An Update on Troubled Debt Restructurings

Transcription

1 An Update n Trubled Debt Restructurings Lyle Alexander Partner BKD, LLP lalexander@bkd.cm Chris Van Lng Senir Manager BKD, LLP cvanlng@bkd.cm T Receive CPE Credit Participate in entire webinar Answer plls when they are prvided If yu are viewing this webinar in a grup Cmplete grup attendance frm with Title & date f live webinar Yur cmpany name Yur printed name, signature & address All grup attendance sheets must be submitted t training@bkd.cm within 24 hurs f live webinar Answer plls when they are prvided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days f live webinar 2 1

2 FASB ASU FASB Accunting Standards Update (ASU) Receivables (Tpic 310) A Creditr s Determinatin f Whether a Restructuring Is a Trubled Debt Restructuring Issued April 2011 Applies t all creditrs, bth public & nnpublic, that restructure receivables falling within scpe f ASC Subtpic Effective Date & Transitin Public cmpanies Became effective fr interim & annual perids beginning n r after 6/15/11, i.e., Q fr calendar year-end cmpanies Nnpublic cmpanies Effective fr annual perids ending n r after 12/15/12, including interim perids within thse annual perids, i.e., restructurings after 1/1/12 fr calendar year-end cmpanies 4 2

3 TDR Why Nw? Guidance intended t imprve financial reprting by creating greater cnsistency in the way creditrs identify debt restructurings Nt intended t change existing guidance, but prvide additinal clarificatin 5 TDR Why Nw? Intended t assist creditrs in determining whether mdificatin f terms meets criteria t be cnsidered a TDR. Significant because TDRs are cnsidered impaired Requires additinal disclsures (financial statements & call reprt) 6 3

4 ASU What s Included? Receivables that fall within ASC All creditrs, public & nnpublic, that restructure receivables within scpe f ASC May include Transfer frm debtr t creditr f real estate r ther assets t satisfy in part r full Issuance f equity interest t satisfy in part r full 7 ASU What s NOT Included? Mdificatin f lans within a pl accunted fr in accrdance with ASC (purchased credit impaired lans SOP 03-3) r changes in expected cash flws f a pl resulting frm mdificatin FV f cash, ther assets r equity accepted in full satisfactin f receivable at least equal t recrded investment in receivable 8 4

5 TDR What s New? As nted earlier, did nt change the definitin f a TDR Creditr fr ecnmic r legal reasns related t the debtr s financial difficulties grants a cncessin t the debtr that it wuld nt therwise cnsider Have t have bth Brrwer financial difficulty Cncessin granted 9 ASU : Brrwer Financial Difficulty Additinal Guidance Presented belw is additinal guidance in ASU relating t determining if brrwer is experiencing financial difficulty Debtr is currently in default n any f its debt Als, shuld determine if it is prbable that debtr wuld be in default in freseeable future withut mdificatin May cnclude debtr financial difficulty even if debtr nt currently in default Has r is in prcess f declaring bankruptcy Substantial dubt as t whether debtr will cntinue t be a ging cncern 10 5

6 ASU : Brrwer Financial Difficulty Additinal Guidance Creditr frecasts f debtr cash flws indicate debtr will be unable t service any f its utstanding debt in the freseeable future Debtr cannt btain funds frm surces ther than existing creditr at market interest rate fr similar debt fr nntrubled debtr 11 Plling Questin 1 Des the new guidance under FASB ASU change the definitin f a TDR? Yes N Unsure 12 6

7 What Cnstitutes a Cncessin? Definitin Creditr fr ecnmic r legal reasns related t debtr s financial difficulties grants a cncessin t debtr that it wuld nt therwise cnsider & as a result des nt expect t cllect all amunts due including accrued interest at riginal cntract rate Creditr s bjective is t make the best f a difficult situatin. That is, creditr expects t btain mre cash r ther value frm debtr, r t increase the prbability f receipt, by granting the cncessin than by nt granting it 13 What Cnstitutes a Cncessin? Examples culd include Reductin f interest rate Frgiveness f principal r interest Lan terms incnsistent with cmpany plicy &/r regulatry guidelines Extensin f maturity Renewal at existing rate Extensin f interest-nly payments Debtr des nt have access t funds at market rate fr debt with similar risks 14 7

