unless warranted due to actual Default on each Credit Facility.
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6.12 | Wholesale Obligors: The Default of a material Credit Facility must also trigger the Default of the Obligor. In the context of an economic group composed of multiple legal entities, and in the absence of explicit consideration of cross-Default in the legal documentation of the Facility, then the following principles must apply.
a. | LFIs must establish appropriate Credit Facility materiality thresholds and/or criteria, above which cross-Default should be considered and analysed.
| b. | Cross-Default must not automatically apply between an Obligor and its Parent entity or other entities of the group, if the Repayment of the Obligor Facility has no legal or economic dependency towards the Parent entity or any other entity of the group, or where the Repayment of the Credit Facility is only linked to the cash-flow of a specific, clearly defined project of the Obligor.
| c. | Cross-Default must apply if the Repayment of the Credit Facility is economically dependent on the performance and cash-flows generated from the consolidated economic group. In this case, Default on a material Credit Facility under the economic group must trigger the Default of all Credit Facilities and entities within the economic group.
| d. | If the Obligor is benefiting from a guarantee from its Parent company, then the Default of the Parent company must not automatically trigger the cross-Default of the entity benefitting from the guarantee. Consideration should be given to assess whether the Obligor can continue to operate without this guarantee under the terms of its financial obligations. However, the rating of the Obligor must be immediately reassessed without the presence of the guarantee and amended if necessary.
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