Article 8: Restructuring

C 3/2024-STD Effective from 30/11/2024

8.1

Article 8 of the Credit Risk Management Regulation requires LFIs to implement an appropriate process to identify, execute and manage Restructured Credit Facilities.

8.2

For the purpose of this regulation and these standards, restructuring events are categorised into two distinct groups:

a.	Distressed restructuring, and
b.	Non-distress restructuring.

8.3

Distressed restructuring: A Credit Facility must be regarded as a distressed restructuring if any of its terms are amended in a context of financial difficulty of the Obligor. This includes restructuring that commences or concludes after a Credit Facility becomes Past Due more than 90 days or falls within the unlikeliness to pay status. The assessment of financial difficulty must incorporate at a minimum the same criteria as outlined in this regulation and these standards for the assessment of SICR, and in particular the number of Deferrals as required by Article 9 on classification and provisioning.

8.4

Non-distressed restructuring: A Credit Facility must be regarded as a non-distressed restructuring if any of its terms are formally amended for commercial or regulatory reasons, including the intention to mitigate future financial difficulties, but excluding situations of financial distress at the time of restructuring. Such type of restructuring includes Credit Facilities for which the contractual obligations and Repayments have been made, without any history of Past Dues on the Credit Facility.

8.5

Examples of non-distressed restructuring are as follows:

a.	A change in the contractual Interest rate to better reflect the credit worthiness of the Obligor and/or the market pricing,
b.	A change in the contractual tenor and/or the Repayment schedule to better align such Repayments with the Obligor’s future cash flows. This includes restructuring for which early identification of a lower Repayment capacity from the Obligor is observed because inadequate terms for Repayment were originally approved, as long as there is no Default at any time during the restructuring process.
c.	A change in the contractual tenor and/or the Repayment schedule to take into account a modification of the sources of income of a Retail Obligor in order to meet a debt burden ratio requirement. For instance, this may apply in the case of change in employment or voluntary early retirement.
d.	Rescheduling prior to an event of Default, provided as a concession with a modification in the Repayment dates of the principal amount. However, when a Facility is rescheduled after a Default event as defined in Article 6, the Obligor falls into the distressed restructuring category described above.

8.6

Restructured accounts also include cases where a Credit Facility is fully settled by a simultaneous or subsequent disbursement of a new Credit Facility.

8.7

Standstill: In some circumstances, the restructuring process may take time to reach its completion. Such a situation is sometimes referred by LFIs as ‘standstill’. Any type of restructuring that is in standstill for more than 90 days, during which the Obligor is not meeting its financial obligations as per the terms of the original Facility, falls within the definition of Default defined above and, therefore, must be considered a Default event.

Restructuring Process

8.8

The restructuring process must be defined by LFIs for Retail Obligors and Wholesale Obligors separately. All distressed restructuring must follow the principles described for remediation in Article 3.14. It must follow a rigorous governance with clear accountability and must be subject to annual internal audit review. The approving authorities (whether a committee or individual) of a restructuring must be accountable for ensuring compliance with the LFI’s internal policies and procedures.

8.9

Approval process: LFIs must define a clear process to approve Credit Facility restructuring, including a clear delegation of authority to allow terms and conditions beyond the normal course of business. This process must mirror the process employed for issuing new Credit Facilities as articulated in Article 5 on underwriting principles.

8.10

Eligibility of restructuring: LFIs must design and document minimum conditions to evaluate the viability of a proposed restructuring taking into consideration the following:

Criteria outlining the number of times a Credit Facility may be restructured. Robust underwriting practices suggest that the number of restructuring has a practical limit as eventually the LFI must suitably forecast the Obligor’s activity. The LFIs policy must deter restructurings that are poorly designed and not workable from the outset where the LFI can reasonably determine that the Obligor will not perform. LFIs must implement a documented framework to restructure Facilities to control such practice.

The economic rationale for not meeting the original Repayment schedule.

The viability of future Repayment plan.

In addition, certain causes of the Obligor’s financial distress requires a more in- depth assessment for the eligibility for restructuring. LFIs must identify these causes, including but not limited to,

i.	Any occurrence of fraud by the Obligor in relation to past or present business or financial activities, and
ii.	Any occurrence of fund diversion or inappropriate usage of funds by the Obligor.

8.11

Credit Facility structure: The structure of a new Credit Facility must be designed to (a) maximise the Repayment likelihood from the Obligor while (b) minimizing the losses and expenses incurred by the LFI. LFIs must design and enforce a policy to govern restructuring principles, focusing on the amortization schedule and with adequate controls over unfunded Facilities. In the case of a deterioration in the Obligor’s credit worthiness, the extension of overdraft limits or other similar Facilities for the Obligor to repay existing Facilities should be treated as a strong indicator of distress restructuring.

8.12

Viability analysis: For Wholesale Obligors in particular, LFIs must assess the viability of the Obligor upon restructuring by conducting a rigorous forward-looking analysis, based upon both quantitative and qualitative assessments. This must involve a transparent assessment of the economic environment, the state and prospects of the sector in which the Obligor operates, the Obligor’s position in that sector and the business conditions and the specific circumstances of the Obligor. The analysis must also include forecasted cash flows under several economic and business assumptions both baseline and stressed. The results must be presented to the credit committee as part of the decision-making process. The LFI must maintain and perform analysis on the Repayment history of the Credit Facility from inception of the original Facility.

8.13

LFIs performing Islamic Financial Services must carry out the structuring process in accordance with Shari’ah rules and principles and take into considerations the controls imposed in doing so.