8 What Cnstitutes a Cncessin? Keeping the interest rate the same r even increasing the rate but where the rate is still belw market fr risks Receiving additinal cllateral r guarantees that is nt adequate cmpensatin fr the cncessin Insignificant delays in payment as a result f restructuring wuld nt be deemed a cncessin See ASC & 18 fr additinal guidance Cnsider by amunt & by length f time Must factr in previus restructurings in this determinatin 15 Measurement & Accunting Cnsideratins A TDR is cnsidered an impaired lan Based n current infrmatin & events, it is prbable that creditr will be unable t cllect all amunts due accrding t cntractual terms f lan agreement. Fr a lan that has been restructured in a trubled debt restructuring, cntractual terms f lan agreement refer t cntractual terms specified by riginal lan agreement, nt cntractual terms specified by restructuring agreement. 16 8

9 Measurement & Accunting Cnsideratins Impairment Measurements Cmmn practice Present value f expected future cash flws includes default, recvery & prepayment assumptins Discunted at lan s riginal effective interest rate Other ptins Observable market price f lan (very rare) Cllateral value (if lan is cllateral dependent) 17 Plling Questin 2 Which f these culd be cnsidered a cncessin fr the purpses f determining TDR identificatin: Extensin f interest nly payments Refinancing interest rate belw market rates Lan terms incnsistent with lan plicy All f the abve Unsure 18 9

10 TDR Credit Quality Disclsures Fr each perid that incme statement is presented, disclse the fllwing abut TDRs during the perid By class, qualitative & quantitative infrmatin including Hw lan was mdified (rate reductin, nnmarket rate, interest nly, extensin, etc.) Financial effects f mdificatin Qualitative infrmatin by prtfli segment abut hw mdificatins are factred int determinatin f allwance 19 Regulatry Cnsideratins Call reprt instructins Reprting f TDRs by lan categry All lans, including cnsumer lans that have undergne TDRs, required t be reprted Until lan that is a TDR is paid in full r therwise settled, sld r charged ff, lan must be reprted in apprpriate lan categry in Schedule RC-C, part I, items 1 thrugh 9 & in apprpriate lan categry (but nt bth) 20 10

11 Regulatry Cnsideratins Schedule RC-C, part I, Memrandum item 1, if it is in cmpliance with its mdified terms Schedule RC-N, Memrandum item 1, if it is nt in cmpliance with its mdified terms Except Lan that is a TDR that bth yields market rate f interest at time f restructuring & is in cmpliance with its mdified terms need nt cntinue t be reprted as a TDR in Schedule RC-C in calendar years after year in which restructuring tk place 21 Regulatry Cnsideratins T be cnsidered in cmpliance with its mdified terms, lan Must nt be in nnaccrual status Must be current r less than 30 days past due n its cntractual principal & interest payments under mdified terms 22 11

12 Prcesses & Cntrls Prcedures & cntrls in place t timely identify TDRs cnsidering ASU clarificatins Ensuring tracking & reprting prcesses in place t address new disclsures required Fcus n mdificatins n classified lans Utilize mem & checklist utlining TDR assessment t ensure clear cmmunicatin with lan fficers BKD Example Checklist Cnsider separate lan cding fr tracking purpses 23 Plling Questin 3 Once a lan is identified and disclsed as a TDR, it will always be disclsed as a TDR until the lan is settled. True False Unsure 24 12

13 FAQs Des TDR guidance apply if lan is cnsumer aut, 1 4 family residential lan r ther type f smalldllar-balance hmgeneus lan? Yes, guidance must be fllwed fr all types f lans. N exceptins 25 FAQs Can mdificatin f lan that is current be cnsidered a TDR? Yes Yu need t evaluate whether it is prbable debtr wuld have been in payment default in freseeable future withut mdificatin. If s, brrwer is likely experiencing financial difficulty & yu need t determine if cncessin was made 26 13

14 FAQs Is cncessin granted if bank restructures lan frm an amrtizing lan t an interest-nly lan? Unless deferral f principal payment is cnsidered insignificant delay, i.e., changing terms t match cash flws f a cmpany, yes, it is a cncessin if brrwer is experiencing financial difficulty 27 FAQs Are shrt-term extensins, i.e., interest nly fr shrt perid, cnsidered a TDR? Nt necessarily If timing & amunt f mdificatin is insignificant &/r n cncessin has been granted, mdificatin is nt a TDR Number f extensins shuld be a cnsideratin Have seen in limited instances regulatrs really dig in n numerus cncessins t ne brrwer, particularly n cnstructin/develpment lans 28 14

15 FAQs Brrwer s cash flws (debt service cverage) have declined but brrwer cntinues t pay as agreed. Bank renews lan with n change in terms. Is this a TDR (assume underlying cllateral supprts lan) Maybe Is brrwer experiencing financial difficulty? Are terms f new lan cnsidered a cncessin? Will require significant judgment! 29 FAQs Brrwer has line f credit renewed annually. Debt service cverage has declined but payments cme frm liquid assets that appear sufficient. Is the renewal f the line f credit a TDR? Maybe Similar t prir issues need t determine if there is financial difficulty & a cncessin If nt a TDR, bank shuld be able t demnstrate this lan wuld have been made as if brrwer was a new custmer 30 15

16 FAQs Brrwer is experiencing financial difficulty & agrees t pledge additinal cllateral during its renewal perid. Additinal cllateral puts bank in excess cllateral psitin. Is this a TDR? Maybe If additinal cllateral is adequate cmpensatin fr terms f renewal (Wuld bank have made this lan if a new lan? Then nt a TDR) 31 FAQs Brrwer is experiencing financial difficulty & wner f cmpany agrees t guarantee debt. Owner has excess net wrth. Is this lan a TDR? If n mdificatin f terms N If lan is renewed Need t determine if guarantee is adequate cmpensatin difficult depending n liquidity f guarantr. Have seen regulatrs in sme instances be very pessimistic abut lng-term abilities/desire f guarantrs t fund deficiencies, unless prven track recrd 32 16

17 FAQs Must a lan identified as a TDR be placed n nnaccrual status? It depends. Call Reprt instructins require bank t dcument their evaluatin f the likelihd that the brrwer will be able t make principal & interest payments under the new terms If lan was n accrual status prir t the TDR, brrwer demnstrated payment perfrmance under the ld terms, & the new evaluatin shws it likely that brrwer has the capacity t repay under the new terms, can cntinue n accrual basis 33 FAQs If lan was already n nnaccrual, r the cllectability f principal & interest is still uncertain Brrwer must shw sustained repayment perfrmance befre bank can cnsider mving back t accrual basis (generally at least six mnths) We have seen regulatrs begin t inquire abut accrual/nnaccrual status, particularly when there isn t much in the way f dcumentatin 34 17

18 Plling Questin 4 Are hmgeneus lans, i.e., cnsumer aut, 1 4 family residential excluded frm TDR guidance? Yes N Unsure 35 What Is Happening in the Real Wrld? Observatins f regulatry treatment 36 If lan n bank s watchlist was mdified, it is ften assumed t be a TDR unless prven therwise If bank determines nt a TDR, dcumented analysis shuld be rbust If any lan that is classified is renewed, it is generally assumed t be a TDR as the renewal rate f interest is nt deemed t be a market rate f interest even if the renewal rate was the same r even slightly higher Incme-prducing prperty is generally deemed t be cllateral dependent & lan must be valued at the cllateral value 18

19 What Is Happening in the Real Wrld? Little cnsideratin ften given t guarantrs, unless their desire & ability t back lan has been prven n this r ther debts Challenging appraisal values with respect t highest & best use Expectatin that banks have updated plicies fr identifying & reprting TDRs Just having & fllwing these plicies/prcedures can g a lng way in nt having TDRs becme fcus f yur regulatry exam 37 What Is Happening in the Real Wrld? Mre regulatry bservatins We ve nticed a difference in hw TDRs are being scrutinized Banks with manageable prblems & strnger capital dn t seem t be having many TDR issues with regulatrs In ther cases, thse with asset quality issues are really being challenged n their TDR reprting fr Call Reprt purpses 38 19

20 What Is Happening in the Real Wrld? Have seen in a few instances where there are asset quality issues, lans required t be reprted as TDRs, then having accrual vs. nnaccrual status get challenged Even n currently perfrming lans that have had a number f renewals May need t dcument justificatin fr why lan shuld stay n accrual 39 Lyle Alexander Partner lalexander@bkd.cm Chris Van Lng Senir Manager cvanlng@bkd.cm 20

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